Case Study No. 6 Bangladesh An unexpected source of branchless banking innovation?

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1 Case Study No. 6 Bangladesh An unexpected source of branchless banking innovation? Nomsa Kachingwe Alexandre Berthaud December

2 Contents I. Overview... 3 II. Financial Inclusion in Bangladesh... 3 II.1 Socio-Economic Context of Bangladesh... 3 II.2 Characteristics of the Financial Services Market... 4 II.3 Legal and Regulatory Framework for Financial and Postal Services in Bangladesh... 5 III. The Bangladesh Post Office: From Money Orders to Mobile Banking... 7 III.1 Description of the Business Model for Digital Financial Services... 7 III.2 Rationale for the Business Model for Postal Financial Services... 9 III.3 Results Achieved IV. Analysis of the Business Model: Key Issues and Success Factors V. Challenges IV. Conclusions and Lessons Learned APPENDIX

3 I. Overview The Bangladesh Post Office has for some time been playing an important role in providing access to financial services in rural and remote areas of Bangladesh. With an extremely large and far-reaching network of 2,000 post offices and 8,500 rural outlets, Bangladesh Post has offered remittance services, savings accounts, and life insurance schemes. In 2010, the Post embarked on an ambitious drive to develop and provide innovative digital financial services, and launched a new Mobile Money Order Service and Postal Cash Card in 2010, as well as a Mobile Banking Service at the end of These new services, targeted primarily at the unbanked population in rural and remote areas, have already enjoyed considerable success. To date, the Post Office has issued over 11 million mobile money orders, worth US$ 7 million, and the Postal Cash Card has built a customer base of 52,000 card-holders, many of whom live in rural areas. The case of Bangladesh Post therefore shows that with the right approach, postal operators can innovate successfully, and as a result, make a meaningful contribution to financial inclusion. This case study is one of a series of studies undertaken by the Universal Postal Union to showcase best practices in postal financial inclusion. This study illustrates the business model adopted by Bangladesh Post to offer digital financial services, and provides lessons for other postal operators seeking to digitise their financial services in order to better reach the unbanked population. II. Financial Inclusion in Bangladesh Bangladesh has long been considered a role model for financial inclusion, first with the emergence of Grameen Bank in the late 1970s, and then with the subsequent proliferation and prominence of microfinance institutions such as BRAC, especially in rural areas. In spite of these developments, access to basic financial services remains a challenge for many, especially women, marginal farmers, informal sector enterprises, and other socially excluded groups. According to the World Bank, only 39.6 percent of the adult population have an account at a formal financial institution. 1 When quasi-formal and informal financial services are taken into account, the proportion of adults with access to financial services rises significantly to 76.8 percent. 2 Nevertheless, enhancing the reach of formal financial services has become a priority for the Government of Bangladesh. In particular, the Central Bank, Bangladesh Bank, has in recent years taken extensive measures to promote the development of a more inclusive financial system in Bangladesh. II.1 Socio-Economic Context of Bangladesh Bangladesh has a vast population of 155 million people, of which 71 percent live in rural areas. In recent years, significant advances have been made in economic and social development, as the economy has grown steadily over the last decade, with an average GDP growth rate of 6 percent. Growth has been driven mainly by manufacturing exports, as well as by improvements in agricultural production, services, and construction. 3 Interestingly, migrant remittances also make a considerable contribution to the economy, as remittance flows from Bangladeshis living abroad totalled US$ 14 billion in With regards to social development, Bangladesh has achieved remarkable reduction in poverty since the 1990s, alongside improvements in life expectancy, infant mortality, literacy, and education. This is despite having a per capita GDP of US$ 747, much lower than the regional average of US$ 1, However, as is the case in many developing and emerging countries, ensuring that economic growth remains broad-based and inclusive continues to be a significant challenge for the Government of Bangladesh. 1 World Bank (2011). World Bank Global Financial Inclusion Database (Global Findex) 2 Institute of Microfinance (2011). Access to Financial Services in Bangladesh, Research Brief. 3 World Bank (2013). Bangladesh Country Brief. 4 Bangladesh Bank (2013). Wage Earners Remittance Flows Data. Accessed at 5 International Growth Centre (2013). Bangladesh s Achievements in Social Development Indicators: Explaining the Puzzle, Research Brief, 13/0303 3

