Financial Technology and MFS Framework and Regulations

One would be overwhelmed by the exponential growth in digital transactions if they followed their footprints from its inception till now. The rise of financial technology (fintech) throughout the years had an enormous influence on a consumer’s spending behavior and more recently during the COVID-19 crisis, digital transactions came to the rescue to nearly every economy’s survival.

However, it still faces backdrops and challenges in today’s time, especially in a developing country like Bangladesh. Even though the idea of financial technology was introduced nearly a decade ago, the country has lacked success in fully integrating it into its economy. This was partly due to the regulations that were made for the conventional/traditional banking that used to transact by paper or in person and partly due to the majority of the population not being technological and financially literate.

Nevertheless, the recent joint initiative by Bangladesh Bank and Access to Information (a2i) to encourage digital transactions targeted at the fintech firms in order to produce citizen-centered product and service innovation as well as increasing financial literacy among the rural and unbanked population may come as a silver lining. Regulators have been trying to catch up with the speed in which fintech is progressing but it seems like a problem which affects vice versa, as fintech companies are unsure about the future regulations which may cause difficulties in it’s planning and implementation. This can be seen where there is a legislation regarding the gathering of information from consumers as a vast majority of fintech companies operate by collecting consumer data in order to adapt to the future market trends. On the other hand, one cannot blame the government in trying to protect the personal information of it’s people.

Bangladesh too, reaped the benefit of fintech in recent years, albeit by employing only a small number of it’s features. The most popular one has been the Mobile Financial Services (MFS) so far. The country’s population is slowly adapting to the digital payment for transferring funds or for transacting anything in their daily lives.

In it’s attempt to keep everything in order, the government of Bangladesh introduced a set of regulations in 2018 for the MFS sector when it witnessed the  exponential growth in MFS from 2011 and onwards. The  Mobile Financial Services (MFS) became a major catalyst in the economy.  This was to ensure that there was equal footing for all involved by creating a competitive and cost efficient environment, to promote access to such services in the rural areas in order to create awareness among the unbanked segments of the population and also to make sure that they comply with Anti Money Laundering and Combating Financing of Terrorism standards as provided by the Bangladesh Financial Intelligence Unit.

The Bangladesh Payment and Settlement Systems Regulations 2014 states that it’s regulatory department, Payment Systems Department (PSD), issues licenses in two categories, namely, Payment Service Provider (PSP) and Payment System Operator (PSO). MFS utilizes the PSP tool as it facilitates payment processes directly to customers and from customers themselves and settle their transactions via a scheduled bank or financial institution.

The stringent regulations can be seen when a prospective service provider wishes to enter the industry. Bangladesh Bank would only  promote Bangladeshi scheduled commercial bank-led Mobile Financial Services. In cases of new applicants, the scheduled banks will be required to form a subsidiary so as to focus entirely on the provision of MFS. Approval for the new MFS applicants will be granted in two phases. Firstly, a No Objection Certificate (NOC) needs to be produced in order to set up the platform. The second step is where the license would be provided in order to initiate the operation. However, before the initiation of the operation, the MFS provider will need to seek permission for the commencement of the business from the Bangladesh Bank’s PSD within one year of receiving the NOC.

If the already existing scheduled banks who are now running a MFS are interested in forming a subsidiary, they can do so provided that they restructure their MFS units as a subsidiary company so as to exclusively provide MFS providing PSPs. The Regulation further provides that the one single bank, also known as the parent bank, will need to have at least 51% of the equity of the MFS providing subsidiary. These parent banks may wish to perform the role of the subsidiary themselves or may enter into an equity partnership with other banks or non-banking financial institution(s) or NGOs or other investment or fintech companies who have substantial experience in the financial market. It is also provided that the subsidiary model-based MFS provider will need to maintain a minimum paid up equity capital to the tune of Bangladeshi Taka forty-five crore in addition to a cushion of ‘capital reserve’ equal to the amount of paid up capital will have to be raised from retained earnings, at a rate which would not be less than ten percent of the annual after tax profits in order to mitigate the risks associated. It is also expected that the charges that MFSs would be imposing on the clients for the services is set in a competitive, non-collusive manner and to keep a clear record of its transaction for verification in addition with it’s rate of charge at every agent’s office.

The 2018 Guideline also instructs MFSs to be in line with the Information and Communications Technology Act 2006 (amended in 2013) and the Guidelines on ICT Security for Scheduled Banks and Financial Institutions 2010 in relation to the ICT security issues. This is to ensure the publics’ trust on the medium as well as eliminating any attempt at foul play by any parties involved.

Naturally, MFS providers are strictly barred from any outward or cross-border payment transaction as they can only be authorised and dealt by the Authorised Dealers branches of the scheduled banks. This provision comes in to tackle the never-ending difficulty of money leaving the country with out proper means or illegally, especially via money laundering or financing terrorism.  However, MFS providers can

handle foreign inward remittances if they are received through Nostro Accounts of scheduled commercial banks as provided by the regulations set out by the Bangladeshi Banks provided that they pay out the same amount in Bangladeshi Taka to the account of the beneficiaries. Another function which a MFS can utilise is to act as an agent of banks and financial institutions, who are licensed by the Bangladesh Bank, in disbursing loans and also accepting the repayments later on, but they are prohibited to engage in lending from their own funds at any time.

Another major drawback is the lack of interoperability between the MFS providers. What this entails is that a user of one MFS provider will not be able to transfer funds/make payment to another user of a different MFS provider. This would be very beneficial to the economy as people would have more choice over the sources from where they buy their goods, eventually increasing the digital financial transactions and possibly encouraging the unbanked population into using the service. Even though the Bangladesh Bank regulations clearly mention the providers to promote interoperability, 2 years since the day it was introduced, it is yet to be implemented.