The story of Bangladesh is one of relentless reinvention. Bangladesh’s ambitious digitalisation vision, the Digital Bangladesh initiative, first laid out in 2008, has been a key driver of its decade-long progress. Evolving from a primarily rural agrarian economy, it is a tale of leapfrogging from analogue to the digital era.

As was recently made clear by Bangladesh Prime Minister’s ICT affairs advisor, ‘the next dream of Digital Bangladesh is to make a cashless society.’ A cashless society is one where people complete financial transactions through digital or electronic services, rather than with physical banknotes. The benefits of a cashless economy are manifold: reduced crime, increased safety, corruption deterrence, faster transactions, reliable data, automated ‘paper’ trails, increased tax compliance and quicker financial inclusion.

Bangladesh has a unique opportunity to become a world-leader in this area. The essential ingredients already exist: extensive mobile network coverage, widespread personal mobile phone ownership with verified financial accounts and, particularly, the central bank having clear regulations for a cashless ecosystem to operate effectively.

Zero to big

Firstly, let’s look back at Bangladesh’s journey so far. In 2011, when the mobile financial services (MFS) industry was taking its first steps, Bangladesh’s regulators faced a choice: treat the nascent industry as an extension of mobile network operations or as a regulated banking service. They chose the latter, and it proved to be a masterstroke.

As a result of this decision, the MFS industry is regulated by the country’s central bank, the Bangladesh Bank. A set of MFS guidelines was formulated in 2011 based on two fundamental principles: the protection of the customer’s fund and the central bank having full visibility of fund flow. Consequently, the central bank is able to enforce Bangladesh’s international anti-money laundering and combating the financing of terrorism legal obligations on the MFS industry. This has meant that all regulated MFS providers face high scrutiny in ensuring valid customer information and audit trails.

The policy led to users having a high degree of trust in the MFS industry, and generally viewing them as safe and reliable platforms. The knock-on effect was that users started saving their funds in these platforms. There was a particularly acute effect on people’s wellbeing because any form of saving is an early sign of people coming out of poverty.

Even a decade earlier, a USD 14 mobile phone with an average person already had more processing power than the computer NASA first used to send humans to the moon. When the average person gets hold of such a tool, they maximise its utility. When Unstructured Supplementary Service Data (USSD)-based technology, already available in every handset, was used to design mobile money solutions, users with basic mobile phones smartly availed the mobile money service with their apparently simple gadgets. They adapted, thus maximising their USD 14 investment. In addition, when these solutions were backed by timely policies, mobile money flourished in Bangladesh.

The smart user

It is important to realise the importance of the individual customer’s investment in a mobile phone. Without a customer investing in a handset, it would be impossible to achieve any major goal in this space. When mobile money proliferated, handset ownership was critical. Likewise, in the next journey towards a cashless society, individual ownership of smartphones will be essential.

When a Bangladeshi consumer avails the services of a conventional bank, it costs the bank approximately USD 1.5 per customer footfall. However, the average transaction of the common customer — say a vegetable vendor — is around USD 12. Therefore, it becomes challenging for a conventional bank with its brick-and-mortar arrangement to cater to a customer’s banking needs if the transaction size is around USD 12.

It was at this moment that Bangladesh’s central bank built a regulatory framework that allowed millions of customer wallets to be maintained in a cost-effective way. While keeping these wallets under the central bank’s jurisdiction, the modus operandi allowed for a low-cost, well-incentivised agent network to operate. The agents were keen to provide cash-in and cash-out services. Thereafter, the mobile financial services (MFS) sector was born in Bangladesh to realise this vision.

The early mover experiences

In Bangladesh, each MFS agent is essentially a ‘human ATM’ who runs a mom-and-pop shop. The mobile money business gives them an income source alongside their day-to-day small businesses. bKash, which is the largest player in the MFS sector, has 269,000 such agents all over the country, and is growing everyday. There is a bKash agent within walking distance from anyone’s home, anywhere in Bangladesh. There the customer can convert her digital money into physical cash.

Similarly, to build a cashless society, we must work towards a ubiquitous ecosystem which accepts digital money everywhere, for everything. This is a chicken and egg issue: unless there is an abundant presence of shops that accept digital money, customers won’t adopt digital currency. On the other hand, until a great number of customers transact with digital money, shops will not invest in the digital currency infrastructure. Bangladesh has to continue investing in the ecosystem until it reaches the tipping point where both customers and shops reach their comfort zones.

In Bangladesh, the first critical use case for mobile money was sending money home. Mobile money emerged as a fast and efficient income transfer tool. People of lower-income groups from far-flung districts were moving to income generating hubs for jobs. On the other side, divided by the country’s great rivers, less-developed districts were far from the bustling commercial hubs. The income from these hubs is spent in those districts. Research shows that those who sent money home did so using informal systems, through ‘friends,’ with a lot of risk and at a significant cost.

