Banking the unbanked requires new ways to fight fraud

Fintech offers easy access to banking for millions of people in developing countries, but regulators need to find better ways to address the risks, says Dr Mamiza Haq

As financial technology or ‘fintech’ evolves, new services are increasingly bypassing the banks to enable users to avoid transaction fees. In the coming years, banks will not only have to compete with other financial institutions, but also with online services which allow customers to make payments and trade with each other directly.

In developed economies, bitcoin is increasingly used to bypass the banks; however, what is more surprising is the growth of new services in developing countries. With two billion people worldwide without a bank account, fintech is helping to bank the unbanked and bring financial services even to those in remote and rural areas.

One example is the success of bKash in Bangladesh. Of the 163 million people in Bangladesh, over 70% live in rural areas and less than 15% have bank accounts, yet almost all have mobile phones. 

bKash introduced the concept of mobile phone banking in 2011. Now over 27 million people use their mobile to receive salary payments, make purchases, pay bills and receive remittances in real time.

A joint venture between Bangladesh’s BRAC Bank and the US company, Money in Motion, bKash counts Bill & Melinda Gates Foundation among its investors. It now handles around 70% of the country’s mobile money transfers.

Accounts are linked with individual SIM card numbers and can only be accessed by the user through their personal PIN. With the combined services of Mastercard, Western Union and bKash, it has become easier, more convenient and secure to make cross-border money transfers.

Many microfinance institutions including Oxfam, Sajida Foundation and BRAC itself use bKash to provide financial services to clients. Institutions can disburse loans directly into their members’ bKash accounts, while members can make loan repayments and deposit savings with them. Usually, microfinance clients incur high transport costs as many live in rural areas. The bKash model not only helps to reduce clients’ costs, but also staffing costs for institutions.

However like any other financial services provider, it has its challenges. bKash operates through a network of 80,000 agents across the country, who open accounts for local clients and facilitate transactions. Hence, the system depends on the trustworthiness of its agents.

In early September 2017, the central bank discovered fraudulent or irregular transactions conducted by over 2,800 agents. The state’s Central Intelligence Department is currently investigating and the agents involved have been suspended.

Regulation and supervision is very important for developing economies. One way to address the challenges would be to establish a separate regulatory body to monitor these institutions. Regular audits and on-site supervision could help them to improve services.

The agent-based model also needs to be much more formalised. Just like any banking business where agents handle other people’s money, resources and time should be spent to train them and they should be held accountable when things go wrong.

Agents should be considered as part of the business, which would increase disclosure and improve transparency. Those in financial services will be familiar with the principle of ‘know your client’ (KYC) – the obligation to verify an individual’s identity to prevent money laundering. The emphasis here should be on ‘know your agent’. The 5Cs that are applied to borrowers in a banking environment - character, capability, collateral, compliance, and conditions - should also be applied to the agents.

In addition, regulators should digitise the clients’ identification details, which are currently stored with local agents, to prevent them being denied bKash services – for example where someone whose details are held in their local village goes to work in the capital, Dhaka.

Fintech is helping to bank the unbanked, but we need regulators to catch up if we want to build and retain people’s confidence in the banking system.

Dr Mamiza Haq is a finance lecturer at UQ Business School. Her research interests include banking regulation, credit risk, microfinance and Islamic banking.

Last updated:
25 March 2019