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OP-ED: The untapped potential of Bangla cards for regional payment settlement

  • Published at 10:01 pm August 29th, 2021
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The proposition may support bringing all regional trade transactions within official networks, eradicating shadow currency markets

Consumption abroad is the second mode for service trade under General Agreements on Trade in Services (GATS) of the World Trade Organization (WTO).

This mode covers cross border travel including hospitality services, transport, medicare, education, training, seminars, and many more.

For these services, people are entitled to have foreign currency in cash or in international cards or bank to bank remittance as per foreign exchange rules. 

International cards are an alternative to cash currency. In cross border travels, international cards in foreign currency are used.

People travelling abroad use the cards for payments against purchases, settlement of which is executed through card settlement platforms.

For payments against purchases by cards, issuing banks arrange settlement from the balances held in their accounts maintained with banks abroad.

In the current payment ecosystem, digital wallets are becoming popular but these are still not permitted for outward transactions in our country.

It is said that Bangladeshi people travel to neighboring countries frequently, huge in numbers.

Many passport holders have multiple visas. In some countries, visiting does require only entry visas. Insider information indicates that without foreign currency, people can travel to these countries where they can encash their own currency into the currencies of host countries.

It can be said in a simple language that if people do not use foreign currency, our foreign currency will be saved.

But the reality is adverse for the economy since there is a question regarding how host countries will use our currencies.

Definitely they will not use the currencies as their legal tenders. These may abet the settlement of payments for unofficial trade transactions, result of which is the loss of recorded revenue and income at both ends.

What is to happen if all people travel with foreign currencies or international cards officially?

The transactions result in official records and eradicate unofficial movements of goods and services.

But who is to bell the cat is a question.

It is easy to say to bring all people under official records of the currency they take for cross border physical movements, especially in regional countries.

Retrospect

If we look at the 90s of the last century, we will find the introduction of plastic cards for use to withdraw money from ATMs.

Later multiple payments at PoS (points of sales), on the internet for e-commerce, from cards to cards, from banks to cards, from cards to banks and the like are found executed by cards.

The system can be termed as a payments solution, not financial inclusion which is a broad issue.

Banked people mostly use cards but cards in foreign currencies are still young.

People like businessmen, officials and other segments of people traveling frequently use cards in foreign currencies.

But such cards are rarely used in regional travels. Is it possible to make local currency cards roaming, like mobile phones, to be used while visiting neighboring countries- is a question.

The answer is - why not, if cards in foreign currencies can be used.

Really it is possible for which some regulatory knots need to be opened or relaxed.

Nostro and vostro

We all know that our banks maintain accounts with banks abroad which in turn can maintain accounts in Bangladesh.

Accounts of Bangladeshi banks with banks abroad are known as nostro accounts and their accounts with ours are known as vostro accounts.

Nostro accounts maintained in major financial hubs like the city of London, New York are in international currencies - US dollar, Euro, etc.

In other places, nostro is maintained in their local currencies. Bangladeshi banks can maintain nostro accounts in Singapore in Singapore dollars, for example.

Foreign banks can maintain vostro accounts with Bangladeshi banks in Taka.

It means that foreign banks are making Taka available through payments in foreign currencies for the Taka fund.

As such, vostro accounts in Bangladesh are as good as accounts in foreign currencies. Making payments locally from the accounts is treated as inward remittances, and outward remittances if payments from local sources are, like import payments, credited in the vostro accounts.

Foreign investors can invest in Bangladesh through funds from vostro accounts of foreign banks maintained in Bangladesh, as per foreign direct investment policy of the central bank. 

Let us focus on card issues for settlement of payments against services under mode 2 of GATS. There may be different options to implement the proposition.

Bangladeshi people will visit abroad with cards in Taka which can be termed as Bangla card.

Cardholders can use the cards in specified regional countries while on visit for which banks will activate the cards as roaming.

This will facilitate payment solutions abroad ranging from cash withdrawals from ATMs to purchases at PoS.

On conclusion of the transactions, card settlement platforms will execute payments to receiving banks abroad by debit to nostro accounts of card issuing banks as per arrangements.

The opposite situation will happen in case of incoming passengers to Bangladesh from regional countries.

Regional nationals will use their cards during their stay in Bangladesh. Our banks will receive payments in foreign currencies through card settlement platforms.

There is another alternative to Bangla card transactions. Bangladeshi banks will maintain nostro accounts with banks in regional countries.

Counterpart banks will maintain vostro accounts with our banks in Bangladesh, as said earlier. The accounts will work as settlement accounts for transactions executed by cardholders in local currencies.

Our nostro accounts will be debited by banks in regional countries for payments against use of Bangla cards.

Debit is to be made in vostro accounts of counterpart banks for transactions by incoming people from regional countries.

One debit in our country will result in credit to regional countries.

The settlement for imbalance can be made immediately or periodically as per mutual understanding within the regulatory framework.

There may be another alternative for which Government involvement will be needed.

Transactions through cards here and there by people of Bangladesh and other regional countries will be netted off through arrangements of secure interlink among respective payment system networks of concerned countries.

End result in deficit or surplus will be settled through nostro accounts maintained abroad.

Also usable in border haats

In addition to mode 2 transactions as noted earlier, the card arrangements can be applied in border haats as operated in specified areas for trading goods between people of Bangladesh and India in accordance with understanding signed at Government levels.

Presently, people from Bangladesh visit border haats with permissible Taka equivalent foreign currency for purchase of goods from border haats.

Indian people visit with their local currency as per permitted limit.

The settlement is executed through physical movements of currencies between designated banks.

To remove the hassle, banglacards may be introduced in the haats which may make the end-settlement process smooth between banks.

There needs to be facilitation under regulatory framework to implement the use of cards in local currencies like Bangla cards.

Foreign exchange rules set annual travel and other permissible entitlements in convertible foreign currencies.

Based on the rules, banks release foreign currencies with endorsement on passports to people intending to travel abroad.

But such arrangements will not be necessary for cards in Taka. In this case, banks need to allow their customers up to the permissible limit to use Bangla cards while travelling abroad.

Foreign exchange rules need to be fine-tuned accordingly with the reporting system by national identity cards of the customers without focusing concentration on passports.

The rules should also accommodate transactions of Taka in equivalent foreign currencies with relaxation of settlement under ACU (Asian Clearing Union) mechanism.

The settlement at end-leg may be made through card settlement platforms, or nostro-vostro accounts between local banks and regional banks, or payment systems network under Government to Government arrangements.

The system may equally be applied to border haats, also.

The proposition may support bringing all regional trade transactions within official networks, eradicating shadow currency markets. Regulatory authorities including the central bank may think of the above propositions.

 

The author works in the development sector and can be reached at [email protected]