4 II.2 Characteristics of the Financial Services Market Bangladesh has a relatively large financial services market, with several banks, non-bank financial institutions, capital market intermediaries, and microfinance institutions (MFIs). The banking sector is comprised of 4 State-Owned Commercial Banks (SOCBs); 39 private commercial banks; and 4 specialised development banks, including Grameen Bank, Palli Karma Sahayak Foundation ( Rural Employment Support Foundation ), and the House Building Financial Corporation (HBFC). There are currently 29 non-bank financial institutions providing long-term financing, savings and equity services, and 62 insurance companies, of which 44 are general insurers. Microfinance institutions have become prominent players in the Bangladesh financial services market, with over one thousand formal and informal institutions offering micro-credit services in both urban and rural areas. 6 The Bangladesh Post Office Department has also come to play an important role in the financial services market, offering savings services on behalf of the Ministry of Finance through its Post Office Savings Bank, as well as other financial services, including postal insurance, mobile money orders, prepaid cards, and mobile banking. Bank and Non-Bank Financial Institutions: Private commercial banks dominate the banking sector, with private bank assets making up 60 percent of the total banking sector assets in , compared to 35 percent in Domestic private commercial banks are primarily involved in lending to large industrial and agricultural firms, and are increasingly providing loans to Small and Medium Enterprises (SMEs) and agricultural firms. Presently, the banking sector has a combined network of over 8,000 bank branches. In comparison, non-bank financial institutions are small and relatively underdeveloped, with a total network of only 164 branches. 9 Investments made by non-bank financial institutions are also largely concentrated in industry, as well as in real estate and housing. Consequently, access to bank and non-bank services has been limited for retail consumers. Here, the Bangladesh Post Office Savings Bank (POSB), which is operated on behalf of the Directorate of National Savings (DNS) under the Ministry of Finance, has been playing a role in filling the gap. Savings accounts and savings certificates are offered in approximately 2,000 of the Post s 9,886 outlets. 10 Savings products offered include ordinary savings, family savings for women, fixed deposit accounts, and a range of long-term savings certificates. Insurance Companies: With insurance companies, few insurance services are offered to low-income consumers, despite the large number of insurance providers, and the rapid growth the industry has seen in recent years. 11 Although some large NGOs have been providing microinsurance services for health, disability and death, the Asian Development Bank (ADB) reports that these initiatives are yet to make a significant impact. 12 In this case again, the Bangladesh Post is a key actor, fulfilling this unmet need by providing Postal Insurance schemes in the same 2,000 outlets of the Post, as the POSB. Insurance products offered include postal life insurance, endowment insurance, and endowment assurance for marriage and education. The premium rates charged are the lowest in the country, and the products are offered on a no profit, no loss basis, as the entire surplus is shared among policyholders as a bonus. Microfinance Institutions: Microfinance services in Bangladesh are provided by a wide range of institutions, including Non-Government Organisations (NGOs), specialised government agencies, SOCBs, private commercial banks, and specialised development banks. Services provided by these institutions typically include general loans for small-scale self-employment activities, microenterprise loans, agricultural loans, as well as loans for disaster management. Some MFIs also provide voluntary savings and time deposits. 13 The sector has grown significantly over the last two decades, and is now contributing 3 percent to GDP and serving over 25 million clients. 14 As of August 2012, 651 institutions had been licensed to provide microfinance services, although only 10 large NGO-MFIs and the Grameen Bank account for over 80% of total savings and total outstanding loans. 15 Despite the welcome expansion of MFIs in Bangladesh, concerns have been raised regarding the over-indebtedness of borrowers, and the fact that many MFIs have not been successful in reaching the hard core poor. In any case, MFIs have become prominent players in the financial 6 Bangladesh Bank website: 7 Bangladesh Bank (2012). Annual Report International Monetary Fund (IMF) (2010). Bangladesh: Financial System Stability Assessment 9 Bangladesh Bank (2012). Annual Report International Finance Corporation (IFC) (2011). Deposit Assessment in Bangladesh 11 Asian Development Bank (2011). Developing Microinsurance Sector in Bangladesh 12 Ibid. 13 Bangladesh Bank website: 14 Ibid. 15 Ibid. 4

5 services market in Bangladesh, reaching segments of the population, and sectors of the economy, that have little or no access to the commercial banks and other financial service providers. National Payments System: Recent advances in branchless banking have necessitated the development of an automated payments system in Bangladesh. In the last few years, the Bangladesh Bank implemented automation initiatives aimed at replacing the manual clearing system, introducing electronic funds transfer, and providing a platform for mobile financial services, among others. The payments system now comprises of the Bangladesh Automated Clearing House, Automated Cheque Processing System, Electronic Funds Transfer Network, Mobile Financial Services, Online Payment Gateway Service Providers, the National Payments Switch, and E-Commerce and M-Commerce. 16 Recent Developments in Mobile Financial Services: Although mobile financial services are still at the early stages of development in Bangladesh, considerable progress has been achieved since the Central Bank introduced guidelines for mobile financial services in By early 2012, 10 financial institutions had launched mobile financial services, although only 5 were active. 17 The deployments that have grown the fastest are those focused on providing mobile accounts and basic person-to-person (P2P) services. BRAC ( bkash ) and Dutch Bangla Bank are currently the leaders in the mobile market, and BRAC alone has a customer base of over 2 million subscribers, with a network of over 40,000 agents. 18 According to the Bangladesh Bank, there are presently 28 financial institutions with licenses to provide mobile financial services, and 19 mobile deployments are now active. It has been estimated that the mobile financial services market now serves over 60 million unique subscribers, and this number is expected to grow significantly over time. 19 The Bangladesh Post Office has also been at the forefront of developments in digital financial services. In 2010, the Post Office launched a new mobile money order service (or Electronic Money Transfer System ), which allowed customers to send money from one postal outlet to another via mobile phone. The Post also launched a prepaid ATM card, the Postal Cash Card in 2010, as well as a mobile banking service, Post e-pay, in These are the products we will focus on in this Report. Overall, the financial services market in Bangladesh has made considerable progress towards financial inclusion. Not only are banks and other formal financial institutions beginning to address the needs of underserved markets, MFIs, the Post Office, and new branchless banking channels are now playing an important role in reaching the unbanked population. II.3 Legal and Regulatory Framework for Financial and Postal Services in Bangladesh The legal and regulatory framework for financial services in Bangladesh is particularly conducive to financial inclusion, and the Central Bank has been playing a crucial role in this regard. With regards to postal services, the Post Office has traditionally been mandated to act as an agent for savings mobilisation on behalf of the Government, as well as to provide other financial services in rural and remote areas in Bangladesh. II.3.I Legal and Regulatory Framework for Financial Services The financial system is regulated primarily by Bangladesh Bank, which provides regulatory and supervisory oversight for state-owned and private commercial banks, as well as non-bank financial institutions. The central bank recognises two types of banks: scheduled banks, which are licensed under the Bank Company Act of 1991 (Amended 2013), and are able to perform all functions of a bank; and, non-scheduled banks, which are specialised banks with restricted functions. Several Policy measures have been taken by the Bangladesh Bank to promote the expansion of banking services to the unbanked population. Specifically, guidelines have been issued to SOCBs and specialised development banks to provide accounts tailored to farmers, unemployed youths, the hard core poor, and beneficiaries under social safety net programmes. Additionally, private commercial banks are being strongly encouraged to adopt financial inclusion programmes in their Corporate Social Responsibility (CSR) obligations. 20 With regards to MFIs, the Microcredit Regulatory Authority (MRA) Act of 2006 was enacted in order to bring existing NGO-MFIs under supervision, as well as to promote the sustainability of new MFIs, and ensure the 16 Bangladesh Bank website: 17 Bangladesh Bank (2012). Mobile Financial Services in Bangladesh: An Overview of Market Development, Policy Paper, July IFC (2013). IFC Mobile Money Scoping Report: Bangladesh 19 Ibid. 20 Chowdhury, N. (2013). Current Situation and Policies on Financial Inclusion Perspectives Remittances, Country Presentation at ADB Institute 2013 Asia-Pacific Financial Inclusion Forum, June

