Fintech is throbbing…yet a long way to go!

Fintech is no longer a buzzword; in fact it could be revolutionary for Pakistan if given the right boost. Consistent efforts by new age entrepreneurs, high demand of Digital Financial Services (DFS), rapid technological advancements, windfall of start-ups, and some crucial measures by the regulator has surfaced this sector on the international investors’ radar. This budding industry has convinced prestigious Venture capitalists (VCs) from abroad about its thriving prospects and staggering growth rates. During 2021, 78 percent of investors funding Pakistan-based start-ups came from outside the country (Pakistan 2022 Venture Investment Report, Magnitt).

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Inevitably, Pakistani start-ups bagged a solid funding of USD 350 million during 2021 (Source: Invest2innovate), conveniently doubling the cumulative amount received during the last five years. As anticipated, the first half of 2022 showed more encouraging results with greenbacks amounting to USD 249 million (Venture Capital Investor Report: 1H22 Magnitt) during the first six months of the current year. If this pace is continued, Magnitt forecasts cumulative funding for 2022 to cross the USD 500 million mark proving why Pakistan has one of the highest international investor participation across all the emerging markets. This is good news for the financially exclusive population of the country as almost half of the pie is being invested in the Fintech and ecommerce domain. Hopefully, the result would be an influx of more solution oriented, innovative and economical financial products in the next few years.  

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Favourable global trends also played a pivotal role in supporting this trend; global Fintech deals during the outgoing year crossed a mammoth figure of USD 200 billion (Source: KPMG report), although blockchain and cryptocurrencies attracted the majority of funding internationally. In the local context, crypto is still a novel concept for the masses where ambiguity, complexity and lack of knowledge of digital currencies are becoming the biggest hurdles in unlocking its true potential. 

Instead, the local market looks fertile for simpler models such as payments, wealth management, crowdfunding, lending, insurance, and digital banking services. 

So, we did not exaggerate when we said… the pulse is throbbing!

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Nonetheless, sometimes the numbers can make us short sighted as in the absence of solid structural foundation, this growth spurt can become stagnant. The purpose of this argument is to avoid being myopic in our approach and foresee the big picture, which shows that the current share of digital payments stands at a meagre 0.2 percent, out of total transactions of 100 billion daily comparing it to other emerging economies standing at 1.5 percent to 7 percent respectively.  (Source: World Bank Report 2020)

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Although the Pakistani Fintech landscape is showing all the green flags and funding flow is consistent yet, WB thinks that the growth is still restrained due to two major reasons. First, “deficient regulatory framework for structured engagement  between the regulators and fintech firms and second, limited understanding and capacity of traditional financial sector players (including regulators such as central bank) of innovative areas including data sharing and product design”.

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SBP has realized that it's never too late to acknowledge the long term sustainability of this sector as, post pandemic, there has been a paradigm shift in consumer behaviour in favour of digital transactions. In response to soaring demand, the regulator launched an exciting program “the Regulatory Sandbox” allowing fintech innovators to conduct live experiments in a controlled environment under SBP’s supervision. This program aims to assist financial policy makers to better understand innovations whilst improving product quality simultaneously. We will also discuss some other initiatives by the policy makers and industry players in this blog. 

Banks…Partners or Rivals?

Financial technology is not an alien concept for the banking sector, it has always been prevalent in the core of banking (e-banking) but the flexibility, freedom, efficiency and service quality that a Fintech provides, has the potential to upset the banking system to a large extent. For instance, a start-up OneLoad targeting micro-retailers is growing leaps and bounds as it is the largest non-banking digital platform (android app) in the country. The USP of this enterprise is not to target the obvious tech savvy consumers but small retailers. The company provides basic payment, lending and cash deposit facility managing millions of transactions per month (400,000 daily). Similarly bSecure is a seamless checkout solution which increases the conversion rate of ecommerce websites and helps in cutting costs through various automations along with fraud management. In the race of payment gateways offered by every Tom, Dick and Harry, bSecure works on the last mile ensuring that no customer ever leaves without completing the purchase. 

Start-ups like these need to partner with banks to blur the concept of rivalry if meaningful collaborations happen between the former and the latter. Such partnerships could expedite the ultimate goal of SBP for maximum financial inclusion of the masses. Many could argue that banks have the competitive advantage over fintechs in terms of branch network, reach and economies of scale which is true to a large extent but the latter offers innovative, quick and easy to access financial services preferred by fuss-free consumers.

Fintech for Business

Thumb rule for any successful entrepreneur….adapt, scale and grow!‍

Late technology adoption can erode revenues

It is very easy for a leader to get into the dormancy cycle when the revenues are consistent. But the idea of not changing something unless it is totally damaged can erode profitability and long term sustainability. Leaders need to ditch those traditional inefficient systems and adapt fintech models in order to make their financial processes more agile using specialized softwares. There are account management and fund management tools that enable real time financial monitoring ensuring transparency and credibility of business accounts.

Yes, your cautious approach will always prevent you from adapting to change but the opportunity cost of not keeping up will hurt the business more in the long run. So as a business manager, strike a perfect balance between predictability, risk mitigation and innovation in systems. 

To stay ahead of competition, make e-commerce an integral part of your business while simultaneously investing in new age payment systems that provide ease of transactions to end customers.

Security being another major concern for small and medium sized enterprises, Fintech cyber security packages provide extensive data security and prevent digital fraud. Having access to structured consumer data of every transaction can be priceless if the business knows how to make use of it. 

