POLICY & REGULATORY AND COMPLIANCE OF MFS in Bangladesh
Practices of MFS service providers : KYC and Customers confidence support, securityÂ
Background:
Bangladesh MFS market current situation
1. Marketshare :  Bangladesh MFS market is an absolute monopoly . According to  Financial Inclusion Insights report of 2015,  one company holds 91% market share in terms of Active mobile-money (MM) account holders,  and 82% market share mobile money usage wiseÂ
2.  Most of the transactions (over 80%) are done  throughOver the Counter  (OTC)and active wallet user  is just 8%.  As per BB latest reporting 59% of total MFS accounts are  inactive
3. Volume of transaction vs real financial inclusion: in BD some  takes the volume of transactions ( BDT 616 crore) as the parameter of financial inclusion. In reality,95% of transactions in Bangladesh are still basic money transfer and it has actually only enabled money transfer through an electronic channel  and replaced earlier modes of courier service.  Bangladesh has long way to go  to include the financially excluded as still approx  60% of adult population are  financially excluded  (FII, 2016) and  (WB, 2014)
Bangladesh Institute of Bank Management conducted a study titled, “Impact of Mobile Banking on Financial Inclusion in Bangladesh†in 2015. The study identified number of Challenges in this marketÂ
• Long way to go to reach financially excluded, with innovative  and customized products around  credit, saving,  other payment services and insurance  services. Till date the market haven’t seen much innovation in this respect
• Fraudulent KYC:  BIBM report reveals fact quoting LEAs (Law Enforcing Agencies), “it is very easy to open an MFS account with fake identity. Money laundering is mostly done through mobile accounts registered with fake identity. An investigator from CID, Bangladesh Police, observed that: ‘While we ask for KYC information during investigation of any relevant crime, 99 out of 100 KYCs are turned out to be with false registration. Of course, if criminals have easy opportunity to open mobile account in fake names, why they will open account exposing their real names?’ Agents simply ignore maintaining minimum CDD (customer due diligence) during opening an account, nonetheless, Bangladesh law authorize only dealing banks to open a new account (CID, Bangladesh Police, 2015). Guidelines on Mobile Financial Services (MFS) for the Banks 2011, clause 6.0 mentions ‘Customer account, termed "Mobile Account" will rest with the bank and will be accessible through customers’ mobile device’.  Now the Question raises is it really being followed , specially by the leading service provider?
• Use of OTC: Report title “Mobile Financial Service in Bangladeshâ€, jointly conducted by  fhi360,mSTARand USAID state that  “Transactions that are completed with the assistance of an agent are called over the- counter(OTC) transactions. The main reason for restricting OTC transactions is to ensure compliance withKnow your Customer (KYC)/Anti-Money Laundering (AML) requirements. The sender andreceiver in a pure OTC transaction are untraceable since the transaction is actually conductedentirely through agents.â€Pure OTC transactions  are still common inBangladesh and has become a widely practiced irregularity in MFS sector inBangladesh, which is a serious problem and is considered as the root of many evils in this sector.Â
• National security  (terrorism financing/ money laundering) concern in absence of proper Surveillance / monitoring  or regulatory measures: MFS money transfer services lacks surveillance in terms of detection of source and destination of funds.  Besides, we need to have ability to fight cyber crimes and AML/CFT (Combating financing for Terrorsm) issues by adopting new technologies and strict monitoring system. Bangladesh Bank has issued a circular to discourage mobile paymentsmade by individuals without a mobile wallet. To date, however, they are yet to devise amechanism to properly monitor agents and take actions accordingly. In Bangladesh, number of recent incidents in financial sector and  particularly highlights the sheer need of building capacity and mechanism to combat AML, CFT and Cyber crimes.
• Innovation and Investment suffers with only one serious player in the market : In Bangladesh, a Systematic monopoly has been created with entry barrier to potential and serious investors . though 29 licenses are awarded so far but in reality we see only two serious players and one dominates the market clearly. with global fintech revolutions MNOs, tech-based companies, start-ups are increasingly becoming part of the bigger eco-system. Though globally over 60% of MFS providers are MNO led and but in Bangladesh they havenot been allowed to get into the business so far.  As mentioned in previous articles, most countries of Latin America, Sub-Saharan Africa and Asia have adopted regulation to have a competitive, investment  and innovation friendly market with the access of MNOs.  All  of our neighboring countries  of SAARC regions  (relatively developed market like India, Sri Lanka )and  that were behind us (Myanmar, Nepal) have enabled MNOs to be part of the industry realizing the global trend and potential strengths of the sector.
Keeping in mind the existing challenges , global trend around Mobile money and futuristic view following are my policy recommendations :
a. Remove entry barrier to non-banks for a competitive , future proof and innovative eco-system: MFS guideline 2011 keeps MFS mostly bank-led, for this business to be more controllable and predictable from the point of  AML and  customer service point of view.  MNOs specially can contribute with its Technical and compliance expertise and appetite to invest and innovate can ensure  contribute more for Lawful Interception Activities  by leveraging  the existing skill set of MNOs rather than starting from basic. At present, MFS is in its elementary level of transaction. In future the complexities is expected to increase manifold (in terms of interoperability, product portfolio, security , fraud management, up gradation of IT platform etc) and in that case Telecoms’ experience of working in enormous scale,  capital intensive, fast paced, complicated and technology driven industry will count  even more.Market driven partnership model should be encouraged between banks and non-banks where the liquidity management and custody of customer funds must remain with Banks.
b. USSD: USSD access regulation by MOPT :at present, operators are not incentivized to give the access and USSD access consumes similar resources like voice service and  sustainability rests on a justified return for the consumption of the used resource.  Currently, access to USSD is provided on revenue sharing basis.  This arrangement is not going to  be sustainable in long run as the transactions which exhaustively use the USSD channel is extensively misused  and are mostly free of cost . MNOs are not getting the rational return for the use of their resources. Universal access is even more important to MNOs and  overall Quality of service (QoS) is getting affected  because of free usage of telecom resources/ spectrum which also reduces the value of spectrum if this is forced through.  Connectivity should be separated from service and USSD should be regulated like other telecom resources or services.
4. Address the legacy issue:MNOs are providing number of payment services (e.g. Utility bill payments, Railway ticketing etc.) since 2006 and much before the MFS guideline came in being.  these services has proved their capability as well as trust of millions of customers proves that these services are in demand. I would request the policymakers to open the payment space formally to them as the legacy is being continue for last 10 years with the adhoc service approvals.  As per ‘ Bangladesh Payment and Settlement System (BPSS)  Regulation 2014’  and the proposed ‘National Payment System (NPS) Act’ there is no requirement for bank ownership for PSP (Payment Service Provider) that seek a license. Both BPSSR and the draft NPS act provide full oversight and regulatory power of the BB over such entities. Hence, a consistent link should be formed with BPSSR 2014 and establish MFS companies as a specialized type of PSP or e-money issuer licenses while ensuring important regulatory issues through  direct and risk based regulations. Clearly define the MFS Platform as an e-money issuer/PSP to reduce the need for bank ownership for regulatory purposes as payment is not a banking service. Any entity with the right capabilities able to hold 100% ownership of e-money issuer platforms, including banks.