6 transparency and accountability of microcredit activities. Grameen Bank is an exception, however, as it continues to operate under the Grameen Bank Ordinance of The MRA Act also established the MRA as the main regulatory body responsible for the MFI supervision. The Authority is empowered to issue guidelines regarding areas of operation, the use of earned profits, recommended governance structures, and reporting requirements for MFIs, among other rules. 21 In light of the recent advances in mobile financial services, the central bank issued Guidelines for Mobile Financial Services for Banks in 2011; and supporting guidelines for agent banking were introduced in The guidelines for mobile financial services, in particular, only recognise a bank-led model, although partnerships with MNOs and other solution providers have been encouraged. As such, the guidelines require that customer mobile accounts must rest with a bank. Furthermore, mobile accounts are to be classified separately from standard bank accounts, and banks are required to comply with the KYC and AML/CFT rules and regulations provided by the Bangladesh Bank. Banks are also responsible for selecting, training and monitoring agents in their network. Permissible mobile financial transactions include the disbursement of inward foreign remittances, cash in/cash out services, utility bill payments, salary disbursements, government social transfers, tax payments, microfinance, as well as P2P transfers between registered mobile account holders. 22 However, Bangladesh Bank the cashing in/out of mobile money transfers by customers without a mobile account, for example, is prohibited. 23 II.3.II Legal and Regulatory Framework for Postal Services As a department of the Ministry of Posts and Telecommunications, the Bangladesh Post Office is not officially regulated. However, the primary pieces of legislation governing the postal and financial services provided by the Post Office include the Post Office Act of 1898 (Amended in 2010), the Government Savings Banks Act of 1873, and the Post Office National Savings Certificates Ordinance of The Post Office Act of 1898 provides rules for the carrying out of postal services, as well as for providing postal orders and money orders. The Act states that the Post Office has the power to operate the money order system and to make rules as to remittances, [including] the limit of amount for which money orders may be issued; the period during which money orders shall remain current; and, the rates of commission or the fees to be charged on money orders. 24 The Government Savings Bank Act of 1873, as well as the Post Office National Savings Certificates Ordinance of 1944 also provide some rules for the operation of savings bank accounts and savings certificates. Importantly, the recent amendments to the Post Office Act, now the Post Office (Amendment) Act of 2010 allow the Post to provide new value added services, including other financial services. 25 In particular, Section 4A of the Amendment Act empowers the Post Office to modify, rearrange or adopt new technologies and provide new services for securing speedy services to the people as it deems fit, as well as to provide remittance services, banking services, postal life insurance services either individually or in contract with other organisations providing the aforesaid services to the people. 26 The new Act also enables the Post to appoint agents for providing its services, as well as act as an agent for other service providers. 27 These provisions paved the way for the introduction of the Posts new digital financial services. In terms of supervisory oversight, the Bangladesh Bank regulates and monitors the Post s new financial services, namely the Mobile Money Order Service, Postal Cash Card, and Mobile Banking 28, while the Ministry of Finance provides oversight over the Savings Bank and Savings Certificates. 21 Government of Bangladesh (2006). Microcredit Regulatory Authority Act of Bangladesh Bank (2011). Guidelines on Mobile Financial Services for the Banks 23 Bangladesh Bank (2012). Mobile Financial Services in Bangladesh: An Overview of Market Development, Policy Paper, July Government of Bangladesh (1898). Post Office Act of Ministry of Posts and Telecommunications (2011). 2 Years Achievement: Bangladesh Post Office. Accessed at 26 Government of Bangladesh (2010) Section 4A, Post Office (Amendment) Act of Ibid 28 Sudhangshu Bhadra, Additional Director, Bangladesh Post Office, Speech at Universal Postal Union (UPU) Workshop on Postal Financial Inclusion, 31 October,

