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Bangladesh Financial Inclusion Study

Market Overview


Market Dynamics


· Competitive Rivalry — Moderate

24 banks with agent banking model, with 5 banks accounting for 80–90% of the current market penetration share. The competition is moderate among the banks and will keep on increasing as the agent banking penetration and saturation increases.


· Threat of New Entrants — Moderate to high

Threat of new entrants in agent banking is moderate to high because of the push by the central bank to increase its penetration. Entering the agent banking market requires partnership with a bank having an agent banking license which is regulated by the central bank.


· Bargaining power of customers — Low


Bangladesh has a population of nearly 166 mn with 60% living in rural areas. It accounts for nearly 74% adults with more than 73% literacy rate. Around 50% of the adults are still financially excluded due to lack of access to financial services and low awareness about the products and services and their advantages. So, agent banking can provide the suite of financial services to these customers who are otherwise unreachable by regular branches. Once they open an account through an agent with a bank, the chances of switching to another bank will be low because of agent-bank exclusivity. Overall, customers in rural areas have low bargaining power to dictate terms.


· Bargaining power of suppliers

- Agents — Low to moderate

Bangladesh has over 10,000 agents and 14,000 outlets, seeing a growth of 16% and 12% respectively. The central bank has defined the procedure and requirements for agent selection and onboarding. They are primarily locals in rural areas with a known presence and place of business. With 24 banks having agent banking operations, of which only 5–6 banks have significant presence, agents have moderate bargaining power in terms of choosing which bank to tie up with. But, agents have a high switching cost as they are required to have an exclusive relationship with only one bank. Overall, agents have low to moderate bargaining power in the market.


-Banks — High

Only 24 banks have agent banking operations in Bangladesh with 3–4 banks having double digit market share. Different banks are offering different commissions to its agents and are in a position to manage as per their terms within the prescribed guidelines of the central bank.


· Threat of substitute products — Low

The formal banking penetration is very low in the market compared to the developed nations. Customer stickiness is high once an account is opened because of the trust that agent banking partners bring in when acquiring new customers. This will reduce the switching from one bank to another and increase the probability of upselling other products and services.


On the lending side, banks having lending operations may have an upper hand because of larger service offerings but compared to MFIs, the threat is low because of higher rates of lending by the MFIs.


Barriers to entry


-Banking partner having agent banking license from the central bank

-Regulatory clearance and compliances like setting up an eligible entity.

-Capital requirements to setup operations (branded outlet, logistical support and equipment to agents, training, etc.)

-Experience of running distribution network operations.

-Political clout or influence in starting agent banking operations.

-Competition from established players like telecom companies having an operational network of people who can work as agents — This will result in larger break-even time for new entrants as they will achieve operational efficiencies later than the incumbents having an established distribution network.


Barriers to exit


-Regulatory compliances to exit

-Economic factors like taxation implications to exit with money

-Government and social restrictions of shutting down business vs selling it off to be run by some other company

-Restrictions on exit based on certain performance benchmarks and goals if grants are taken initially

-Strategic contractual terms with banks for whom agent banking operations are being managed


Industry Lifecycle — High Growth


-The agent banking industry has transitioned from an early stage of acceptance to a high growth stage for the last two years. This trend is expected to continue for the next couple of years because of the increasing focus and benefits being realized by both the banks and the customers

-With the increasing acceptance of such a model and low product differentiation, competition is increasing in this space with more banks setting up operations every year

-Few banks are the current market leaders but the market share and revenues are growing due to a large un(der)served population segment present

-There are moderate barriers to entry, mostly to have serious players to be present in this space. Overall, there is a push from the central bank to proliferate this model

-Target customer awareness is still low with many not feeling the need to have banking accounts.


Bangladesh market scenario


Business Correspondents — Primary revenue source generating significant cash

There are 24 banks running agent banking operations. 82% market share in outlets and 90% in accounts is captured by just five banks. Out of a total of 14,000 outlets, Bank Asia and Dutch Bangla Bank are clear leaders with more than 4,000 outlets each. Because of dense outlet footprint, they have significant market share of accounts and deposits. Islami Bank Bangladesh’s case is interesting considering that they have less than half the market share in agent banking outlets and accounts of the leading banks but, they have still been able to capture the largest amount of deposits with a 29% market share.


Digital Lending

With a loan to deposit ration of 8.34%, lending through agent banking is a very small and largely underserved service. Only 9 out of the 24 banks with agent banking operations are doing lending through agent banking and the focus is increasing here because of clear cost benefits. It is a concentrated market with 99% market share being captured by just top 5 banks. BRAC Bank is a leader in this space having more than 50% market share with just over 500 outlets.


Collections and Recoveries

This is again a very small segment but will grow as the lending portfolio grows. Agents, mostly being locals of the same area, tend to have a good relationship with the customers which will make collections easier.