Fintech systems accumulate consumer data through queries, social media posts providing insights to decision makers about consumer behaviour that helps them alter marketing strategies and tweak product designs accordingly.

Think beyond payment…pave way for lending

Access to credit has been a biggest hurdle in the growth of SMEs in Pakistan. Multiple international bodies have persistently highlighted the significance of small businesses as an impetus for economic growth and employment generation in emerging economies. In Fact, in some of them more than half of the GDP growth emanates from them. 

SMEs account for 90 percent of all enterprises in Pakistan, producing between 30-40 percent of GDP. Unfortunately, its share in private sector lending stands at less than 10 percent (2021). Clearly  there is a huge void of financing needs by small and micro enterprises which are restricted to grow to their full potential in the absence of formal credit lines. 

The sudden demand of online payments surged during and post covid after a myriad of e-commerce stores surfaced. Catering to this demand, out of the total 40 fintech startups in Pakistan, almost 90 percent are focused on digital payments while only 20 percent are exploring other models like lending, wealth management, capital markets, account, and insurance. 

Although we cannot sabotage the importance of digitizing payments, lending, order management and payment processing also have solid scope in the country. The bottom line is, if everyone replicates everyone, innovation could take a back seat for sure.

Fintech for Consumers 

A temporary disruption or a paradigm shift in consumer behaviour?

The most repetitive argument against Fintech states that because Pakistan is primarily a cash driven economy, the potential for digital financial services (DFS) in the underdeveloped strats of the economy will be limited. Still, the projected smartphone adoption by 2025 is expected to be 70% for Pakistan (Source: Karandaaz report 2021), clearly indicating that technology adoption is not a fad instead people are genuinely becoming tech savvy. 

We can confidently proclaim that there is a permanent paradigm shift in consumer behaviour where people are willing to adopt technology other than entertainment. Also non bank micro finance enterprises can gradually change the informal credit line concept in the country since 2.5 percent of Pakistanis use formal credit from the banking system. Tez financial services is one such start-up providing credit, savings, insurance and investment options to an individual customer under a single platform.

Having a consumer centric approach is crucial for Fintech success!

Pre-pandemic, banks and financial institutes had already stepped into the fintech domain but pandemic accelerated their efforts to another level as more traditional, rather rigid customers also realized the convenience of shifting to easier payment models. Companies followed suit and started making consumer centric products catering to the needs of very selective Pakistani youth, driven by convenience.  

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While we propagate the numerous benefits attached with adopting a consumer centric approach to stay competitive, companies must analyse the extent of customer centricity to stay profitable as fintech start-ups are already struggling with sustainability and profitability issues to support their growth trajectory.

Yet impulse buying of financial products could harm the consumer

Consumer behavior experts would agree to the premise that the buying behavior of a chocolate placed on a point of sale (POS) is entirely different from the buying behavior of a financial product. Easy access of financial products on mobiles through apps can undoubtedly make life easier but in the absence of financial literacy this could harm an average consumer who is unaware of the financial consequences of making a bad chioce. 

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Having said that, Fintechs should capitalize on 101 million internet users and 183 million mobile subscribers in the country showing a massive untapped market (PTA).

Ultimate goal: Educate and expand!

Low financial inclusion ratio (21 percent) presents an amazing opportunity for any new entrant but it also highlights that despite persistent efforts by the regulator, the pace of inclusivity is very low. It means that the majority still lacks financial knowledge and are accustomed to the traditional cash driven mindset. Therefore, it necessitates large scale programs, campaigns and extensive workshops by industry players in conjunction with the regulator to actually educate the youth.

The National Financial Literacy program was launched by SBP a decade ago with a sole purpose of targeting the youth and lower income strata individuals. The regulator had collaborated with various education institutes to disburse knowledge and understanding about financial management. However, it remained ineffective due to lack of commitment by the stakeholders. 

Until recently a few innovative programs have been launched by SBP through its subsidiary NIBAF (National Institute of Banking and Finance). These programs include an interactive game called ‘PomPak’ launched in collaboration with JazzCash. Another, partnered with Meta, aims at uplifting women entrepreneurs through teaching them to make their businesses resilient and sustainable in the long run. Some other programs have also been launched this year directed towards education and financial literacy for girls and hearing impaired students.

Transparency will lead to trust and more penetration

Every stakeholder agrees that more efforts are required but unless transparency is provided to consumers, it is highly unlikely for them to shift to an alien digital system. 

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Fact Check: Trust deficit towards financial institutions!

An interesting perspective was shared by a representative of Oraan fintech in a recently held hackathon organized by NIC (National Incubation Center) and Allied bank, stating that in order to make finance gender inclusive for women in Pakistan, think tanks have to be creative in designing financial products. Provide solutions that women from every class can relate to and understand. Innovate something as transparent and easy as the traditional ‘committee’ system (it is their flagship product) which will not only improve financial inclusion within masses but also improve penetration and positively affect welfare.

What does the Crystal ball say?

No arguments on this one; Fintech is here to stay and grow!

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Consumers and businesses are not going back to inconvenient traditional systems after experiencing the benefits of new convenience driven models. Experts are also optimistic about the growth of other models primarily SME lending and wealth management services. But let’s reiterate that regulators have to lay some solid foundations in terms of flexible policies, and a supportive framework for nascent startups to survive and become profitable in the local market.

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From the consumers’ perspective, better financial products, quick access to funding, and transparent payment systems will establish trust and improve penetration. While startups need to frequently partner with large financial institutions to create awareness about their products for a cash driven society to shift to digital finance.

All of this will happen gradually, it's only a matter of time!