7 III. The Bangladesh Post Office: From Money Orders to Mobile Banking The Bangladesh Post Office Department was established over 100 years ago, and it has since been providing a wide range of postal and public services to the vast majority of the population. The Post Office renders doorto-door services, employing 39,887 staff, spread across an extensive network of 9,886 post offices and outlets. Of these outlets, 1,426 are post offices staffed by government salaried staff, and 8,260 are rural outlets staffed by agents on an ad honorarium basis. 29 Of the 1,426 post offices, 76 percent are in rural areas. 30 The Post recently deployed five new mobile post office vans to serve the cities of Dhaka, Chittagang, Khulna, Rajshahi. 31 The functions of the Post Office are categorised into three segments: (i) Postal Services; (ii) Agency Services; and, (iii) Financial Services. Postal services include letter post, parcels and other core mail services, while agency services include the Savings Bank, Savings Certificates and Postal Life Insurance operated by the Post on behalf of the Directorate of National Savings (DNS), under the Government. The proprietary financial services offered by Bangladesh Post comprise the new digital financial services: Mobile Money Order Service (or Electronic Money Transfer Service ), Postal Cash Card, and Mobile Banking Service (or Post e- Pay ). These new services have become increasingly important for the Post Office, as financial services were reported to contribute 60 percent to the total revenue of the Post in 2010, up from 48 percent in III.1 Description of the Business Model for Digital Financial Services In the space of three years, the Bangladesh Post Office has entered into three separate partnerships to offer innovative mobile and electronic financial services across the postal network. The case of Bangladesh indicates that postal operators are able to progress along the ladder of postal financial services, from traditional money order services to sophisticated digital financial services, even where there are gaps in internet and mobile technologies. The models adopted to provide each service are discussed in turn below. III.1.1 Mobile Money Order Service In March 2010, the Post Office launched a new Electronic Money Transfer Service (EMTS), popularly known as the Mobile Money Order Service, to supplement the traditional paper-based money order service. The new service, provided in partnership with Banglalink Mobile Company, employs both electronic and mobile technologies to provide instant domestic and international money transfers. Presently, the service is available in 2,750 postal outlets, covering all district level and upazilla (sub-district) post offices, as well as rural postal outlets. The Post Office maintains a central server, and a call centre to monitor and support the service, and all EMTS locations have been equipped with a computer, internet connectivity and/or mobile phones, which are used to issue the money order, and send the payment to the central server. To access the service, a customer must go to a participating postal outlet, and request a money order by filling out the relevant form with his personal details and mobile phone number, as well as the details and mobile phone number of the recipient. Once the cash is handed over, postal staff will issue the money order using either a web interface where there is internet connectivity, or a specially modified mobile phone (see Figure on the left). The data is then transmitted to the central server, which automatically generates a unique personal identification number (PIN), and sends a short message transfer (SMS) to the sender s mobile phone with the PIN code. The sender must then pass on the code to the recipient, who must submit the information 29 UPU (2011). Postal Statistics 30 IFC (2011). Deposit Assessment in Bangladesh 31 Bangladesh Post Office website: 32 UPU (2011). Postal Statistics 7

8 at a participating postal outlet in order to cash out the transfer. Once the transfer has been cashed out, a final notification SMS is sent to the sender. Clients are charged Tk. 27 (~ US$ 0.35) 33 for the first Tk. 1,000 transferred and Tk. 10 for every subsequent Tk.100. The maximum amount that can be sent via mobile money order is currently Tk. 50, The service is available on all mobile networks, and does not require senders or recipients to have a Banglalink phone number. To date, the Post has issued over 11 million money orders, worth Tk million (~ US$ 7 million ). 35 In terms of the partnership model adopted to provide the service, the agreement with Banglalink has been arranged on a revenue-sharing basis. 36 Banglalink financed the acquisition of mobile phones, worth Tk. 7 million; and the Post pays Banglalink only Tk. 7 for each successful money transfer. In addition, Banglalink provided network connectivity in participating postal outlets, while the Post developed the software used to offer the service, and provides postal staff to run the service. 37 The Post is also responsible for training postal officials and staff to manage and operate the service. Plans are currently underway to expand the service to the remaining outlets on the postal network. III.1.2 Postal Cash Card Also in 2010, Bangladesh Post introduced the Postal Cash Card, a prepaid card that allows customers to deposit, withdraw and transfer money (Card to Card), make purchases and perform utility bill payments, as well as receive social benefits and allowances from the Government. For instance, a pilot project under the Social Safety Net Programme is currently being implemented, in which over 14,000 very poor families have received conditional cash transfers through the Postal Cash Card. 38 The Card service is currently offered in 1,332 post offices, and new ATM booths have been launched in the capital city, Dhaka. POS devices have been distributed in post offices, outlets and retail merchants, and there are plans to set up 1,200 ATM booths by July In rural and remote areas, the Post employs postmen equipped with POS devices to offer door-to-door cash collection and cash-delivery services to Postal Cash Card-holders. 39 Already, the Card has a customer base of 52,000 card-holders, and services have been accessed at 598 post offices across the country. 40 The Card therefore provides a convenient and low-cost means of accessing financial services. Presently, it costs Tk. 45 (~US$ 0.60) to open an account and receive a standardised card. A card with the personal details and picture of the account holder can be obtained for Tk. 110 (~US$ 1.40). 41 Customers are only charged for withdrawals, at a rate of 1 percent of the withdrawn amount. The card is provided and operated in collaboration with Information Technology Consultants Limited (ITCL), and the state-owned bank, Sonali Bank. The card is hosted on ITCL s Q-Cash network, one of the largest networks of ATMs and POS devices in Bangladesh. This network is comprised of 26 member banks, and several other financial institutions, Government agencies, and retailers. 42 This means that the card is not provided in a closed loop system of the Post, card-holders are therefore able to access their funds on ATMs and POS devices operated by other institutions participating in the Q-Cash interbank switch, in addition to those provided by Bangladesh Post and Sonali Bank. The Postal Cash Card ATMs are provided in partnership with Sonali Bank. As per the partnership agreement with Sonali Bank, ATM booths are to be co-branded with the bank, and the bank also provides cash- 33 Conversion to US Dollars calculated at rate of Tk./US$. The same rate can be applied throughout the Report. 34 Banglalink Mobile Company Limited website: 35 Nayeb Hossain, Director General, Bangladesh Post Office, Speech at UPU Global Forum on Financial Inclusion for Development, 24 October Ibid. 37 Mobasherur Rahman, Former Director General, Bangladesh Post Office, Interview in Union Postale, Issue 2, Nayeb Hossain, Director General, Bangladesh Post Office, Speech at UPU Global Forum on Financial Inclusion for Development, 24 October UPU (2013). Global Panorama on Postal Financial Inclusion 40 Ibid. 41 CGAP (2011) Innovation in Branchless Banking at the Bangladesh Post Office. Accessed at 42 Postal Cash Card website: 8

