Digital bank vs digital banking: Competing to bank the unbanked

Last week, a friend called after learning that Bangladesh Bank had given initial approval to five digital banks, including bKash Digital Bank, Boost backed by Robi Axiata, Nova backed by VEON and Square, DK Digital Bank and Kori, approved under the earlier political regime. His question was simple: “I already use my bank’s app. Why do we need another bank without a branch?”

It is a fair question.

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Established banks have done commendable work. Citytouch, Astha, SkyBanking, Cellfin, NexusPay, MyPrime and Smart Banking show that customers are comfortable paying bills, transferring funds and managing deposits by phone. But digital banking is largely a new window on an old house. It still carries branch costs, legacy systems and, in too many cases, a mountain of default loans.

A digital bank starts without branches and can potentially lend smarter. Wallet and telecom usage data can help identify people who earn regularly and repay on time. Small loans based on alternative data could carry lower default risks than the concentrated corporate lending that has strained the banking sector. Sceptics point out that several sponsors are telecom and fintech operators rather than traditional bankers. They bring reach and agility. bKash brought mobile financial services to remote villages, while telecom companies built nationwide networks. Banking expertise can be hired, but digital banks need experienced risk managers and technology-focused product teams. Bangladesh Bank should require that balance from the start.

The model will work only if digital banks do more than replicate mobile financial services. MFS providers rely heavily on cash-out, send-money and merchant fees. Digital banks need wider revenue streams, including lending, merchant payments, cards, remittances, insurance, savings and investment products. Transfers within the bank should be free or nearly free, while agent withdrawals should cost less than current wallet charges.

Product design will also matter. Beyond young customers, salaried professionals and corporates, digital banks could serve elderly people through simple pension accounts with Bangla voice assistance, healthcare payments and easy support from children abroad. Students, homemakers, farmers and small shopkeepers also need tailored products. The Tk300 crore paid-up capital should strengthen technology, risk management and lending, not just marketing.

The biggest risk is a closed ecosystem. If a digital bank serves only its parent network’s customers, deposits and risks could become concentrated. Universal interoperability through NPSB and Bangla QR should therefore be enforced across SIMs and wallets. Financial inclusion will also require partnerships with RMG payrolls, microfinance institutions, cooperatives and agricultural networks. Existing agent networks, ATMs and deposit machines should be used where regulations allow. In rural and suburban areas, local agents and voice helplines can help customers move to digital banking.

Purpose-built technology can further distinguish digital banks. Cloud-native systems, behavioural credit scoring, real-time fraud detection, biometric onboarding and open APIs could turn people without formal credit histories into bankable customers.

The regulator’s role remains crucial. Digital banks need a functional sandbox, clear data-hosting rules, access to credit bureaus, liquidity facilities and strong cybersecurity requirements. Consumer protection is equally important, as easy access to digital credit must not become easy debt.

To my friend, my answer remains: You may not need another bank. But millions of Bangladeshis still outside formal finance do. If these institutions keep that purpose at their core, they could open a new chapter in financial inclusion.

The writer is a lead partner with Financial Excellence Limited.