Progress on financial revolution slows

When the State Bank of Pakistan (SBP) granted, in principle, approval to five digital retail banks in 2023, many hoped it would kick-start a much-needed financial revolution. The goal was simple; use technology to help millions without bank accounts, especially in rural areas, via promoting financial inclusion and providing credit access.

However, the progress after one and a half year is sluggish and most of the digital banks are struggling to commence full operations.

Until February 2025, only easypaisa digital bank has managed to obtain the country's first digital retail banking licence from the SBP. Industry experts say creating an ecosystem for digital banking in Pakistan will not be an easy ride as the digital and financial industry is grappling with weak technological systems and unclear plans, which ultimately lead to a slowdown in such revolutions.

Digital banking needs strong internet, secure systems and smooth applications,

but Pakistan's infrastructure is not ready.

"Digital banking is not just an app, it's a complicated setup," said Farhan Ahmed, a fintech adviser. "Many licence holders lack systems to handle real-time transactions or protect user data," he added.

Muhammad Ali Inayat, Chief Executive Officer of Kinverg, a Lahore-based cybersecurity company, highlighted another layer of complexity, ie, the mismatch between digital banking's target audience and Pakistan's connectivity realities.

"The concept of digital banking is for those who live in remote areas and lack access to banks. They may have a smartphone, but not reliable internet," he said. "In Pakistan, it will be initially tough for digital banks to reach their target customers. Internet coverage in Gilgit-Baltistan, Skardu, Balochistan and other remote regions is inconsistent at best."

Frequent internet outages and low smartphone use in villages force banks to focus on basics like improving network stability. One bank official said on condition of anonymity, "We are stuck bargaining with telecom companies instead of building services."

Apart from connectivity issues, a lack of cohesive strategy among some licence holders has made the situation more confusing. The SBP's guidelines encouraged digital retail banks to target the underserved segments, including small businesses and women, but without a clear path to profitability, institutions are struggling to define their niche.

As a result, investor confidence in Pakistan's digital banking sector has taken a hit and stakeholders claim that funding dropped 80% in 2023 to just $20 million. They said concerns about regulatory uncertainty, security risks and slow executions made investors hesitant and without a clear and predictable framework, digital banks were struggling to attract long-term financial backing.

"There is disconnect between ambition and execution," said Mariam Khalid, a Karachi-based financial analyst. "Some players entered the race with unclear plans to disrupt traditional banking, but have not articulated how they will attract customers or differentiate their offerings. Are they focusing on microloans, remittances or saving products? Without answers, investors get nervous and timelines stretch," she added.

This ambiguity has also impacted partnerships. Digital banks rely on collaborations with e-commerce platforms, telecom giants and logistic firms to expand reach. "Negotiations stall when there is no clarity on whose customer base they are tapping or how revenue will be shared," said the bank official.

For those, who navigated the initial hurdles, operational complexities emerged as the final barrier, requiring them to handle a complexity of compliance checks, staffing challenges and last-minute regulatory adjustments.

"The SBP's scrutiny is intense, as it should be," said a former central bank official. "However, the compliance process for digital banks is still evolving. Many applicants submitted their plans based on initial guidelines, only to find new requirements added later, like stricter anti-fraud measures or liquidity ratios," he added.

Nevertheless, Inayat said that regulating such banks would be an uphill task for the SBP. "The central bank itself is in an evolutionary phase with this framework. They will identify risks and mitigate them slowly once operations go live," he said, adding "the good thing is that the SBP has recently created a sandbox to facilitate the financial institutions entering this space. We should hope for improvement, but progress may be slow."