9 management for the ATMs. The Post Office provides real estate and space for the ATM booths. Furthermore, cash balances on Postal Cash Card accounts are ring-fenced within the Post, but are remitted to Sonali Bank on a monthly basis. III.1.3 Mobile Banking Service The service most recently launched by Bangladesh Post is the Mobile Banking Service, also known as Post e-pay. The Post Office signed an agreement with Bangla Phone Limited, along with its sister firm, Commlink Infotech Limited, in September The service is being implemented on a turnkey basis, and at no cost to Bangladesh Post. On the contrary, a revenue-sharing arrangement, which is very favourable to the Post, has also been agreed, under a design build finance operate business partnership model. 43 Specifically, the project has been estimated to cost Tk. 300 crore (~ US$ 39 million), and revenues are to be shared under a ratio of 42:58 percent in the first three years (42 percent for the Post, 58 percent for Bangla Phone), and 56:44 thereafter. 44 The Mobile Banking Service essentially acts as a mobile wallet, and allows customers to store money, as well as make P2P transfers without going to a postal outlet. Mobile account holders can also make bill payments, receive salaries and government disbursements, as well as pay for goods and services by swiping their mobile phones over a special reader. Each transaction is charged at Tk. 3, while cash withdrawals (cash-out) are charged at Tk. 5. This excess cost for cash-out is a built-in feature to dis-incentivise withdrawals and promote the usage of electronic money. At the moment, customers would have to have a smart phone (internet-enabled) to access the service, although there are plans to provide the service on basic feature mobile phones in the near future. To use the service, customers must open an account at a postal outlet, at a cost of Tk. 10. The service is currently being offered on a pilot basis in seven divisional cities (metropolitan areas), with plans for expansion to the wider network of postal outlets, as well as to an additional 100,000 agents. Each agent will be provided with a Bangla Pad, a hand-held tablet computer which will enable them to provide associated services. The Post Office has also provided training to postal staff, to enable them to provide the service effectively. 45 Importantly, the mobile accounts provided under the Mobile Banking Service are not linked to the other accounts provided by the Post namely, the Postal Cash Card accounts and Savings Bank accounts. As per the guidelines for mobile financial services issued by Bangladesh Bank, mobile accounts must be kept separate from standard accounts. However, an unknown factor is whether this requirement limits the linking of mobile accounts to the Postal Cash Card accounts by Bangladesh Post. III. 2 Rationale for the Business Model for Digital Financial Services Not long ago, the Bangladesh Post Office processed around four million physical money orders on an annual basis, which decreased considerably to 2.8 million as a result of competition from private courier businesses. 46 The introduction of the new mobile money order system, along with the other digital financial services would enable the Post to remain a key player in the remittance and financial services market. As a Government department, however, the Bangladesh Post Office would not have had the capacity to launch and operate digital financial services on its own. Forming multiple partnerships therefore enabled the Post to obtain much-needed capital investment, technology, and network infrastructure. These partnerships have also ensured that postal officials and staff receive the technical skills needed to effectively manage the new services. Partnership with Banglalink Mobile Company: Banglalink is the second largest Mobile Network Operators (MNOs) in Bangladesh, and has an extensive network coverage area. This partnership therefore allows the Bangladesh Post to ensure that the Mobile Money Order Service is accessible in a large number of postal outlets, especially in areas where there is little or no internet connectivity. Partnership with ITCL and Sonali Bank: On the network side, as ITCL operates one of the largest networks of ATMs and POS devices across the banking system, the Post Office can provide a good level of 43 Bangla Phone Limited website: 44 Post Office Launches e-pay: New service aims to earn more revenue, The Daily Star, December Accessed at 45 Ibid. 46 Mobasherur Rahman, Former Director General, Bangladesh Post Office, Interview in Union Postale, Issue 2, 2010 Former DG, Interview with Union Postale 9

