Emerging payment channels and prospects

Transaction channels have been evolving at a great pace over the last five years. Historically, the most prominent payment channel has been MICR cheque clearing, a channel used quite frequently for high-value transactions.

In fact, MICR clearing accounted for 61.31% of the value of all transactions for the second quarter of 2020. Similarly, it accounted for 69.25% and 79.5% of the value of all transactions for FY 2019 and 2015 respectively. This decrease in contribution is not the result of a contraction of the MICR channel but rather a transition caused by the emergence of digital payment channels.

Most of these emerging payment channels are consumer-driven in nature, such as- agent banking, Electronic Fund Transfer (EFT), e-commerce transactions, prepaid card transactions, internet banking and most importantly, mobile banking.  All the aforementioned digital channels accounted for 25% of the transaction value through all electronic channels in FY 2019. (Q2 2020 33.3%)

Agent banking has transformed the way banking is done today. Not only has it allowed banks to reach the remote areas of Bangladesh but it has also eliminated the need for banks to set up physical branches in those areas.

Subsequently, the consumer side of the story is one that reflects financial inclusivity as indicated by the growth of the agent banking channel. In the last four years, the transaction value via agent banking has grown at a 4Y CAGR of 170.5%. At the same time, the number of transactions grew at a CAGR of 136.5%.

While agent banking transactions have the fastest growth rates, it accounted for 4.1% of all transaction value via all channels in FY 2019.

E-commerce transactions are also on the rise. These are the transactions that have been made by using debit or credit cards for either international or local e-commerce payments.

Transaction value through this channel has grown at a 4Y CAGR of 66.50%. The total number of transactions have surged by growing at a CAGR of 85.5%.

Moreover, local e-commerce transactions grew at a CAGR of 89.9%, while international transactions grew by 56.9%.

However, this channel accounted for only 0.06% of the total transactions via all channels in FY 2019. This reveals the fact that a large portion of e-commerce consumers still relies on either cash payments or mobile banking channels.

The growth of prepaid card transactions is very promising. The total transaction value for the last 4 years has grown at a CAGR of 36.2%. At the same time, the number of transactions grew at a CAGR of 48.73%. However, this channel accounted for only 0.05% of all transactions in FY 2019.

Additionally, internet banking transactions grew at a 4Y CAGR of 29.4% while the number of transactions grew by 27.8%. Even though the popularity of internet banking may not be as high as that of mobile banking, internet banking transactions still accounted for 1.98% of total transaction value in FY 2019.

Similarly, Electronic Fund Transfer (EFT) transaction value grew at a 4Y CAGR of 26.5%. The transaction count has also grown by 22.7%.

The reliance on EFT has increased significantly in 2020. At the end of Q2 2020, EFT transactions accounted for 8.81% of the total transaction value via all transaction channels compared to 5.6% in FY 2019.

Likewise, mobile banking transactions have experienced substantial growth, especially in terms of the overall volume of transactions. The ease of access and use has been the driving factors of growth so far.

As of June 2020, mobile banking transactions have grown at a 4Y CAGR of 24.4%. This has translated into a 19.7% growth in the number of transactions made during the period.

Additionally, for FY 2019, mobile banking transactions accounted for 13.22% of the total transaction value via all channels. Given the current context, mobile banking has become a more widely accepted method of payment across the nation.

Many of the aforementioned channels like e-commerce and prepaid card transactions have a low contribution to the aggregate transaction volume via all channels. However, experts believe that customer-centric innovation will allow these emerging channels to gain a greater degree of acceptance.

Mr Maksudul Chowdhury, CEO and Analyst at Magpie Analytics, commented, "bKash and other MFSs are disrupting the OTC transaction model. According to Bloomberg reports, 93% of all transactions in India are retail transactions. The situation is similar in Bangladesh. Therefore, the sooner we see more customer-driven solutions, the faster the respective channels are expected to grow".

He added, "We have seen evidence in China dating back to 2015 when 50% of internet users were relying on QR code-based payment channels. In China and India, the usage of QR code-based transactions is much higher now. bKash has launched its MyQR feature this year, which enables individual users to have their own QR codes. Not only will this boost p2p transactions but also eliminate the need for retail merchants to go through the tedious process of availing in-store QR Stickers."

A decade ago, financial inclusion was a massive concern, especially when traditional banking was the only alternative for transactions for the masses. With the advent of mobile and agent banking, financial inclusion has been improved significantly.

Looking forward, consumers want a more user-friendly experience. So far, these emerging channels have provided that to some extent. However, more customer-centric developments in the market paired with the recent decision of the central bank regarding MFS interoperability and bank transfer will be a gamechanger for these channels. The implementation of this service will not only allow users to send money from one MFS to another but also allow users to deposit money into bank accounts. With the growth in retrospect and the central bank's decision in hindsight, the outlook for these digital channels is very promising indeed.

Abrar Ahmed is a BI Intern, Magpie Analytics.