When it comes to interoperability, MFSs still have a long way to go. Currently, they cannot ‘talk’ to one another and customers on one network cannot pay people using another network.
Being a relatively nascent market hasn’t prevented the mobile financial service (MFS) industry from making great advancements in recent years. Ask Hemayetul Islam, an executive of a large travel agency in Dhaka, he would tell you why.
“It’s so convenient—it’s like an actual wallet in the phone, without the hassle of carrying all those banknotes. On these days, a lot of merchants have started accepting this mode of payment, so I have been loading and keeping a lot of cash into my mobile wallet,” said Islam.
There is one slight problem that bugs an otherwise happy MFS user like Islam. “I have three different mobile wallets in my smartphone-bKash, Rocket and UCash. I do most of my shopping with bKash as it is the most ubiquitous among the merchants, pay my utility bills with Rocket and pay my son’s school fee with UCash.”
“I have to load cash into these separate wallets on a regular basis and that’s sort of an irritation for me. It would have been much easier if I could transfer some money, say, from my bKash wallet to UCash wallet in times of need or vice versa. But that hasn’t happened yet,” he said.
What Islam has innocuously termed as a “slight problem” for him, has actually been putting the MFS providers across the world in a hot seat, forcing them to debate, object, counter-object amongst themselves, as well as with their regulators.
There is a formal definition and it is called “interoperability” among the MFS or in general financial service providers. At present most MFS operators operate as a “walled garden”, meaning that transactions can only be performed between users of the same system, i.e. a user can only transfer electronic money to another user of the same mobile money deployment.
Upon the implementation of interoperability among the MFSs, a bKash user can easily transfer money from his bKash wallet into, say, Rocket wallet by pressing few buttons.
While this sounds like a rather straight-forward implementation for the MFS operators if they have shaken hands amongst them, it actually is not as there are technical, commercial and regulatory aspects that need to be covered to make interoperability among MFS a success, said the experts concerned.
The challenges of inter-operability
Fintech contacted Minaoar Hossain Tanzil, managing director of Kona Software Lab Limited (KonaSL), a South Korea based company specialized in developing payment system to understand the challenges of interoperability.
KonaSL developed Konapay—one of the most popular mobile payments platforms in South Korea. In Bangladesh it developed the Nexuspay of Ducth Bangla Bank Limited (DBBL).
Tanzil said bKash is one of the largest MFS operators in the world. “There is only one operator in Kenya which is as big as a MFS as bKash and its name is M-pesa. No other MFS operators in the world are operating in such large scale,” he said.
The KonaSL MD said mobile payment system is a different platform altogether and interoperability among the MFS is a unique thing globally. “Commercially and technically it is an uphill battle as there are several challenges.”
Explaining the commercial challenge, he said all the financial institutions and payments systems across the world communicate with each other through secured medium. But mobile network doesn’t communicate with the financial system, so MFS, by definition is different since mobile operators are related here.
These MFS services have unique input and output system—namely cash in and cash out— which other traditional financial system doesn’t possess. “If you want to draw out your own money in cash from a traditional financial institution, it won’t charge you. Yes, bank takes a fee for chequebook or ATM card but that is very nominal. But in case of MFS, when you cash out, the MFS charges you one percent to two percent for each transaction,” said Tanzil
He said the MFS charges this comparatively large sum for each cash out transaction since its main revenue generation happens through this cash out option. “If the money is being transacted within the system or spent within a merchant account then that doesn’t generate much revenue for the MFS.”
So, naturally a large MFS operator want to keep as many customers as possible within its own system as this would generate more revenues for the operator through the cash-out option.
“Think about bKash; if there is an option that you can transfer money from your bKash wallet to Rocket wallet, then the money within bKash’s system actually get out of its own revenue generation model unless there is a set contract between bKash and Rocket that the former would get a percentage on that very transaction,” explained Tanzil.
He said unless this particular commercial aspect is addressed, a large operator will naturally not be interested in having set contract with a relatively small operator.
“This is because then a user would get a lot of option to cash out from MFS system without paying the cash out charge. For example, think a bKash user want to cash out Tk 2,000. Normally he needs to pay Tk 40 for this, but if there is interoperability, then he could transfer the money from bKash to Rocket and then cash it out from DBBL’s ATM network without paying any fee since Rocket has that option,” he explained.
About the technical challenge, he said for MFSs to contact and make transactions within each other through a secured medium, there has to be an established “switch” mechanism. “Banks have this established “switch” with proper protocols and because of that there is no charge when money is being transferred from one bank to another bank,” he said adding that at the end of each day, Bangladesh Bank (BB) as a regulator acts as a clearing house and settle all the recorded transactions among the banks.
“So for MFSs to make transactions within themselves, BB as their regulator has to work as a clearing house to settle all the recorded transactions, clearing all the fees and charges. BB has national payment switch to do that, so the central bank must allow MFSs to get connected with the switch for making interoperability a possibility.”
Interoperability will reduce cost of transactions
Getting mobile payment products to “understand” each other, or to be “interoperable,” is of course a big challenge to solve if we want to expand overall digital services and financially include over six crore people in the country who are currently excluded from the formal financial system, believed by the experts .
One-third of the population in Bangladesh is still financially excluded because of the high cost of financial transaction and poor regulations, a study of World Savings and Retail Banking Institute (WSBI) said.
MFS which in the past few years have reached to nearly 41 percent of the country’s population is dubbed by the experts as the “best vehicle” to bring those unbanked population under any financial services.