10 interoperability for Postal Cash Card users, and thus ensure convenience and easy-access to financial services. Furthermore, the arrangement with Sonali Bank allows the Post to share the risks associated with cash management, as well as the costs of setting up ATM booths across the country, which can be significant. Partnership with Bangla Phone Limited: This partnership, in which Bangla Phone is responsible for the full implementation and operation of the mobile banking service, as well as the full cost of the service, enables Bangladesh Post to further utilise its network of postal outlets to expand financial services to the wider population, without bearing the full cost of rendering the service. III.3 Results Achieved Since the introduction of digital financial services at the Post Office, the popularity of Bangladesh Post [has been] increasing day by day. 47 In 2013, the Post earned Tk. 240,000,000 (~US$ 3 million) more revenue than the previous year, mainly due to the growth and success of its new financial services. The net income of the Post also improved considerably to Tk. 750 million in The Mobile Money Order Service has been particularly successful, accounting for 22.5 percent of the remittance money transfer market in Bangladesh by June The service is expected to grow at a rate of 5-6 percent in the future. IV. Analysis of the Business Model: Key Issues and Success Factors This section provides an analysis of the business models adopted by Bangladesh Post, in terms of the key success factors for postal financial inclusion, highlighted in the Universal Postal Union (UPU) Global Panorama on Postal Financial Inclusion. These factors include network, staff, financial capacity, trust, automation and process integration, willingness to foster financial inclusion, governance, legal and regulatory framework, marketing, and flexibility. A summary of the analysis is provided in Figure 2 below, which displays the strengths, weaknesses, opportunities and threats (SWOT) for the digital financial services provided by Bangladesh Post. Figure 2. SWOT Analysis: Digital Financial Services Offered by the Post Strengths Partnership arrangements allow the Bangladesh Post to share risk of investment, and obtain technological and network infrastructure and skills; Interoperability on mobile networks and Q-Cash ATM and POS network makes service easily accessible for clients; Good incentives provided to postal staff to promote new financial services. Weaknesses Silo approach to the development and operation of the Mobile Banking Service and Postal Cash Card means products cannot be linked for convenience; Shortage of skilled staff, particularly in rural offices, constrains the expansion of digital financial services to rural areas; Limited use of overall network, as only 20% of total postal outlets offer new financial services. 47 Nayeb Hossain, Director General, Bangladesh Post Office, Speech at UPU Global Forum on Financial Inclusion for Development, 24 October Ibid. 49 Sudhangshu Bhadra, Additional Director, Bangladesh Post Office, Speech at Universal Postal Union (UPU) Workshop on Postal Financial Inclusion, 31 October,

11 Opportunities Potential to link Mobile Banking Service to Postal Cash Card for further convenience; Potential to partner with MFIs and/or SOCBs to provide microcredit via mobile or through Postal Cash Card. Threats Competition from existing mobile and electronic solutions in financial services market could limit growth of the Post s mobile banking service in particular. Other a. Network Postal operators can be successful in enhancing financial inclusion if they are able to ensure full utilisation of the postal network, connectivity among postal outlets, and capillarity of the postal network (or high postal density). 50 As mentioned in previous sections, Bangladesh Post has a large and far-reaching network of post offices and outlets, totalling 9,886 outlets. However, financial services are currently only offered in roughly 20 percent of the total postal network. This suggests that the potential to expand new financial services to the mass population is as yet unrealised. In terms of internet connectivity, only 100 post offices were reported to have internet connection in This represents only 1 percent of the postal network, and is a significant weakness given that connectivity is needed to ensure clients have access to real-time information on their accounts. However, the Post has dealt with this weakness, in part, by using mobile network connectivity in postal outlets without internet connection, and without consistent electricity. The Post has already provided 8,500 rural Postmasters with SIM cards and mobile phones, so that postal outlets in very rural and remote areas are still able to conduct money transfers on behalf of clients. 51 This is important to help rethink our approach to upgrading connectivity and electrification in post offices in the developing world. In less than three years with a minimum investment, Bangladesh equipped 8,500 post offices to offer financial services. The same could be done in many parts of sub-saharan Africa where electricity is patchy at best and connectivity inexistent in the post offices. Finally, with regards to capillarity, Bangladesh Post fares reasonably well compared to regional standards. In terms of postal density by area (average area covered by a permanent post office in km 2 ), there is one post office per km 2 in Bangladesh, compared to the South Asia average of one post office per 29km 2. On the other hand, in terms of inhabitants, the average number of inhabitants served by a permanent post office in Bangladesh amounted to approximately 15,000, compared to an average of 9,000 for South Asia. 52 However, the South Asia averages for postal density are the lowest of all continents, indicating that the postal presence is the highest compared to other regions. Thus, Bangladesh Post does not necessarily need to open new offices, instead it should recruit an army of agents which can offer its financial services even closer to the population than the current post offices do. b. Staff Staff can be a key asset or liability for Postal operators, especially in the provision of postal financial services. The Bangladesh Post currently has a staff complement of over 39,000 employees. The success the Post has achieved in providing its new financial services can be attributed to the commitment of postal staff and management to learning new technologies, and to promoting the services. This has been achieved primarily through incentives. For instance, Post Master s in different postal outlets are paid a commission for every transaction that is processed, and commissions are higher if the Post Master has to use his or her own resources to fund a transaction if the postal outlet runs out of cash. 53 This is an excellent approach to reducing the issues of lack of funds to pay remittances in rural areas. Additionally, the SIM cards provided to Postmasters enable them to sell airtime to postal clients, thus providing them with extra income which has encouraged them to remain in the Post Office, focused on postal services rather than on other services UPU (2013). Global Panorama on Postal Financial Inclusion 51 Mobasherur Rahman, Former Director General, Bangladesh Post Office, Interview in Union Postale, Issue 2, 2010 Former DG, Interview with Union Postale 52 Figures for Bangladesh taken from UPU Postal Statistics (2010); Regional averages obtained from UPU Global Panorama on Postal Financial Inclusion (2013) 53 CGAP (2011) Innovation in Branchless Banking at the Bangladesh Post Office. Accessed at 54 Mobasherur Rahman, Former Director General, Bangladesh Post Office, Interview in Union Postale, Issue 2, 2010 Former DG, Interview with Union Postale 11

