Governance and Audit Scope of Mobile Banking in Bangladesh

 

As the number of registered mobile banking users in Bangladesh approach 10 million, Raihan Alhusain, Head of mCommerce Operations in Airtel Bangladesh offers his expert practitioner insight into how the mobile financial services guidelines issued two years ago support the remarkable growth in the country. He reflects on areas in which regulations could benefit from extension to support new scenarios stemming from this rapid growth.

Views specified are solely Raihan’s personal views as an expert in the mobile banking sector. This interview is part of the research Shift Thought conducted in the release of our “Digital Money in Bangladesh 2014” Viewport.

Background

In September 2011 Bangladesh Bank published the Mobile Financial Services (MFS) Guidelines allowing commercial banks in Bangladesh to start bank-led mobile financial services. The guidelines describes the services that may be offered, including a broad range that are required to promote financial inclusion. Only the bank-led model is permitted. The guidelines prescribe essential governance processes including licensing, agent management, AML/KYC, education of customers and agents, building awareness of customer services, security and controls related to technology, data retention policy and reporting and more.

Q: Why is this a good time to discuss 2-year old regulations?

image_thumb2Today the number of people in Bangladesh using financial services delivered through their mobile phones is fast approaching 10 million. Since the start of these services in 2011 when DBBL started without distributors, the systems have grown more sophisticated and with greater coverage so that now all the usage scenarios and implications are of great importance across the country. The guidelines issued by Bangladesh Bank as Central Bank and main regulator of financial services underpin the delivery of services. However along with the guidelines I thought it important to discuss the practical checks and balances these new systems imply in greater detail at this juncture.

Currently banks and mobile network operators (MNOs) execute agreements to ensure network coverage and agents reach for the service. The audit and governance scope of mobile banking in Bangladesh mainly focus on adherence to the policy established by the guidelines. Additionally as practitioners we continue to learn about governance and audit and determine the best ways for responsibilities to work across partners. By reflecting on these there may be useful points for others in Bangladesh as well as for other bank-based branchless banking developments in India, Nigeria and elsewhere around the world.

Q: What is the concept of a trust account in mobile banking and why is it important?

In the bank-led model adopted in Bangladesh, banks are the custodians of funds deposited against each mobile wallet. Even though the guidelines do not include the trust account mechanism, in order to be aligned with the guidelines, funds kept in the bank must to be treated as a liability and may not be used for operational purposes. This applies to Telco-led models as well. The accounting book should clearly mention the accumulated amount through a specific general ledger code, following IFRS (International Financial reporting standards) principles. The audit scope in this aspect should include a complete checking of the trust account mechanism.

Q: What is the concept of a book balance mechanism and why is it important?

At any point of time, the relevant balance in the bank book shall be equal to the virtual balance of all registered mobile accounts shown in the system. This means at any point in time, reconciliation processes must be in place to allow the following to be checked:

Bank Balance = Channel Balance (Agent Wallet Balance+ Distributor Wallet Balance) + Bank Branch Wallet Balance (If Banks deploy their own Branch to work as channel for Mobile Banking) + ATM Wallet Balance (If Banks deploy their own ATM channel to work as channel for Mobile Banking) + Registered Customer Wallet Balance + Merchant Point Wallet Balance + Commission Wallet Balance.

If a Bank disburses commission related to mobile banking through the mobile banking platform, it must keep an equal amount of funds in the account.

All virtual points created in the economy must be backed by the balance kept in the Bank. This mechanism is very important and should be adhered by so that virtual money is not created in the economy without being backed up by physical cash in the Bank.

The audit scope of this section should involve the matching of general ledger virtual wallet balances against the bank account balances.

Q: What are some of the compliance processes and issues relating to agent and partner management?

The Cash Points/ Agents are to be selected by the bank and a list with their names and addresses must be submitted to the Department of Currency Management and Payment System (DCMPS), Bangladesh Bank. This list must be updated on a monthly basis. Banks may need to develop their own Agent Accreditation Policy for this purpose. This policy should include assessment of competence to implement and support the proposed activity, financial soundness, ability to meet commitments under adverse conditions, business reputation, security and internal control, audit coverage, reporting and monitoring environment.

