In recent years, the financial landscape in Bangladesh has witnessed a transformative shift with the advent of digital banks. These institutions, relying heavily on technology, aim to provide convenient and accessible financial services to a broader population. However, as digital banks proliferate, they encounter numerous challenges unique to the Bangladeshi context. This blog post delves into the key challenges faced by digital banks in Bangladesh and explores potential solutions.
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Challenges of Digital Banks in Bangladesh
Bangladesh is going to introduce digital banks to keep its smart Bangladesh journey more vibrant. Digital banks are not very old, they are just booming with both opportunities and challenges. This article presents some of the opportunities and challenges based on a webinar on ‘Digital Bank in Bangladesh: Opportunities and Challenges’ jointly organized by the Center for Enterprise and Society (CES) at ULAB and Digital Finance Forum Bangladesh, featuring industry experts on Friday, November 17, 2023.
Photo Courtesy: Digital Finance Forum, Bangladesh
The event is organized in conjunction with the Singapore-based think tank Global Impact Fintech Forum (GIFT) and the Global Fintech Institute (GFI).
Moderated by Md Ashraful Alam, CDFP, Advisor, DFFB, Executive Director, Bangladesh Bank, the event featured a keynote presentation on the Digital Bank industry by Gazi Yar Mohammed, Director, KubeMoney, UK, Co-Founder & CEO, Dana.
The speakers were Rahel Ahmed, MD & CEO (Proposed), Kori Digital Bank; Shyamol B. Das, Chief Digital Officer, Nagad Ltd; and Sajid Rahman, Chairman, Digital Bank PLC.
The digital banking sector in Bangladesh faces a shortage of skilled professionals who understand both finance and technology. Recruiting and retaining such talent is a challenge. Investment in training programs, partnerships with educational institutions, and offering competitive compensation packages can attract and retain skilled manpower.
Building trust is perhaps the foremost challenge faced by digital banks in Bangladesh. Traditional banking has deep-rooted trust among the population, and digital banks must overcome skepticism regarding the security and reliability of online transactions. Security breaches and fraud can erode trust quickly. To address this, digital banks must invest in robust security measures, communicate them transparently, and establish a track record of secure operations.
Digital banks in Bangladesh face challenges in forging collaborations with other financial institutions, technology partners, and regulatory bodies. Collaboration is essential for interoperability and a seamless financial ecosystem. Establishing industry-wide standards and fostering a collaborative spirit among stakeholders can mitigate this challenge.
As digital transactions surge, so does the threat of cyberattacks. Digital banks need to fortify their cybersecurity infrastructure not only within the bank but also at various access points. Ensuring end-to-end encryption, regular security audits, and employee training can help safeguard customer data and maintain trust.
Digital banks often rely on international cloud services like Azure and AWS for data storage. Many of such services are not available in Bangladesh. The absence of international data centers poses challenges related to data sovereignty and compliance with local regulations. Crossborder data storage and Cloud Domiciliation matter a lot. Developing local data centers or partnering with local hosting services can address this issue.
Cash Withdrawal Difficulty:
While digital transactions are on the rise, a significant portion of the Bangladeshi population still relies on cash. Limited access to ATMs and cash withdrawal points poses a challenge for digital banks. Expanding the network of ATMs, collaborating with local businesses for cash withdrawal services, and incentivizing digital transactions can alleviate this challenge.
Lack of Credit Score Data – CIB API Not Available:
Credit information is crucial for assessing the creditworthiness of individuals and businesses. The absence of a Credit Information Bureau (CIB) API in Bangladesh makes it challenging for digital banks to access credit score data. Advocating for the development of a CIB API and exploring alternative data sources can help digital banks make informed lending decisions.
In some regions of Bangladesh, especially rural areas, the lack of robust digital infrastructure poses a significant challenge for digital banks. Investing in the expansion of digital infrastructure, including reliable internet connectivity and power supply, is essential to ensure that digital banking services reach all corners of the country.
The financial landscape in Bangladesh has long been dominated by traditional brick-and-mortar banks that have earned the trust and familiarity of the population over the years. As digital banks emerge, they face formidable entry barriers, rooted in the entrenched presence of established banks. This article explores the challenges posed by existing banks, the significance of brand and trust, the role of familiarity, and the impact of the “Banks’ Halo Effect” on new entrants into the financial arena.
Established Banks’ Brand and Trust:
Established banks in Bangladesh boast a legacy that spans decades, cultivating a strong brand identity and trust among customers. This legacy is a formidable barrier for digital banks aiming to establish themselves. The challenge lies in convincing customers to shift their loyalty from long-trusted brands to relatively new and unfamiliar digital entities. To tackle this, digital banks must employ innovative marketing strategies that highlight the unique benefits and security features of their platforms.