12 Furthermore, postal staff are trained on a continuous basis, and much-needed technical skills have been transferred through the partnership agreements the Post has arranged. Bangladesh Post reports that for the EMTS service in particular, hundreds of postal officials are being trained every month in new locations where the service will be offered. However, the Post still faces a considerable shortage of skilled staff. This problem is compounded by the fact that as a Government department, the Post cannot recruit staff independently, and must do so through the Ministry of Finance. Concretely, this entails that every new recruitment, even at the teller level, needs to be approved by the Ministry of Finance, this creates a hurdle for the development of modern financial services. As such, the lack of skilled staff may be a key factor limiting the expansion of the new financial services to other postal outlets in the network. In any case, the Post has embarked on a project aimed at building technical capacity among its postal staff and officials. 55 c. Financial Capacity In general, a Postal operator with positive net results is better able to cover investments in new technologies, as well as manage the day-to-day operations of the Post Office. 56 Bangladesh Post had been loss-making in 2009 and 2010, as operating expenditures increased significantly between 2007 and 2010, while revenues declined. However, this position has been turned around, as the Post has now reported positive net results, largely due to the success of the recently launched financial services. Additionally, by entering into partnerships with technology and other service providers, the Post has been able to generate revenue while transferring and/or sharing the cost of providing the services. For example, and as indicated above, the partnership with Sonali Bank enables the Post to transfer the cash management risks and costs associated with the Postal Cash Card, as well as share the cost of setting up ATMs activities the Post would not have been financially able to undertake on its own. In terms of liquidity, the Post has not experienced significant shortage of cash given it is a Government department and the Government provides its cash facilities in the country to the post. 57 However, there are security issues associated with cash delivery in very rural and remote areas, especially as in these areas, a Postmaster s house usually serves as the post office or outlet. Rural Postmasters often have to use their own cash for paying out remittances. They are refunded, with commission, by sub-post offices within two to three days. d. Automation and Process Integration Another factor that is essential to the success of postal financial services is automation and process integration. For a postal network to function effectively internal processes need to become automated and integrated. Bangladesh Post has made progress in this regard, especially with the Mobile Money Order Service. In particular, the central server installed to operate the Mobile Money Order Service performs an automatic audit trail as transactions are processed. The Post has recently implemented a project named Process Automation of Postal Department, which was aimed at automating the processes in 134 offices, including 71 Head Post Offices and 13 Main and Sorting Offices. The project involved installing computer hardware, as well as an integrated web-based application software in selected post offices. e. Willingness to foster financial inclusion through the Post In order for postal financial services to contribute meaningfully to financial inclusion, there needs to be a strong willingness from the Government, the Central Bank, as well as the leadership of Post, to promote postal financial inclusion. In the case of Bangladesh Post, all parties have shown considerable commitment to the provision of new, digital financial services through the postal network. On the part of the Government, direct support is provided to the Post due to its status as a Government department. The Government s Digital Bangladesh initiative has also provided support for the efforts to digitize the services offered by Bangladesh Post, particularly in rural areas. For instance, the provision of 55 Bangladesh Post Office website: 56 UPU (2013). Global Panorama on Postal Financial Inclusion 57 Mobasherur Rahman, Former Director General, Bangladesh Post Office, Interview in Union Postale, Issue 2,

13 social grants and transfers through the Postal Cash Card, shows a commitment not only to providing a social safety net for the poor, but also to modernising the financial services provided by the Post. On the part of the Central Bank, although the Post is not a licensed financial institution, the Bank has accommodated the Post s provision of mobile and electronic financial services without requiring compliance with onerous financial sector regulation. Finally, the leadership within the Post can also be credited for the development and success of the new digital financial services. In particular, the personal commitment of the former Director General, Mobasherur Rahman, and of the current Director General, Nayeb Delowar Hossain, has been an important factor driving the digitisation of financial services at the Bangladesh Post. f. Governance between the Post and Postal Financial Services Recent trends around the world indicate that postal operators are building legally independent entities to provide financial services across the postal network. As such, governance between the core postal business and the postal financial services business becomes a key factor in ensuring financial inclusion is achieved. Contrary to this trend, Bangladesh Post provides both postal and financial services under one roof, within the Government department. However, the case of Bangladesh Post is interesting as it holds a significant amount of savings on behalf of the DNS, while at the same time offers its new financial services on a proprietary basis, which are not linked to the Savings Bank. While the Post has established a Banking and Insurance Directorate to operate the Savings Bank, Savings Certificates and Postal Life Insurance, all financial and administrative decisions regarding these services are taken by the Ministry of Finance. The Post is yet to establish a Directorate for its new financial services. The primary drawback of this arrangement is that the financial services offered by the Post, from savings services to mobile banking, cannot be inter-connected in a way that is convenient for the Post s customers. This is a fairly significant concern given that savings account-holders that wish to use the Postal Cash Card, or the Mobile Banking Service, would have to open separate accounts within the Post, when they could easily link each service to one account held at the Post Office. This is particularly relevant, if we consider that the Bangladesh Post Office Savings Bank holds several million accounts many more than the current users of the new mobile products and economies of scale and scope could be achieved by linking the products. g. Legal and Regulatory Framework As discussed in Section II.3.1, the legal and regulatory framework for the Post is supportive of postal financial services. Recent amendments to the Post Office (Amendment) Act of 2009 [expanded the powers of the Post to offer financial services], and the introduction of agent banking guidelines by the Bangladesh Bank have clarified the provision of agency services by the Post. An important limitation within the framework, however, lies in the guidelines for mobile financial services. Specifically, the requirement to separate mobile accounts from standard accounts means that the Post, and other financial institutions, are unable to link existing account services to new mobile services. This may hinder the growth of the Post s new mobile banking service. h. Trust and Flexibility For Bangladesh Post, trust and flexibility are considerably important for the provision of financial services, especially given that many postal outlets are staffed by one or two agents in very rural and remote areas. Customers therefore need to be able to trust postal staff to remit funds on their behalf, or to provide cash when withdrawals are requested, for example. The efficiency of the Mobile Money Order Service, for example, has enabled customers to be more trusting of the Post as a financial service provider. The flexibility of the Post has also contributed to the success of the Post s new financial services. For instance, the provision of evening opening hours in some locations, the use of mobile post office vans and delivery-men to offer door-todoor postal and financial services, are remarkable examples of the flexibility of Bangladesh Post. V. Challenges All in all, Bangladesh Post has made considerable progress in developing and providing digital financial services, ahead of several financial services providers and MNOs in Bangladesh. Nevertheless, there are some challenges the Post is presently facing, and will face in the future, as it continues to expand its financial services across the postal network. These challenges include: Competition from other mobile financial service providers 13

