Bangladesh’s digital payments infrastructure has undergone multiple shifts in recent years, with Mobile Financial Services (MFS) emerging as a key contributor. During the COVID-19 pandemic, mobile money was crucial in providing millions of people access to digital financial services (DFS) for their daily needs. Even as the pandemic subsided, mobile money usage surged in 2022, surpassing pre-COVID levels. The habit of using digital payments, enforced by the pandemic, has become deeply ingrained for many, indicating a fundamental shift in consumer behavior. Amid pandemic-induced lockdowns and restrictions, reliance on digital payments, including mobile money, surged globally, contributing to the rapid growth in registered accounts and active usage. Looking at the figures post-Covid, total MFS transactions have nearly tripled from 2020 till H’1 2024.

Barriers to Scaling DFS in Bangladesh

A host of products has been introduced to meet the diverse needs of consumers and businesses. Mobile Financial Services, digital wallets, digital nano loans, and online payment platforms have become integral parts of everyday financial transactions. While MFS constitutes a major segment of the DFS industry in Bangladesh, the country’s digital payments infrastructure still needs considerable development. 

• Absence of Interoperability: The absence of an interoperable digital platform raises transaction costs for consumers and restricts the seamless transfer of funds between different financial platforms. This lack of connectivity creates a fragmented payments ecosystem, resulting in user friction as consumers frequently need to cash in and cash out to navigate between services. Strengthening interoperability would enable smoother, cost-effective digital transactions, fostering a more cohesive digital financial ecosystem.
• Insufficient Adoption of Security Standards: The Payment Card Industry Security Standards Council (PCI-SSC) and EMV standards are crucial for securing payment transactions. The slow adoption of these standards leaves payment systems more vulnerable to fraud and cyber-attacks.
• Lack of Incentives for Digital Transactions: There is a need for government and regulatory bodies to create incentives for digital transactions, which would encourage greater adoption and integration of electronic payment systems.
• Poor Internet Connectivity: The slow and expensive internet bandwidth, particularly in rural areas, hinders the effective deployment and usage of electronic payment systems. Moreover, the recent 6-day nationwide internet shutdown has caused significant damage to the IT industry, further eroding customer confidence in digital financial services. 
• Regulatory Bodies as Operators: When regulatory bodies also act as operators within the payment ecosystem, conflicts of interest are created. This dual role can lead to biased decisions that may not favor innovation or fair competition among different stakeholders.

Designing a Blueprint for a Robust Payments Infrastructure

1. Digital Identification: Bangladesh has taken leaps in developing digital identification systems, particularly with the rollout of Smart NIDs and Bangla QR. These initiatives aim to streamline transactions, enhance security, and improve access to government services. The Bangla QR system facilitates cashless transactions, while smart NIDs offer secure authentication for individuals accessing various services. However, challenges remain in ensuring universal adoption and interoperability across different platforms and services. India's Aadhaar system established a digital identification framework by providing a unique biometric ID to over 1.2 Bn individuals, enabling access to financial services and government benefits. While the e-KYC process has become much more efficient, there is still room for improvement in achieving widespread adoption and integration across various services.
   
   
2. Interoperability: The central bank of Bangladesh, in collaboration with the ICT Division, established the Interoperable Digital Transaction Platform (IDTP) known as "Binimoy” in 2022. This initiative aimed to overcome the prevailing fragmentation among MFS providers and Payment Service Providers (PSPs), which inhibited seamless money transfers across different platforms. While the initiative held promise for enhancing financial accessibility, its implementation faced hurdles. Private sector entities led the development process, resulting in a lack of comprehensive user testing and pilot programs. Consequently, the platform encountered security vulnerabilities, leading to instances of financial malpractice within days of its launch.
   
   
3. Data Security: While Bangladesh has taken steps to enhance data security measures, including the enactment of the Data Security Act, there are still gaps in enforcement and compliance. Strengthening data security protocols, implementing encryption standards, and fostering a culture of cybersecurity awareness are essential steps to safeguarding digital assets and preventing unauthorized access or data breaches. The vulnerability of data security has been highlighted by the hacking of 25 local websites, leaking sensitive information of various stakeholder groups. Bangladesh's data security and consent frameworks are still evolving, with opportunities to strengthen user rights and privacy protections. In comparison, Singapore has stringent data protection laws, such as the Personal Data Protection Act, ensuring high standards for data security.   Bangladesh can draw inspiration from Singapore’s approach to data governance and explore opportunities for collaboration and knowledge sharing to develop robust data protection frameworks.
   
