Will digital banking be successful in Pakistan?

Pakistan is on track to roll out seamless digital banks in 2025, with at least one of the five financial entities in the digital race claiming near-completion of "operational readiness." It is set to apply for pilot project licensing in the coming weeks. Success in the small-scale trial phase would lead to full-scale digital retail banking operations in the rapidly approaching new year.

Mashreq's Group Head of Retail Banking, Fernando Morillo, told the media this week that they have achieved over "90% operational readiness" to begin digital banking in Pakistan. CEO of Mashreq Bank Pakistan, Hamayan Sajjad, told The Express Tribune that the UAE-based bank would apply for pilot project licensing from the State Bank of Pakistan (SBP) in a few weeks, with full-fledged digital banking operations expected to start within months in 2025. Financing for Small and Medium Enterprises (SMEs) will remain a key segment of their business strategy to support economic activities in the country, they said.

In a bid to foster innovation, financial inclusion, and the availability of affordable digital financial services, the SBP has granted In-Principle Approval (IPA) for establishing five digital retail banks, namely, HugoBank Limited, KT Bank Pakistan Limited, Mashreq Bank Pakistan Limited, Raqami Islamic Digital Bank Limited, and Telenor Microfinance Bank Limited. Earlier, the central bank issued no-objection certificates (NoCs) to the five, out of a total of 20 applicants—including top conventional banks in Pakistan—for establishing digital banks back in January 2023.

These banks are tasked with making a difference in the financial sector, doing what conventional banks have failed to do, such as SME financing and catering to banking needs in remote areas. They aim to meet the financial needs of businesses, rather than lending all their deposits to the government, and to promote financial inclusion by offering people-friendly, reliable, and trustworthy services to win the trust of customers using digital financial transactions.

Although Pakistan remains a tech-savvy, young, and largely unbanked financial market, the five new entrants are well aware that it will not be easy to win customer trust for full-scale banking on smartphones. Many consumers in the country are used to queuing in long lines to ensure funds are safely transferred, especially in an environment where news of cyber theft and data breaches is prevalent.

Therefore, their success hinges on changing mindsets from manual to digital transactions, replacing decades-old habits by earning trust in the technology, and increasing the number of customers through the introduction of customer-centric products, ultimately making digital banking mainstream.

The five banks—competing among themselves and with conventional banks, which have decades of experience—are ramping up their preparedness. They are forming teams, finalising banking apps (a key element of their success), and deploying technology to enter the tech-savvy, young, and still significantly unbanked Pakistani financial market, particularly in remote areas. All the banks are at different stages of "operational readiness," according to reports.

SBP Governor Jameel Ahmad has said that, after operational commencement, digital banks will help develop a digital ecosystem, enhance customer experience, and provide affordable digital financial services, including credit access to underserved segments of society. The central bank explained that digital banks are required to achieve "operational readiness" in all their functions, including governance, risk management, capital requirements, compliance and audit, consumer protection, business continuity, cybersecurity, product development, deployment of technological infrastructure, and the formulation of relevant policies, processes, and procedures.

Mashreq Bank Pakistan CEO Sajjad added that his bank, and likely the other four digital banks, are not in a hurry to conquer the Pakistani market. "Rather, we are coming to Pakistan to stay for the long term and gradually penetrate the financial market by changing people's mindsets about digital banking," he said.

"Our global experience suggests it takes 10 to 15 years to completely shift people from conventional banking to digital banking," he added, noting that Pakistan is in the midst of significant change, which has accelerated exponentially over the past five years.

Shedding light on the current state of digital banking, which is partly managed by the existing conventional banks and fintech companies in the country, Sajjad referred to the central bank's latest report, stating that 83% of financial transactions are conducted online. However, in terms of total fund transfers, some 64% are still carried out through physical banking methods like cash or cheques suggesting that large payments are still being made through conventional channels due to people's mistrust of technology and fear of cyber theft.

Coach at Planet N and Raqami Bank, Nadeem Hussain noted at a conference last year that the five digital banks are set to revolutionise the lending landscape in Pakistan. "Lending will be key to the success of digital banks. They are expected to lend more than conventional banks within five years. However, they will still rely on their partners to generate deposits," he said.

Digital banks are also expected to reduce the time needed to open a bank account for corporate entities to around one day, compared to the current process of about one month. Similarly, they will expedite lending to industries, reducing the time from one month to just one day, Hussain added.

THE WRITER IS A STAFF CORRESPONDENT