Banks have to follow the full KYC policy issued by Anti Money Laundering Department (AMLD) of Bangladesh Bank for the cash points/agents/partners. Banks bear all the liabilities that arise from improper action on the part of their subsidiaries/cash points/agents/partners. Banks need to perform periodic audits of the agent locations in order to ensure proper processes are being carried out by them. Strict action should be taken by the banks against the agents for not following the processes.

The audit scope in this section should include a complete checking on the modus operandi between the banks and the agents/ partners.

Q: What are your thoughts on audit relating to transaction management?

Clear guidelines have been issued by Bangladesh Bank relating to the transaction limits as well as overall caps including limits per customer, per agent and per month. Service charges have been fixed for each transaction. Banks need to ensure that these limits and caps are built into the mobile banking platform and service charge rules are set up as per the policy. Periodic audit is needed to ensure that this continues to be properly applied.

Q: What are some of the processes that must be followed regarding KYC management?

Banks have to use the prescribed ‘Know Your Customer (KYC)' format as given in the MFS guidelines. The Bank will be responsible to ensure that KYC processes implement guidelines issued by Anti Money Laundering Department of Bangladesh Bank (AMLD) for all customers and across all agents and partners. Banks need to ensure that the agents are properly trained in KYC management and also ensure that agent KYC has been checked and maintained properly while registering the agent.

The Audit Scope for KYC management should include the modus operandi of registering agents by Banks, checking of the authenticity of the documents provided while registering customers and agents and also record keeping of the documents related to KYC.

Q: How is AML compliance assured for the new branchless banking transactions?

All transactions should be monitored through an IT-based system developed by the banks. Banks shall ensure that suspected transactions can be isolated for subsequent investigation. Banks shall develop an IT based automated system to identify suspicious activity/transactions (STR/SAR) before introducing the services. Banks are expected to immediately report to Anti‐Money Laundering Department of Bangladesh Bank regarding any suspicious, unusual or doubtful transactions likely to be related to money laundering or terrorist financing activities.

A periodic audit is needed to ensure the mechanism of reporting of suspicious transactions. The audit scope in this sector includes checking of rules set in the system based reporting mechanism which should be in in line with the AML act of Bangladesh.

Q: What are some of the processes and issues expected to be followed relating to security?

Banks must follow the Guidelines on ICT Security for Scheduled Banks and Financial Institutions, 2010 issued by the Bangladesh Bank and ICT Act, 2006 to address the security issues of Mobile Financial Services which will address issues of confidentiality, integrity, authorization and non-repudiation for each transaction through the portal. Apart from the PIN, a second factor of authentication should be built‐in for additional security as chosen by the bank. A periodic audit must take place to ensure the implementation of security policy as mentioned in the guidelines.

Q: How is the customer required to be protected by the guidelines?

As per the MFS guidelines banks are held responsible for protecting consumer rights and for dispute resolution. Banks may address dispute resolution with the assistance of selected partners and agents. The Audit scope in this sector may include the checking of bank policy and turn-around time (TAT) for dispute resolution. It may also look into the proactive approach banks have taken to ensure better customer services to the customers and agents.

Q: Please share your final thoughts on governance and audit of processes relating to mobile banking

Bangladesh Mobile Banking has seen a tremendous growth in the last few months and is expected to achieve more than 15 million mobile banking accounts at the end of 2014 by reaching over 110 million cell phone users, where 60% are unbanked out of the population of 160 million.

Considering this success, growth, and expectation, in my opinion some of the gray areas that were not covered by the MFS guidelines need to be revisited. For example, both Banks and MNOs need to work together with the policy makers to set policies in regards to Branding, Platform Management and Marketing. This will set clear guidelines for everyone on the Do’s and Don’ts of each sector. MNOs, who have the greatest reach and expertise on Branding and Marketing need to be able to help banks to reach the expected number of mobile banking accounts through innovative marketing strategies, branding concepts and campaigns.

Apart from this, another area which needs to be taken care of is the modus operandi related to Payment Services. Through separate permissions granted by Bangladesh Bank, most of the MNOs provide various payment services such as BillPay, Railway Ticketing using their own platform. They have also integrated their platforms with those of the banks to offer various financial services. A common guideline needs to be issued and added to the MFS guidelines to clearly mention the modus operandi and policy with regards to these kinds of services.