The data of Bangladesh Bank (BB) said at present there are 7.3 crore registered accounts under MFS service out of which 3.35 crore are active. On every day, the number of transaction is around 7.3 million which in amount worth nearly 37,477 crore, said the BB data.
The average daily cash in transaction is worth Tk 12,524 crore, cash out Tk 12,346 crore and the point to point (P2P) transaction is Tk 8,196 crore, said the BB data.
Md Assalatuzzmaan, CEO of Prolific Analytics, a Dhaka based company which conducts R&D on mobile payment system told Fintech that the P2P transaction could be at least doubled if interoperability among the MFS is implemented. P2P transaction mainly refers money transaction from a user account to a merchants account.
Cash in and cash out is basically mobile money transfer service but P2P is the service in where no cash is involved hence the essence of mobile money is fully implemented, he said.
Assalatuzzaman said, at present two MFS providers bKash and Rocket control over 97 percent of the MFS market. “bKash alone comprises 80 percent of the market and they charge quite heavy amount for their services. Charging two percent on cash out transaction is of course too much but since they are technologically advanced and has no equal competitor in the market, they can charge whatever they want,” he said.
Interoperability among the MFS would however change that, he said, as the P2P transactions would significantly increase, which will automatically reduce the cash in and cash out operation.
“We have to realize that the core essence of mobile payment or mobile wallet is to create a cashless society and that would be possible if interoperability among the MFS is implemented,” he said.
What the market players say?
Smaller market players vehemently want interoperability to be implemented as they believe such implementation would open up the market and would ultimately benefit the common people like the way opening up of the telecom market benefitted the people in the middle of the past decade.
Rezaul Hossain, Managing Director and CEO of Celero Ltd. and Co-founder and Director of Nagad—a payment system of state owned post office— told Fintech that a lack of interoperability has been highlighted as a major barrier to the development of the mobile money market.
“The strongest reason for enabling interoperability is the dramatic increase in mobile money transactions that will result. Transaction volume in any network is proportional to and driven by the number of interconnections possible between subscribers,” he said.
Hossain, a former employee of bKash, said during his time there, he realized the market potential and the fact that it was not possible by one single company to cater to the whole mobile financing market.
“In order to develop the industry, more competitors are needed. According to market potentiality, 65 percent of the whole market is still available for grabbing. So far, the cash-in-cash-out feature has become widespread but there are many more options left to venture when it comes to MFS,” he said
Nagad -partnering with Bangladesh Post Office – was formed in order to take on this opportunity and compete amongst the few companies currently innovating and operating in this space, he added.
Hasan Mahmud Jahid, head of service of UCash told Fintech that interoperability among the digital payment channels would ensure clients’ benefits, facilitate competition based on product innovation and boost the growth of a digital finance ecosystem.
“Interoperability in itself is a challenging task and collaboration is the key to its achievement. Not only do we need multiple stakeholders to coordinate with each other but we require legal frameworks, business models, enterprising solutions and policies at par with international standards for it to ever function as a whole,” he said.
About the prospect of interoperability, AKM Shirin, Managing Director of DBBL said, when interoperability in MFS comes into effect, it guarantees an increase in transactions because this avenue of digital cash has no limit. Rocket now enjoys the second highest market share with approximately 17 percent of the MFS market.
“Now of course, taking a step back again, we need the governments to understand how their approach is affecting the market and the regulatory bodies are struggling to tackle the right balance between the key market players and the customer’s interest.
The largest MFS operator bKash enjoys around 80 percent of the MFS market and its spokesperson Shamsuddin Haider Dalim told Fintech that there are reasons behind this success. “Even though we are a subsidiary of a bank, but we operate with complete independence and we completely concentrate on improving and bringing new technologies to our service.”
He said entities like Bill and Melinda Gates Foundation, Alibaba have ownership of bKash and the company in 2017 was ranked as no-23 on Fortune’s third annual “Change the World” list which recognizes top 50 companies that are changing the world through solving a multitude of societal problems.
He said as the largest MFS operator, bKash has no objection against interoperability. “Interoperability among the MFSs is possible provided that the operators are at par on the ground of technological integration. As fintech (financial technology) based service provider every operator has to ensure right technology and compliance to cater the seamless interoperability to the customers. bKash is committed to comply the regulator’s directives in this regard,” he said.
What the regulator says?
Experts and stakeholders concerned said to implement the interoperability, the regulator has to play the major role. In some countries, the central bank is leading the way, as in Indonesia, while in other countries not-for-profit organizations are taking the first step, such as the Bill and Melinda Gates Foundation in Tanzania with the support of the local regulator.
An official with the payment system division of BB who preferred anonymity told Fintech that in some countries, where there is a clear dominant player; this service provider may be reluctant to support interoperability.
As the leading mobile money scheme, they may not be keen to open their solutions to others and make their services accessible to customers who are not registered as their mobile money subscribers, the official said. In Bangladesh two MFS enjoy over 97 percent market share while rest of 14 out of 16 MFS licensee enjoy only 3 percent altogether.
Mesbah Ul Haque, head of payment service department of the BB however told Fintech that interoperability between banks and MFS would be introduced by December this year and MFS to MFS by June next year. “We have already held several meetings on this manner and the MFS providers are on board with us,” he said.
The banking regulator has already launched an initiative for the interconnection of the MFS account holders and their bank accounts, he said.