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The silver lining that came with the coronavirus pandemic has been the rapid move towards digitalization in different sectors of the economy that previously moved at a turtle pace. Financial inclusion of rural areas is, in particular, crucial to accelerate the pace of economic growth that the country needs to develop, and the fintech revolution offers opportunities to attract many of these previously unbanked people, reports Global Village Space.
Pakistan’s FinTech Revolution Sounds Cool, But Do You Understand What It Means?
Essentially, it refers to the technology supporting banking and financial services. Well, that’s a start! But what’s new about it – don’t we all know that cashiers have computers they log into when we deposit or withdraw money in the bank.
In its simplest form, that might have meant that, but in essence, the fintech we’re referring to more correctly refers to any technology that helps you meet your general banking needs without the help of a anybody. So it can be as simple as checking your balance or transferring your funds in your phone app.
What does this mean for Pakistanis?
Huge deal. Seventy-seven percent of the country is still not physically banked and is not financially included for several reasons, including the fact that bank branches cannot cover all regions of the country; at 10 branches per 100,000 adults, Pakistan’s bank coverage is low compared to the average of 16.38 in Asia.
This means that a large number of people do not have access to finance, and everything that goes with it, including farm loans, tractor loans, machine loans, car loans, mortgages, Farmer insurance and SME development is hampered by a lack of access. in capital and so on.
This prevents individuals from engaging in life-changing economic activities and globally inhibits economic growth. According to the Access to Finance Survey, the country is still predominantly cash-based.
Only 23% of the adult population of Pakistan has access to formal financial services, and even less, only 16% of adult Pakistanis have a bank account. The Black Swan event known as COVID-19 quickly transformed countries like Pakistan into the digital 21st century in the financial industry.
With banks trudging along and talking about digital wallets, branchless banking was pushed to act immediately as it encouraged consumers to “stay safe and stay home” and use their online banking services; it has acted as an extraordinary catalyst for digitization and e-commerce.
The PTI government has launched a “Digital Pakistan Initiative” covering all sectors including agriculture, health care, education, trade, government services and financial services.
The huge money that was spent on the Ehsaas program was sent in the form of digital payments, and the government used this (government-to-person (G2P) payments) as an opportunity to bring previously unbanked populations in the financial sector.
Pakistan’s digitization has seen a log acceleration as digital solutions have become necessary, especially during the lockdown. The State Bank of Pakistan is also accelerating change with the availability of instant payments through its Raast system.
FinTech has impacted many areas such as banking, insurance, lending, personal finance, electric payments, lending, venture capital and wealth management, to name a few. -a. Many new startups have entered the field and faced established players head-on, often creating a competitive environment that benefits consumers.
According to MarketScreener, the global financial sector is expected to be worth $ 26.5 trillion in 2022, and the fintech industry is worth around 1% of the industry.
According to a study by Goldman Sachs, it has been estimated that the global fintech industry could potentially disrupt up to $ 4.7 billion in revenue from traditional financial services. PwC estimated in 2020 that up to 28% of banking and payments services would be at risk of disruption due to new business models driven by fintech.
FinTech in Pakistan
According to the Pakistan Telecommunication Authority, 101 million people use the internet in Pakistan, 46% have access to broadband services and 85% of the Pakistani population has mobile connections which accounts for 183 million mobile subscriptions, a high penetration in the population. .
Pakistan offers immense business opportunities in the payments sector for banks and other fintech entities, including startups and telecom operators, to capitalize on the strong mobile penetration in the country by offering financial services through devices. mobile, applications and web services.
An electronic wallet can be used for various payment transactions, such as receiving payments including remittances, salaries and bill payments as well as phone top-ups. According to McKinsey Consulting, the cost of offering digital accounts to clients can be 80-90% lower than using physical branches.
Neobanks hit the country several years ago after the telecom giants realized they could step into this industry and challenge traditional banks. Neobanks are basically internet based banks which are virtual banks that operate exclusively online without traditional physical branch networks and without any of the costs associated with it.
According to a 2019 World Bank report, Pakistan’s digital financial services will boom to $ 36 billion, contributing 7% of GDP if a real-time retail payment gateway is introduced.
Currently, branchless banking, even with telecommunications companies, has not made a big leap; As of March 2021, the average daily transactions remain around 6,604,143, and the total number of transactions in the quarter was only 594 million, with the value of transactions around Rs. $ 1.8 trillion.
Who will serve the unserved?
According to a 2016 World Bank report, 27.5 million Pakistani adults say that distance to a financial institution is a significant barrier to accessing financial services. The arrival of remote banking service providers in the market has added around 180,000 active agents since 2008 to the 100,000 existing bank branches, but this contributes only slightly to the scarcity of financial contact points for the population.
Moreover, a report by Karandaz shows that banks still offer 80 percent of existing financial services while serving only 15 percent of the population. Increasingly, in markets where this shortage of financial service providers exists, we are seeing startups entering to meet this need for faster, more efficient, and no-frills payment services, especially among small to medium-sized businesses and businesses. unbanked individuals.
Since the introduction of Electronic Money Institute (EMI) regulations by the SBP in April 2019, several Pakistan-based startups have approached the SBP for approval, including Finja, Nayapay, Sadapay and AFT. pilot approval to SBP approval in principle.
More fintech startups and other companies are preparing to acquire EMI licenses to unlock the potential of digital financial services. The EMI license only allows fintechs to provide customers with an account with daily and monthly transactional limits.
They are not authorized to issue credit or savings products; companies that also wish to do so should opt for branchless banking or request a non-bank financial institution (NBFI) from the Securities and Exchange Commission to Pakistan (SECP).
Finja recently became the first fintech to obtain both regulatory licenses: an EMI license under the SBP and a lending license for an NBFC (non-bank financial company) under the SECP. Not all fintechs seek to compete with banks.
Finja, for example, is partnering with banks by working with them and creating loan and payment products to serve a segment they may not have previously targeted.
Recently, HBL invested $ 1.15 million in Finja, saying it would proactively reinvent the bank to become a “technology company with a banking license”. The bank noted that investing in Finja would serve two of the bank’s strategic priorities, namely investing in digital financial inclusion and in development finance companies involved in agriculture and SMEs.
Since April 2020, Finja has increased its digital loan portfolio by 550%, providing more than 50,000 digital loans to micro, small and medium businesses. There is no doubt that the SBP is keen to ensure that fintech companies contribute to its goal of increasing financial inclusion through new and often innovative digital payments frameworks.
The 2019 regulations provide a clear framework for IMEs seeking to serve the public and stipulate minimum service standards and requirements for these businesses to ensure that payment services are delivered to consumers in a robust and cost-effective manner and provide a foundation. benchmark for customer protection.