14 Although the Post was the first institution to offer a mobile service, with its Mobile Money Order Service, banks and MFIs have already overtaken the Post in the mobile money market. The recently launched Mobile Banking Service will therefore face stiff competition from the likes of BRAC/bKash and Dutch Bangla Bank, as it expands its services. Disconnect between existing and new financial services may constrain growth of new financial services As stressed in the previous sections, the silo approach adopted in developing and offering financial services by the Post may become a constraint to the growth of the new financial services recently launched by the Post Office. Limited technical capacity of postal officials and staff may limit expansion of new financial services to rural outlets While Bangladesh Post has done well to leverage mobile technologies to allow financial services in some rural outlets to be offered simply, more skilled staff will be needed to support the expansion of the Post s new financial services to all the postal outlets. IV. Conclusions and Lessons Learned As in many other developing and emerging countries, mobile financial services are becoming increasingly important for financial inclusion. In Bangladesh, the Post Office has been at the forefront of employing mobile and electronic technologies to provide financial services across a large and far-reaching postal network. What the case of Bangladesh Post shows is that with the help of suitable partners, Postal operators can not only modernise their traditional remittance services, but they can also develop more innovative financial services that meet the need of the unbanked population to provide payments but also banking services such as virtual accounts either on a mobile or on a pre-paid card. In particular, some lessons learned are as follows: For Postal operators that are short on financial and human resources, partnering with telecommunications and technology providers can enable Posts to be more effective in providing new digital financial services; Although well-arranged partnerships provide effective financial and human capital, Postal operators still need to ensure that postal officials and staff are trained in the technical skills necessary to manage and operate the new services. This is especially the case when new services are expanded to rural areas; Interoperability across mobile networks for mobile services, as well as across ATM and POS networks for electronic card services, is essential if Postal operators are to provide easy and convenient access to postal financial services; Postal operators should embed incentives into their mobile or card solutions to incentivize staff to promote these services. Bangladesh Post did this and mobile services have done much better than in Pakistan, where similar schemes were launched by the Post, but incentives were not provided to staff. Providing higher commissions for Postmasters who pay out services from their own money when there is a shortage of cash in the office seems to be an interesting solution, provided proper checks and balances are in place. This can help respond to the liquidity issues in rural post offices that often have trouble paying out remittances due to a lack of cash. Offering both card-based and mobile-based solutions can be a good solution, since these products do not necessarily fill the needs of the same customers. Postal operators must consider how new financial services will fit in with existing financial services on offer. Linking financial services like savings accounts, electronic and mobile wallets, where possible and permissible, can provide further convenience for customers of the Post. 14

15 APPENDIX Table 1. Snapshot of Socio-Economic Context and Financial Inclusion in Bangladesh General Indicators Bangladesh India South Asia (Regional Average) Low-Income Countries (Average) Population (in millions) , ,649.2 Population density (people per sq. km of land area)* 1, Adult population, age (% of total population) Rural population (% of total) GDP per capita (current, US$) , , Mobile cellular subscriptions (per 100 people) Internet users (per 100 people) Financial Inclusion Indicators Account at a formal financial institution (% age 15+) Account at a formal financial institution, rural (% age 15+) Account used to receive wages (% age 15+) Account used to receive government payments (% age 15+) Account used to receive remittances (% age 15+) Account used to send remittances (% age 15+) Saved at a financial institution in the past year (% age 15+) Loan from a financial institution in the past year (% age 15+) Mobile phone used to pay bills (% age 15+) Mobile phone used to receive money (% age 15+) Mobile phone used to send money (% age 15+) Electronic payments used to make payments (% age 15+) Financial Access Indicators Commercial bank branches per 1,000 km Commercial bank branches per 100,000 adults ATMs per 1,000 km ATMs per 100,000 adults Source: General Indicators are for 2012, with the exception of Population Density which is for Figures obtained from World Bank World Development Indicators; Financial Inclusion Indicators are for Figures obtained from World Bank Global Financial Inclusion Database (Global Findex); Financial Access Indicators are for Figures obtained from International Monetary Fund (IMF) Financial Access Survey. 15

16 Table 2. Financial Market Structure of Bangladesh, as of June 2012 Regulated Financial Institutions Number of Institutions Number of Branches Percent of industry assets (%) Banks State-owned commercial banks 4 3, Specialised development banks 4 1, Private commercial banks 30 3, Foreign commercial banks Total 47 8, Non-bank financial institutions State-owned 2 Joint-venture 8 Private 20 Total Insurance Companies Life insurance: State-owned Private Non-life insurance: State-owned Private Total 62 Microfinance Institutions Total Licensed MFIs , 066 Source: Bangladesh 2012 Bank Annual Report; Insurance Development and Regulatory Authority 16

17 Table 3. Summary of Mobile Financial Services, September to October 2013 Source: Payment Systems Department, Bangladesh Bank,

18 Table 4. Summary of Mobile Financial Service Providers, as at March 2012 Source: Mobile Financial Services in Bangladesh: An Overview of Market Development, Policy Paper, Bangladesh Bank 18