Bangladesh is one of the biggest markets for mobile money globally, with over 110mn users transacting USD100bn over the past year. bKash, a subsidiary of BRAC Bank, is the domestic market leader, with transaction market share in the region of 75%. Recent heavy investment to grow the customer base, increase the merchant footprint, and improve e-wallet functionality, has resulted in heavy losses at bKash in recent years. But key performance indicators have been moving in the right direction in recent quarters, and in Q2 22 bKash registered its first quarterly pre-tax profit for over three years. While there is likely to be some quarterly volatility, we do think that the trend in financial results should now be positive, provided there is no strategic decision to lift investment activity once more.
In this note, we take a look at the mobile money industry in Bangladesh and highlight how key performance metrics at bKash have sharply improved in recent quarters. As one of the leading mobile money operators globally, bKash provides a template for executives and investors in other digital payments firms as they seek to build scale and lift profitability. A widely utilised payments product provides the framework upon which to hang a wide range of profitable financial and non-financial products and services, improving customer loyalty and financial risk management. As such, we think bKash may continue to register improvements to its KPIs over the coming years.
Bangladesh is one of the world’s largest mobile money markets
At the regional level, Sub-Saharan Africa is the largest mobile money hotspot, with early exponents such as Safaricom’s MPesa leading the way. But on certain important metrics, Bangladesh is now the largest single market for mobile money, with more than 110mn individuals now using such services in the country (45mn of these are active users).
Transaction value is accelerating
With bKash being the clear market leader (with around 90% market share), many of the top-down industry trends we see can be directly attributed to this entity. One interesting trend in the industry statistics is the acceleration in transactions and transaction value from 2020 onwards.
We can see this trend more clearly if we compare the latest industry data with numbers from 2015. While the number of registered mobile money agents has doubled over this period (to 1.2mn), the value of transactions has increased six-fold. We believe this data signals a structural shift in the industry away from bilateral peer-to-peer transactions and toward a broader range of use cases.
bKash is a global leader in mobile money
bKash is the clear industry leader in Bangladesh, with a market share of around 75% of transactions. Accordingly, the firm is also a global mobile money leader. The firm is 51% controlled by BRAC Bank, one of the most respected banks in Bangladesh, while other high-profile shareholders include Money in Motion (one of the key drivers of MPesa’s success), the Bill and Melinda Gates Foundation, Alipay, the International Finance Corporation and Softbank. As of June 2022, the firm had 62.3mn customers (of whom 37.5mn were active), 280k merchants and 295k agents in its network. It facilitated BDT3.4tn transactions during the H1 period (US$39bn).
bKash: Top line pricing pressure is partly due to mix shifts
As elsewhere, mobile money in Bangladesh primarily arose as a peer-to-peer payments vehicle; a means of sending money easily and cheaply to friends and family, or small businesses. For such transactions, typically the money does not stay long within the mobile money network. Operators generate cash in/cash out fees but agents typically take the lion’s share of these fees.
A shift to e-wallet functionality, where deposited money can be used for a wide range of goods and services provides more opportunities for touch points with the customer. Although take-rates will be lower, margins can be higher (since there is no physical agent intermediary). And the overall revenue opportunity is also much greater
We can see that bKash's revenue margins have been declining steadily over the past few years. We have taken two approaches to measure this. Firstly, by looking at the revenues/ assets ratio. And secondly, via the revenues/ transaction value ratio (also known as the take rate).
Part of this downward trend reflects a structural erosion of payments margins, a development we have also seen in other markets, as technological developments and competition push down prices. But another factor is bKash’s active promotion of agent-less payments transactions. Although recent data suggests we may have reached a trough in the take rate (ie revenues/ transaction value), the experience elsewhere suggests this stabilisation may not persist.
Strategic shift from P2P to B2C requires substantial investment
It is this goal of shifting from agent-intensive peer-to-peer payments to more digitally-focused consumer-to-business transactions that explains bKash’s recent heavy investment in growing its merchant network and in improving its e-wallet functionality. This has generated a substantial deterioration in financial performance in recent years, but it does not look as if we are firmly on the upswing. While we think the investments will continue, these can now be absorbed over a larger commercial footprint.
One positive trend that improved functionality supports is the rising proportion of active customers (defined as those transacting at least one in 90 days) within the customer base. As the merchant network grows further, and the company continues to launch new use cases, we would expect this ratio to strengthen further.
There is significant untapped potential for bKash to exploit
Bangladesh represents an attractive market for a fintech disruptor such as bKash. The banking sector is fragmented, undercapitalised and characterised by poor governance at many firms. Bank account penetration stands at just 53%, and less than one-third of bank customers have been able to take a bank loan. Meanwhile, credit card ownership stands at just 1%, and even debit card ownership is only 5%. bKash’s industry leadership should allow it to direct the country’s youthful population towards a digital payments culture, and in time to add financial products (such as loans, insurance and investment) and non-financial services (eCommerce, deliveries and so on) to its portfolio. The firm’s high-quality shareholder base should be able to channel relevant expertise to the senior management team as it executes on this long-term plan.
At the company level, one key opportunity for boosting gross margins relates to the business mix. Cash out and P2P fees still generate 85% of bKash's top line. Growth in merchant-related fees and new services (a nano loan product has been in the soft launch stage since December) could have a substantial positive impact on profitability.
Key risks include the threat of new entrants; for example, the firm’s transaction market share has dropped from over 90% in 2020 to less than 75% currently. Unexpected regulatory changes could also have a negative impact; we note that telcos are largely excluded from the mobile money sector due to the existing regulatory framework.