Strategic options to invest and build agent banking/BC network


Potential Business Strategies

Below are some of the options in increasing order of risk for an incumbent in India:


a. Expand the agent banking business in the existing regions in India which is a case of market penetration — least risky


b. Expand the agent banking business in the new geographies or regions within India which is a case of market development — slightly more risky than the first


c. Enter the agent banking business in Bangladesh which is a case of market development — considerably more risky because of a totally new market


Market Development in Bangladesh


Entering a totally new geography is riskier than expanding in new areas of existing geography because of different regulatory, political and customer’s behavioral risk.


A business with prior experience of working in this space can enter Bangladesh in one of the three ways:


a. Distribution partner


b. Financial technology company


c. Financial services advisory company


Value chain or operational flow of agent banking


The technology interface connecting the agents to the banks is that of the banks for the agent banking services.


Below are some areas where a business can have a potential presence in the value chain:


· Establishing the agent partner network and their training — being done by other


· Manage customer acquisition


· Manage banking partnerships or relations


· Technology or interface connected with multiple banks to cross sell other banking products or services like investment options


Market Entry as a Distribution Partner


Agent Banking Requirements


· Agent can be any individual or company with a trade license


· Local residents are preferred as agents


· Own or rented premise is required for agent banking outlet, cost of which will be borne by the agent


· One person or company cannot be agent to multiple banks at the same time



Agent Banking Risks


· If agent-bank exclusivity is removed, then it is a risk for new entrants in the master agent model. The incumbents in the master agent model will already have an established distribution network to be able to leverage it with other banks.


· Whether a master agent can partner with only bank or multiple banks for setting up agent banking operations needs to be seen as different banks may have different commission rates and may be leaders in different space. Eg. Bank Asia has large market share in accounts and outlets, while it is lagging on lending side. Compared to it, BRAC bank is a leader in the lending segment with only a fraction of the branches.


· Role and importance of master agent or intermediary is crucial to their survival in the entire value chain. Will the intermediary have a control on its agent network through some checks and balances or once created, the agent network is directly working with the banks through the banking infrastructure needs to be assessed.


· For a late entrant, the strategy should be to enter in un(der)served areas or pockets and saturate them. It will be difficult for such a business to be a market leader in outlets and agents share with market leaders having nearly 5000 outlets but, they can lead or be a contending player in the lending segment which majority of the banks are still not focusing on.


Market Entry as a Financial Technology Company


A pure play technology company can be explored as an option to set base in Bangladesh. Banks or financial companies not having the capabilities to leverage the technology-based solutions to improve their services can be targeted.


The other option as a technology player can be to launch a financial products marketplace wherein multiple partners on the supply side can provide their products and customers on the demand side can pick and choose from them. This can be used to bring in a more meaningful inclusion of the rural sector in the formal financial economy of the country.


High Level Financial Analysis


· Investment of 15–20 lakh BDT is required to establish one outlet


· Two options for the distribution network can be explored:


o Option 1: Outlets can be launched in an ownership model. FOS network per outlet will be required to make the unit economics work and penetrate the market deeper through doorstep services


o Option 2: Agents can be partnered with to launch their outlets. An operations and sales team can be formed which will be responsible for identifying potential agent partnerships and agents will be required to put in the investment for launching an outlet. We can take a commission cut from the revenues (20% assumed)


Based on the high-level estimates and back-of-the-envelope calculations, option 1 is not a recommended way of entering the market to setup the distribution network. Subject to regulatory compliances, a large FOS will be required to make the unit economics work. Due to significant fixed investment costs per outlet, a large amount of funds will be required to make an impact in the market and compete with more established players.


Option 2 is a more feasible one. With the grant of 25 lakh INR (~28.7 lakh BDT), 140 outlets can be setup. This is much more scalable way to gain significant traction and market share.


Exit Options

Distribution model


· Raise funds to create a strong distribution network and expand it which can be used for multi-purpose activities. Sell the distribution network to another player.


· Withdraw profits from the Bangladesh business to India and exit the business


· Last option is going public but that is a very large time commitment subject to becoming one of the market leaders in the given space


Technology company


· Develop and market technology to support banks or other financial institutions to promote their products and services


· Once a large traction has been achieved, either sell the technology to a larger player within the same space or complimenting their existing product and service portfolio


· Or, continue improving the product and technological capabilities and harvest the returns from it


Conclusion


Bangladesh market is a growing one which has seen the acceptance of agent banking in the last few years through high growth. Entering the new markets with an existing service having a proven expertise is a natural progression to expanding the business. Late entry in a market reduces the risk of non-acceptance of a product or service but also brings in competition from the incumbent players.


Bangladesh market entry can be considered with a couple of points in mind:


· Being a late entrant, becoming a market leader, especially in accounts, outlets and deposits, will be a steep challenge. The business may have to contend with being one of the players in this space


· Even despite the rapid growth, there are certain opportunities which have not yet picked up. Focusing on lending and promoting women entrepreneurship can be differentiating factor


· This should be seen as an investment with a medium to long term time commitment of 7–10 years

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