In conclusion, I must say that for MFS in Bangladesh the sky is the limit. I am sure Bangladesh will be an example for the whole world in the setting up successful mobile financial services and also in establishing our main objective of banking the unbanked through mobile financial services. Just imagine what we can already do today in Bangladesh using mobile banking. We can pay our electricity, gas and water bills, buy railway tickets, send money to loved ones, receive salary, cash-out through ATMs and designated outlets, top up mobiles and more. Kudos to the banks, MNOs and the policy makers, Great achievement indeed!!!!

About the Author

raihan_thumb5Ruhullah Raihan Alhusain is a professional with over 9 years of experience in Mobile Banking. He graduated from the University of Texas at Arlington with an Honors Bachelor in Business Administration. He started his career in mCommerce in Bangladesh with Grameenphone Ltd., a Telenor ASA. As Head of mCommerce Operations at Airtel Bangladesh Raihan continues to passionately build and launch specialised products in co-operation with DBBL. Recent projects include micro credit disbursement through mobile banking, airtime sales proceeds collection, mobile banking through modern trade such as ACI Swapno and mobile top-up with bKash.

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What must happen for Branchless Banking in Indonesia to move beyond pilots?

 

Rakhi Sahay, Shift Thought distributor in Indonesia shares her thoughts on the payments scene in Indonesia as the regulators seek to encourage financial inclusion through branchless banking. What are some of the sticking points and how can Indonesia join the ranks of other countries where these services have already entered into mainstream use?

Impressions of an Indian in Indonesia

We moved to Indonesia in June 2012 and it’s been wonderful living here since. Yet a few things came as a surprise, for instance the way people pay. Coming from India where people now increasingly use card payments, having to pay with cash took me back a bit. We had heard about the widespread use of cash for transactions in Indonesia but I had not imagined it to be at such a high level. While doing provision shopping even in big departmental stores, I was taken aback when cashiers did not accept local bank debit cards that I was using  – “sorry we only accept X bank debit card or cash”. Generally the small shops and stores that do business along the street only transact in cash in spite of having customers from middle income groups who have bank accounts and can make payment by card.

My interest in branchless banking and payments was further triggered by an informal  cimageonversation I had with my help, Fatimah. Every month she sends money to her mother who lives in a village. For this she goes to the nearby bank to deposit cash into her mother’s account. I got talking to her to learn about how people from her village who work outside send money home or pay their utilities. Do they use mobile technology for purchase and payment? Do they know about some of the new services being launched by banks, mobile operators and other providers in Indonesia?

Fatima knew about mobile banking and in fact had the m-banking application of Indosat on her mobile. However although she knew about the functionality it provides, she does not use it or plan to use it. She does not have a bank account which she believes is needed for mobile payments and transfers and also does not regard transferring through bank as a reliable and secure mode of transfer. Come to think of it, I too have not felt comfortable with using my mobile for payments. My interest was piqued and I chatted with others close to me and both banked and unbanked people tended to have some reason for not yet investigating the new methods available.

20131207_100534This conversation made me wonder - what needs to happen for myself and Fatimah, along with millions of other Indonesians to benefit from innovations to enjoy more convenient payments? If I feel restricted in making transfers and payments, how would people from remote islands and lower economic segments manage their daily needs? Do we need to change the mind-set of people? How can we increase accessibility to gain confidence? Surely branchless banking can add much value for people who have limited access to banking facilities.

 

20131207_100626Regulations play an integral role in providing a favourable ecosystem for any new banking initiative to flourish. Bank Indonesia, the regulator, has been treading the path carefully and its first pilot which ran from April 2013 just ended in November 2013. The regulators are now consolidating results and by early 2014 intend to roll out the full regulations on branchless banking. Many providers await this in order to obtain the certainty required for investing in the new technology and marketing efforts required to successfully launch the services for all sections of society.

The Market

The country is one of the early entrants in offering financial services through microfinance activities. Although there are a range of service providers to cater to different socio-economic groups, only 19.6% of the population has formal accounts (2011 Global Financial Index). It is estimated that around 100 million Indonesians do not or cannot access formal financial services in a population base of 250 million.

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The vast geographical expanse and remote terrain creates hurdles in the provision of financial services. This creates a potential opportunity for alternative channels such as branchless banking and mobile money. Branchless banking is the delivery of financial services outside conventional bank branches through the use of retail agents and information and communications technologies to transmit transaction details (as defined by CGAP).