Now, in the era of mobile money, a rickshaw puller stops by a friendly agent’s shop, tops up his wallet, and sends the digital money to his wife’s wallet. She, in turn, goes to the agent near her home to cash-out the money. As mentioned earlier, a bank’s footfall cost was USD 1.5. As an early mover, bKash had to find a way to reduce this cost significantly to make sure that the customer finds it affordable. Meanwhile, bKash had to develop a viable business model for all the participants of the ecosystem.

On the supply side, bKash had to consider the cost of various factors. These factors included channel fees of agents, mobile network cost, technology, salaries, marketing and other operational investments. Naturally, the cost could be reduced by expanding the volume of the business.

This brings us to the cost calculation of the channel operators who tie up their own cash to do the liquidity management. A retailer has to incur inventory cost to buy stock. Only then can he sell it. His capital is tied up in maintaining this inventory, and from which he must get some returns. After surveying many potential agent shops and looking at the return requirements, a cash-out fee was determined. Effectively, digital money as a consumer good was then envisioned. It was possible to do this within the regulatory framework, ensuring protection of the customer’s fund. All this fueled the impressive growth of mobile money.

By the end of 2021, it is clear that mobile money is a powerful income transfer tool in Bangladesh. Traditional brick and mortar banks have played the role of drawing in money, from agrarian populations in rural areas of the country into the income hubs of cities. With their intervention, MFS providers like bKash have successfully reversed the flow. What was once a stream of funds reaching the country’s villages has now become a mighty river of mobile money reaching every corner of the country. Mobile money has been an effective income distribution player for Bangladesh.

Fertile ground for cashless-ness

Since 2020, Bangladesh government’s decision to digitally implement direct cash transfers for social security schemes has hugely benefited the recipients. It has also strengthened good governance, enhancing transparency and efficiency. Other steps like wage digitisation for factory workers and digital payment of utilities have enriched the digital records of each user. This, in turn, can help financial institutions to design bespoke financial products, thereby contributing to the growth of a more financially inclusive society.

There are some noteworthy examples of trends towards a cashless society out of Bangladesh. The direct, as well as residual, benefits to society will be countless. There needs to be a digital ecosystem where people can meet their economic needs without converting digital money to physical cash.

According to a report by American consulting firm Kearney, ‘going cashless’ is one of the five global trends that will play an outsized role in the future of businesses, governments and citizens around the world. Sweden is set to be the first cashless society in the world by 2025. According to Riksbank, the central bank of Sweden, less than 10% people use cash for their payments. These are mostly older generations in the country. Bangladesh, with its decade-long digitalisation record, could do the same.

What next?

What can Bangladesh do in order to accelerate the journey to cashlessness?

Regulated interoperability: To create this cashless ecosystem, interoperability between various financial service providers will be essential. Traditional banks, MFS providers and any other transaction platforms need to be interoperable, meaning they need to be able to exchange information. Those at the ‘bottom’ of the ecosystem will benefit the most from this process. In order to make interoperability a success, the role of the central bank of Bangladesh will be crucial in devising an arrangement for settling payment and transfer disputes. Furthermore, regulated interconnect fees will be a necessity.

Low-cost, high-speed data and smartphones: Bangladesh’s vigorous protection of users of mobile networks indicates that the government will ensure data speed continues to rise at affordable rates. Despite Bangladesh already having low-cost data, the people are sensitive to data costs. Data cost can be further lowered specifically for electronic and digital payments services. Discounted data rates for access to payment services will help adopt cashless technologies and bring more people under the umbrella of the formal sector. In addition, individual ownership of low-cost smartphones will be critical for secured payment solutions for the mass.

Incentivising behaviour change: Human behaviour can often be stubborn to change. In order to wean people from physical cash, there needs to be incentives for people to adopt cashless mechanisms. In real life, there are transactional costs for cash users to turn cashless. A policy to stimulate cashless payments should specifically target the user, then the merchant as well. The third party in the ecosystem, the service provider, does not need any incentive. Bangladesh’s central bank is best placed to oversee the governance of such a new policy to ensure that these incentives are not abused. The Philippines, India, and Vietnam are great examples to look at. The policymakers in those countries have successfully encouraged businesses to adopt digital payments. Bangladesh has to curate a solution based on its own circumstances. It may consider examining the actions of other central banks as a starting point.

What the future holds for Bangladesh is extremely exciting. As this paper has hopefully demonstrated, the country has truly been a world leader in mobile financial services. With its current trajectory, it is inevitable that a cashless society will be a reality in Bangladesh in the near future.

Kamal Quadir is the CEO of bKash. He is an e-commerce entrepreneur. He was the founder of CellBazaar, a phone-based electronic marketplace for developing countries. He was a business development lead at Occidental Corporation and based at the New York City Chamber of Commerce. He was a Young Global Leader of the World Economic Forum. He pursued his graduate studies at the Massachusetts Institute of Technology (MIT).