E-commerce adoption is rapidly increasing in Bangladesh, with over 100 million people now connected to the Internet. Over 80% of our population is below the age of 45. Our purchasing power is rising and people are quickly embracing technology to move their experiences online.
Digital transformation has created opportunities for entrepreneurs and enabled access for consumers. However, we still have a long way to go. As e-commerce takes shape in Bangladesh, it is important to build a robust infrastructure, strong policy environment, and sustainable ecosystem to instill trust and confidence in our consumers.
In the last couple of years, we have seen the proliferation of unsustainable business models and fraudulent schemes in the e-commerce sector in Bangladesh.
A number of e-commerce platforms such as Evaly, Dhamaka Shopping, and Alesha Mart have lured consumers with the promise of lucrative 'cashback', funded by advanced deposits from buyers and credit from suppliers - with no meaningful capital raised from investors.
Building an e-commerce platform takes substantial investment - in the technology and product, in the physical infrastructure, and in customer acquisition. The latter often takes the form of offering attractive discounts to bring new users onto the platform, which means selling products at a loss.
Globally, e-commerce platforms scale this growth in user base by raising long-term capital from sophisticated investors (VC funds, institutional investors, strategics) who are familiar with the business model, and the associated risks.
The platforms in question in Bangladesh, on the other hand, failed to raise such capital and funded their growth with short-term liabilities - i.e. payables to their customers and suppliers which are meant to be settled within months if not days.
Evaly, Dhamaka Shopping, Alesha Mart and a number of other platforms that have recently emerged, have flagrantly violated the prevailing laws and regulations, including the Payment Systems Guidelines of Bangladesh Bank, by operating an unlicensed and unregulated digital payment wallet.
Using these wallets, they are collecting deposits from the general public, creating new money by issuing cashback balances in lieu of discounts, and influencing the velocity of money by determining when and how those cashback balances can be utilised. In doing so, they have operated as banks and financial institutions without any regulatory supervision, and in fact have usurped the role of the central bank.
The business models of these platforms have all of the hallmarks of a Ponzi scheme - akin to the multi-level marketing (MLM) model with which we have become all too familiar. In such schemes, people (in this case customers) are lured in with the promise of an outsized gain (in this case cashback), and where the returns are in turn funded by money raised from yet another group of people, usually with the enticement of an even greater return - and thus the cycle continues.
If unchecked, the Ponzi scheme, just like an MLM company, eventually reaches a tipping point where its perpetrators siphon off enough money and disappear from the system.
We have seen this already in the case of at least one such e-commerce platform, Dhamaka Shopping, which according to press reports is suspected by authorities to have laundered Tk50 crore.
So what do we do now?
First, we must recognise the reality. A great fraud has been committed. The 'money' is gone, because it was never there. This is just math, basic accounting. The net liabilities of the company (i.e. dues to customers and users minus the cash balance and any dues to the company) is exactly equal to the losses made by the company.
Where did these losses go? It went into the deep discounts, the high salaries, the sports team sponsorship, the media buying, the influencer peddling. We must acknowledge that the amount of these liabilities are significant.
According to the investigation conducted by Bangladesh Bank against one of the e-commerce platforms, the liabilities are over Tk400 crore; the investigation further notes that the platform did not fully cooperate with the information requests, suggesting that the actual liabilities can be significantly greater.
Second, regulators must take action immediately. Evaly, Dhamaka Shopping, Alesha Mart and the platforms whose operations have come into question must be caused to suspend operations; the bank accounts of these companies and their principals should be frozen.
We should not delude ourselves with the notion that these platforms are 'too big to fail', or that allowing them to continue operations can help 'recover money for people'. Regulators should take the approach of risk mitigation.
Every minute that these platforms operate, they do so at a financial loss. Every taka of that financial loss is borne, not by the founders or investors, but by the customers and the suppliers. Enabling these platforms to operate means that the liabilities increase exponentially.
We must also recognise attempts at obfuscation, a glaring example of which is an 'investment announcement' by Evaly which, according to the media reports, falsely presents a conversion of its outstanding supplier credit into equity, as an infusion of capital. We must see these for what they are: Cynical attempts to confuse people, to give customers a false sense of assurance while continuing to perpetrate the fraud.
Third, we must not overcorrect with policy interventions. We must create policies that enable growth of the ecosystem; and then, we must enforce them.
The introduction of the Digital Commerce Directive by the Ministry of Commerce and the Escrow Policy by Bangladesh Bank is well-intentioned. However, although there are several provisions that must be reviewed to ensure that we do not stymie the growth of the industry, add friction and cost for the legitimate operators.
We find that the fraudulent platforms continue to violate the policies, whether directly or indirectly. For example, since the introduction of the new policy, Evaly has continued to run lucrative offers and collected advance payments with the promise of delivery within 10 days as per policy, then repeatedly failed to deliver on time.
Alesha Mart has explicitly continued to collect 45-day advance payments in violation of the policy, and withdrew such offers only when called out. A successful policy requires consistent enforcement and we are lacking in this regard.
Finally, we must all act responsibly. This is not just the responsibility of the regulators. The suppliers, the payment aggregators, the payment service providers, the logistics services providers, the trade associations, and the media must play a responsible role to stop this stealing.
Suppliers should stop extending credit with the hope that they will recover their dues because it means the dues will simply be shifted to another group of suppliers. The payment aggregators and payment service providers must immediately stop allowing payments into the platforms in question, otherwise they would be enabling this Ponzi scheme.
The logistics services providers must stop delivering for these platforms. The trade associations must suspend the membership of these platforms to send a strong signal to the market. And finally, the media must play its role in responsible journalism by informing the general public.
Fahim Ahmed is the president of Pathao.
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.