In 2012 there were 260 million mobile subscribers with 143 million unique subscribers. Only half the numbers of people possess bank accounts as compared to unique subscribers. The opportunity has been spotted, but scope for adoption remains immense. Branchless banking with the use of mobile technology and agent networks is rapidly improving financial inclusion in countries around the world. Mature microfinance markets of Bangladesh, Pakistan and Kenya have been able to achieve rapid adoption rates. Can Indonesia too leverage the penetration of its mobile technology to foster financial service? The large base of mobile users makes it easy for service providers who do not need to educate the masses on mobile usage.

Regulatory Environment

The regulators have been moving cautiously towards creating the regulatory environment required for this. A new regulation of December 2012 allows full encashment for person to person transfers using mobile wallets at agents. Then in April 2013 regulator Bank Indonesia (BI) released guidelines on branchless banking for banks and MNOs. The move caused MNOs to refocus on strengthening agent networks. As a pilot initiative, BI mandated five banks – Bank Mandiri, Bank Rakyat Indonesia (BRI), Bank Sinar Harapan Bali, Bank Tabungan Pensiunan Nasional (BTPN) and CIMB Niaga to offer branchless banking across the country, to cover rural and remote areas as well. The initiative is looking at bank-led, telco-led and hybrid models, to be tested under this program. The banks are also mandated to include provision store owners, gas stations and business outlets as agents in order to extend financial services to the excluded.

Progress of Branchless Banking Pilots

Reports on the progress of pilots suggest that the participating banks are able to see positive results in implementing branchless banking. Customers, in particular local business, homemakers and students benefit from more convenient access.

Banks have gained an increase in the number of new customers as well as agents. Bank Sinar Harapan Bali, a subsidiary of Bank Mandiri, reported an increase in new customers and agents and aims to double the number of agents. Similar information is reported by BRI, another state-owned bank, who is has reported around 200 transactions per day which is equivalent to daily work of one teller.

Going beyond pilots

The pilot has got many other banks and MNOs interested in branchless banking. But they are waiting for the regulator to open-up and also look at results from the pilot phase. The regulators are also considering inclusion of BDPs (regional development banks) to increase accessibility at regional levels. Bank Indonesia now plans to review the pilot phase and look at pan-country roll-out of branchless banking.

The power of mobile technology in expanding the reach of financial services is immense. It is encouraging to see regulators in Indonesia taking informed decisions in formulating regulations in this space. Indonesia has the advantage of being able to learn from other countries that now have mature branchless banking markets. Pre and post roll-out, it might be useful to take a closer look at such successful markets in terms of product offerings, agent selection, processes and platforms. Over 2014 much can be achieved through proper training of agents, pricing and commission strategies and marketing and communications.

clip_image002Rakhi Sahay, Shift Thought distributor in Indonesia, is a development professional with a deep interest in innovative channels that drive inclusive development. Rakhi’s interest in branchless banking is a result of long experience of working with institutions and consulting agencies in India.

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Mobile Banking in Bangladesh – striding across regulatory divides through savvy Marketing

 

In this guest post Raihan Alhusain, Head of mCommerce Operations, Airtel Bangladesh provides unique insights and practitioner experiences of the tremendous work in progress in Bangladesh. What strikes me from my interview with Raihan and the experiences he has shared is that the consumer is truly placed at the centre when mobile operators and banks come together in an earnest attempt to leverage the best strengths of each partner.

 

The early days of BillPay

imageThe story of Mobile Banking in Bangladesh starts in December 2006 with the launch of BillPay by a Mobile Network Operator (MNO). I was a part of the team that launched the service. We started everything from scratch, designing the financial operation process, the product, reconciliation and payment process. When BillPay became available across the country I felt that I was blessed, I felt that I was doing something good for my country and for the people. Until now, whenever I see the BillPay sign I feel the pride of launching the service in Bangladesh.

In the early days, customer education and customer trust were the biggest challenges for my team. The service was launched in Chittagong and soon started to create interest amongst the customers. Customers were most attracted by the convenience. At one point in time, people in the Chittagong region were able to pay water, electricity and gas bills through the BillPay platform.

imageBillPay used two models, one with 100% validation of data and the other with zero validation of data. The utility company, having automated billing and payment data mainly used the validated system of BillPay. This means whenever customer paid a bill of a specific month, the billing data used to get verified through the utility company billing server and after the payment was made, the payment data was also verified and posted automatically.

