Nagad Digital Bank plans to launch its commercial operation in July this year by offering branchless banking services to customers across the country, a move that may herald in a new era of banking in Bangladesh.

As part of the plan, Nagad will roll out its in-house operation on March 26 on a trial basis to make sure products and services are convenient for customers.

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"We will ensure that all our consumers get customised services," said Tanvir A Mishuk, managing director of Nagad, in an interview recently.

Nagad, one of the leading mobile financial service (MFS) providers in Bangladesh, is one of the two firms that received approval from the central bank in October to establish digital banks.

Nagad says digital banks are expected to accelerate cashless transactions and digital transformation and make the government's financial inclusion agenda complete.

Bangladesh has 61 banks and except for a couple of state-owned banks, most lenders are urban-focused. As of September, banks had 11,200 plus branches and more than half were in urban areas, data from the BB showed.

Mishuk said Nagad would reach the grassroots level where traditional financial institutions have not expanded their footprint yet.

He highlights that informal transactions accounts for 52 percent of the economy. Banks and financial institutions are competing to capture a slice of the rest 48 percent carried out through formal channels.

Nagad holds a 38 percent stake in the MFS market, which records nearly Tk 4,000 crore transactions daily.

The operator said it would focus on this segment. It facilitates transactions amounting to Tk 1,300 crore every day.

"We will have no clash with traditional branch-based banks and MFS operators. We, as a digital bank, will rather work as a bridge between these two," Mishuk said.

"Our goal is to make our products in a way that customers find convenient."

He points out that globally no digital bank is yet to emerge as a full-fledged digital bank.

"We aim to become a full-fledged digital bank. So, we have to work with more than two dozen vendors. Recently, we have brought four globally renowned technological solution providers together to develop a platform for the digital bank."

Thanks to its operation as an MFS provider, Nagad has a database of 8.5 crore customers and it will design products for individual clients by analysing data using artificial intelligence.

"We will even work on the requirements of grocery store owners who are running business in the remote areas. We are developing technology that can be used by all at ease."

Nagad, which launched its operation on March 26, 2019, as an MFS provider under a revenue-sharing model with Bangladesh Post Office, has been operating with an interim licence from the BB. At one point, it wanted to run the MFS operations with an NBFI licence.

It received the go-ahead in May. But in August, Nagad surrendered the NBFI licence and sought a digital bank licence. It plans to become a full-fledged bank.

Mishuk said there is a bright prospect for digital banks in Bangladesh since a large number of people are still unbanked.

In order to reach customers, it will initially provide services through its 71 service centres and forge partnerships with big banks, especially state-run lenders that have branches in rural and suburban areas.

Nagad is aware that providing services through such centres will be costlier than via apps. On the other hand, apps will encourage people to avail services digitally instead of visiting branches.

Mishuk said there are challenges in expanding digital banks. One of them is the low penetration of smartphones.

In Bangladesh, 52.2 percent of households have a smartphone, according to a Bangladesh Bureau of Statistics survey in 2022.

Another barrier is the lack of financial literacy, he added.

In its guideline for digital banks, the BB said digital banks would not be permitted to give out loans to carry out foreign trades and term loans to medium and large industries.

But Mishuk says: "In order to enable digital banks to flourish, the authorities should allow us to support foreign trade."

"This will give us incentives to bring remittances. The Bangladesh Bank should think about this."