   
4. Data Repository: Although Bangladesh has made strides in its digital transformation journey, particularly in the MFS segment and the advent of digital banking guidelines, the establishment of a robust data repository remains a crucial component that is yet to be fully realized. Drawing inspiration from India's DigiLocker, Bangladesh can leverage solutions to propel its digital infrastructure forward. Key benefits of having a digital data repository include:
   a) By deploying multi-factor authentication services, a digital data repository ensures users have full control over their  information, enhancing privacy and data protection.
   b) Documents stored digitally can streamline bureaucratic processes and reduce the burden of carrying numerous documents.
   c) It accommodates various document formats and facilitates digital signatures, simplifying the verification and submission process.

Global Insights: How India and Singapore Shaped Their Infrastructure

India and Singapore have developed advanced and integrated payments infrastructures with strong regulatory frameworks, interoperability, and consumer trust. In contrast, Bangladesh is still developing its digital financial ecosystem. The country’s ongoing efforts, particularly in mobile financial services and digital identity, reflect a commitment to improvement, but several challenges remain. To enhance its payments infrastructure, Bangladesh can draw lessons from the successes of India and Singapore in establishing regulatory clarity, promoting interoperability, and driving consumer adoption. 

1. Regulatory Framework: Singapore has a well-established regulatory framework overseen by the Monetary Authority of Singapore (MAS), which promotes innovation while ensuring consumer protection and financial stability. The Payment Services Act (2019) consolidates the regulation of various payment services, providing clear guidelines for operations and licensing. This regulatory clarity fosters a competitive environment that encourages the entry of fintech companies. Additionally, the Personal Data Protection Act (PDPA) offers a balanced approach to personal data protection by regulating the collection, use, disclosure, and care of personal data. It applies to all private sector organizations, regardless of size, ensuring that a wide range of entities adhere to data protection principles. Central to the PDPA is the emphasis on obtaining consent from individuals before collecting, using, or disclosing their personal data. This empowers individuals to have control over their personal information and promotes transparency in data handling. In contrast, Bangladesh’s regulatory landscape is still evolving, characterized by overlapping roles among regulatory bodies that can hinder innovation and create conflicts of interest.
   
   
2. State of Interoperability: Singapore’s payment ecosystem is characterized by high interoperability among various payment systems, facilitated by initiatives like Fast And Secure Transfers (FAST) and Singapore Quick Response Code (SGQR). These systems enable seamless transactions between banks and payment service providers, enhancing user experience. On the other hand, India’s Unified Payments Interface (UPI) excels in interoperability, allowing smooth transactions across platforms. It features QR-based payments where customers can scan merchant-displayed codes for easy transfers. UPI’s layered architecture enhances scalability and flexibility by building upon existing systems.
   
   
3. Consumer Education and Trust: Government and regulatory bodies like the Reserve Bank of India (RBI) have launched large-scale campaigns, such as the "RBI Kehta Hai" initiative, aimed at educating consumers on the safe use of digital payments, which has boosted trust and reduced apprehensions around security issues.

Way Forward

To develop a robust and layered payments infrastructure, it is essential to evaluate existing systems and identify areas for improvement and integration. A crucial first step is addressing the digital divide, which serves as the cornerstone of an inclusive payments ecosystem. This gap encompasses disparities in access to smart devices, internet connectivity, and digital literacy. Initiatives to subsidize smart devices, lower transaction costs, and extend reliable internet to rural areas must be prioritized. Additionally, introducing value-added services such as micro-credit and conducting financial literacy programs can drive adoption among underserved populations, creating a more equitable and inclusive payments ecosystem in Bangladesh.

By refining and “stacking” these systems, Bangladesh can achieve seamless digital payment operations. The figure below illustrates a series of anticipated outcomes of implementing an interoperable digital platform. This will generate a ripple effect across multiple sectors, encouraging key players to adopt these services and collaboratively address market demand.

While the country has embraced the growth of digital financial services over the years, the path ahead demands a coordinated and deliberate approach. Strengthening interoperability, enhancing data security, and fostering digital literacy are vital steps toward a robust, layered payments infrastructure. By addressing regulatory challenges and ensuring seamless integration across platforms, Bangladesh can unlock the full potential of its digital economy, driving financial inclusion and sustainable growth for the future.

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