What didn’t go well though was the need for manual posting of BillPay data. For some of the utility companies, posting of payment data was totally manual and MNOs had to send paper based payment data to the decentralized offices of the utility company. This process required manual intervention and extensive man-hours to post data.

Then came Railway Ticketing. The same MNO launched the service under a new name. This created another option for BillPay wallet customers. They were able to not only pay electricity, gas and water bills but also to pay for their railway ticketing. This removed the hassle of manual processing of railway ticket payments and added another milestone to the automated payment system in Bangladesh. However, mobile banking through the BillPay platform offered the payment services and fund deposit (Cash in) only. Cash Out was not available.

MFS Guidelines arrive

In 2011 the MFS Guidelines took complete shape and were published by the Bangladesh Bank – a bank-led Branchless Banking model was introduced. One of the major local banks first launched the complete mobile banking facility allowing customers to withdraw cash from the authorized outlets of the bank and also through ATM.

This model was agent initiated. That means most of the revenue generating transactions were initiated through the agent wallet. DBBL signed an agreement with several telcos to ensure the availability of mobile banking at their networks. Since this model was agent initiated, the agreements with telcos also ensured Telco Agent networks could be used for Mobile Banking.

What went well in this model was the Trust Factor. Mobile banking with a bank added more trust in the mind of customers. What did not go well was the channel/ distribution model they used. Initially all the agents belonging to them were directly connected to their Bank Branches. This means an agent had to go all the way to branches for mobile banking (Cash in and Out from agent wallets).

The learning continues

imageShortly after this a subsidiary of another SME based local bank launched their service. Their model was completely customer initiated. All they needed to do, was to sign up with the MNO for access through USSD. They did not depend on the Telco agent to expand their channel reach.

They came up with a distribution channel structure similar to that of the MNO. What went well for them was their expertise in running an effective channel and their strategy towards establishment of their Brand. Their brand achieved more prominence than the other brands in the country. They also signed an agreement with several telcos that ensures the availability of their services across networks.

Both the players ensured the availability of the mobile banking services through the USSD network. The success of this partnership depended on several initiatives taken by both bank and telco partners. Initiatives such as B2B (Channel Payment), P2B (Merchant Solution), B2P (Salary Disbursement, Micro Credit Disbursement), G2P (Government Allowance Payment) brought ease in the life of customers, increased revenue for the Banking Partners as well as ensured stickiness to the MNO SIMs.

Mobile banking goes mainstream

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According to Bangladesh Bank sources, 17 banks now offer mobile financial services (MFS) within just three years. Mainstream PCBs (private commercial banks) now provide services. For instance, we have Brac Bank's bKash, DBBL mobile banking, IBBL MCash, the Prime Bank Easy Cash and more. The number of mobile banking accounts is about 7.21 million with about 0.108 million agents countrywide. The volume of transaction was $1,030 million in the first quarter of 2013. Significant achievements indeed!

Personally this has been an exciting journey for me as I look back and compare what our services could do for customers with just BillPay, and what we can now do for unbanked customers. This makes every experience precious, and justifies all the hard work from our regulators and people across all the different industries.

About the Author

raihanRuhullah Raihan Alhusain is a professional with over 9 years of experience in Mobile Banking. He graduated from the University of Texas at Arlington with an Honors Bachelor in Business Administration. He started his career in mCommerce in Bangladesh with Grameenphone Ltd., a Telenor ASA. Today as Head of mCommerce Operations at Airtel Bangladesh Raihan continues to passionately build and launch specialised products in co-operation with DBBL. Recent projects include micro credit disbursement through mobile banking, airtime sales proceeds collection, mobile banking through modern trade such as ACI Swapno and mobile top-up with bKash.

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Get inside your competitor’s head with the Shift Thought Digital Money SAGE

 

Although mobiles and smartphones present an exciting new dimension for consumer payments, the Shift Thought Digital Money SAGE offers payments providers a panoramic view, so as to prepare for the eventual growth that is essential for building alternative payments services.

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What impact will Digital Money have on employment?

The chief executive of Barclays, suggested during investor meetings that Barclays aims to become a self-oriented company, allowing staff to focus on added value. Antony Jenkins envisages a future in which the bank employs as few as 100,000 people (current strength ~140,000).  

While this is being positioned as blue-sky thinking rather than a statement of potential job cuts, it got me thinking about how the advent of Digital Money is likely to impact what is closest to our hearts at Shift Thought, namely the creation of jobs world-wide.

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