Human beings are creatures of habit, and banking habits are no exception. The familiarity customers have with traditional banking processes, such as visiting a physical branch or using an ATM, can be a significant hurdle for digital banks. Introducing user-friendly interfaces, providing clear communication on the advantages of digital banking, and offering seamless transitions from traditional to digital services are vital steps in overcoming this familiarity barrier.
Banks’ Halo Effect:
The “Banks’ Halo Effect” refers to the positive aura surrounding traditional banks, stemming from their long-standing presence and customer relationships. This intangible advantage can make customers inherently more trusting and comfortable with traditional banking institutions. Digital banks must work diligently to create their own positive narratives, emphasizing factors like innovation, efficiency, and customer-centricity to counteract the perceived halo effect of traditional banks.
Opportunities for Digital Banks in Bangladesh: A New Era Unfolds
The recent issuance of digital bank licenses by Bangladesh Bank has ushered in a new era for the country’s financial landscape. As industry experts gathered during a webinar to discuss the prospects and challenges of digital banking in Bangladesh, several opportunities emerged that could reshape the fintech landscape of the nation.
- Smart Bangladesh Vision: In Bangladesh, the convergence of Digital Bangladesh and later on the Smart Bangladesh Vision opens a compelling chapter for digital banks. Government-led digitization priorities create fertile ground, emphasizing financial inclusion and technological advancement. With a tech-savvy populace and surging smartphone use, digital banks have a golden opportunity to redefine the financial landscape. By aligning with the nation’s vision, they can drive economic empowerment, foster innovation, and play a transformative role in propelling Bangladesh towards a digitally empowered future. The time is ripe for digital banks to seize these strategic opportunities and be catalysts for change.
- Policy Support and Regulatory Framework: The establishment of a committee by Bangladesh Bank in early 2021 to craft policies for digital banks demonstrates a proactive approach. The subsequent approval of digital bank guidelines and the issuance of licenses signify a supportive regulatory environment. Digital banks in Bangladesh have the opportunity to operate within a well-defined regulatory framework, providing a sense of security for both investors and consumers.
- Global Best Practices: Bangladesh Bank’s exploration of global digital banking practices, with a focus on countries like Malaysia, Singapore, Hong Kong, the Philippines, Pakistan, India, and Mauritius, offers a wealth of insights. Digital banks in Bangladesh can leverage international best practices, adapting successful strategies from these countries to meet the specific needs of the local market.
- Innovation and Technology Adoption: The issuance of digital bank licenses marks a significant shift from traditional banking models. Digital banks have the opportunity to innovate and adopt cutting-edge technologies to create a distinct market presence. Strategies highlighted during the webinar, such as business models and technology adoption, provide a roadmap for digital banks to stay ahead of the curve. MFS and digital banking have already created the tech-savvy people in the country.
- Financial Inclusion in Rural Areas: Rahel Ahmed’s insights into leveraging digital banks to address financial inclusion challenges in rural areas present a significant opportunity. Digital banks can play a pivotal role in extending financial services to underserved populations, bridging the gap between urban and rural societies. This not only addresses a social need but also opens up untapped markets for digital banking services.
- Collaborative Opportunities with Fintech Startups: Shyamol Das emphasized collaborative opportunities between digital banks and fintech startups. This collaboration can foster innovation and agility, allowing digital banks to stay responsive to evolving market demands. The synergy between these entities can lead to the development of novel solutions and services, further enriching the digital banking ecosystem.
- Convergence of Traditional Banks to Digital Mode: Md Ashraful Alam’s insights on the convergence of traditional banks to the digital mode present a unique opportunity for digital-only banks. As the industry undergoes a transformative phase, digital banks can position themselves as pioneers in the shift towards a digital-centric banking landscape.
- Competitive Landscape and Differentiation: Understanding the competitive landscape for proposed digital-only banks is crucial. Gazi Yar Mohammed shed light on critical success factors and potential pitfalls for digital banks globally. By learning from these insights, digital banks in Bangladesh can craft strategies that differentiate them in a crowded market, ensuring sustainable growth.
While digital banks in Bangladesh face a myriad of challenges, addressing them is essential for the continued growth and success of the sector. Collaborative efforts among stakeholders, strategic investments in technology and talent, and a commitment to building trust are key factors that can pave the way for a robust and inclusive digital banking ecosystem in Bangladesh.