Moving towards financial inclusion

SBP has implemented frameworks to encourage entrepreneurs to enter this space

With the world rapidly moving from cash and credit payments to cryptos and e-money, Pakistan may have a way to go on the digital payments’ front and it has certainly started its journey.

In a bid to further its goal of digital payments and financial inclusion, the State Bank of Pakistan (SBP) granted approval to a number of Pakistani fintech start-ups over the past months.

Traditionally, payment instruments in Pakistan are issued by banks without participation of non-banking entities. However, new technological innovations are enabling the non-banking sector to deliver innovative and efficient payment services to consumers at a much lower cost.

Following this, the central bank introduced regulations for the electric money institution (EMI) in 2019, which spurred the growth of start-ups like Tag, Finja and Nayapay.

“As a business model, EMIs have great potential to fill the gap between conventional banks and consumers by creating digital products, services and channels for fulfilling a wide range of customer payment needs,” said Karandaaz Pakistan Chief Digital Officer Rehan Akhtar.

EMIs inherently will be tech-oriented, nimble and agile, making them more customer-centric rather than product-centric. This would be a good development for Pakistan, he added. EMI licence is primarily for entities that have a captive consumer market like in the case of e-commerce marketplaces, ride-hailing services, etc that want to diversify the service set and provide financial services to those consumers.

EMIs can only provide an account with daily and monthly transactional limits and are restrained from providing lending or savings products. Companies that aspire to offer savings and lending products should opt for branchless banking or a commercial banking licence or may apply for non-banking financial institution (NBFI) at the Securities and Exchange Commission of Pakistan (SECP) if they have a proposition that fits the SECP’s regulatory ambit, said Akhtar.

“SECP is also in the process of giving approval to the winners of its first sandbox cohort. There is no “fintech” licence at SBP, however, financial services providers have an option of licences to apply from at SBP that include branchless banking, commercial banking, microfinance banking, EMI licences etc,” said the Karandaaz Pakistan official.

He said, “The fintech space is huge. Only 21% of Pakistan’s adult population has bank accounts and that leaves a large room for everyone to create a profitable market share.”

While Easypaisa and JazzCash have laid out the agent network and now leading the mobile app acquisition, there is still a lot of room for newcomers to find their niches and “we see these examples already”, he added.

“What we definitely need is an interoperable digital financial ecosystem, where each and every service can be accessed from anywhere. Some of the fintech targets areas being explored are crowd funding and peer-to-peer lending for which the SECP has already provided approval through their Sandbox,” said Akhtar.

Tag is the latest addition to the list of industry fintechs players which have received in principle go-ahead from the SBP to operate as the EMI.

“There are always three waves in early stages of any start-up ecosystem,” said TAG Chief Executive Officer Talal Ahmad Gondal while answering a query of The Express Tribune. “First is e-commerce, second is tech-enabled startups and third is fintechs.” The country has seen the first wave with the likes of Daraz, second wave of technology-enabled start-ups like Careem, Foodpanda and Bykea.

He said, “Fintech revolution has not yet reached the shores of Pakistan, even though it is one of the largest markets in the world and it has a very high smart phone and internet penetration.”

The main reason why Pakistan is still lagging behind is its conservative regulatory landscape, which did not cater the fintechs in the digital payments space. However, the new leadership in the central bank has liberalised the digital payments and implemented new frameworks, which has encouraged entrepreneurs to launch their venture and disrupt this space.

The Tag CEO revealed that there were a handful of start-ups that got approval from the SBP to operate as an EMI and even fewer in B2C.

“To the best of my knowledge, none of them has a proper public product live yet. As I mentioned earlier, Pakistan is a huge market and fintech is a Greenfield so there is enough room for exponential growth for start-ups.”

In the wake of Covid-19 outbreak, digital payments have grown significantly with the addition of billers on digital bill aggregators like 1-Link, Paypro, QuickPay etc. The biggest addition in billers was noted in the education sector, which shifted to online/ video classrooms during the lockdown, said Akhtar.

Due to this, many schools, colleges, universities and educational academies registered as a biller with 1-Link to facilitate their customers for paying the fees online.

1-Link reported a 270% increase in volume of daily inter-bank fund transfer (IBFT) transactions, during the lockdown months, compared to the pre-lockdown period. The number of daily IBFT transactions was averaging around 188,000 before the lockdown and it jumped to around 357,000 during the lockdown, hitting a peak of almost 700,000 towards the end of May 2020.

Moreover, the number of billers registered with 1-Link rose from less than 100 to 550 in a couple of months’ time during the lockdown period, said Akhtar.

He added that the lockdown also prompted a shift towards online shopping as consumers moved towards e-commerce platforms for the first time in new categories like groceries and household essentials. He was of the view that access to digital payment means needs to be addressed in order to ensure inclusion. “With the current limited penetration of smartphones and 4G in various areas of Pakistan, adoption to digital payments becomes a challenge.”

Another challenge is low literacy and low knowledge of numeracy in different parts of Pakistan, he said.

Akhtar said that most of the government departments are not connected with banks on modern digital financial rails, which can be facilitated by the government.

Published in The Express Tribune, November 18^th, 2020.

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