Aurora Magazine

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Banking on digital inclusion

Published in Sep-Oct 2016
Will banks pull it off?
Illustration by Creative Unit.
Illustration by Creative Unit.

Morgan Stanley Capital International (MSCI) recently upgraded Pakistan’s status to Emerging Market, primarily due to improved macroeconomic, monetary and fiscal indicators. The improved rating combined with the highest ever Consumer Confidence Score (a measure of people’s confidence and optimism with regard to a country’s financial and economic outlook) reported by the State Bank of Pakistan (SBP) indicate that Pakistan’s banking industry may be poised to unlock and realise its growth and profitability potential.

Industry snapshot According to the Financial Stability Review issued by SBP in June 2016, the banking sector had grown by almost 16.8% in the last fiscal year while its asset base expanded by nearly 15.1%. This growth has been supplemented by rising private sector credit lending as well as a rapid increase in the number of Islamic banking customers, all of which resulted in a record after tax profit of Rs 199 billion for the industry.

Banks and key industry stakeholders have attributed this performance turnaround to the implementation of the SBP Vision 2020, a five year strategic plan devised by the SBP to achieve financial stability and establish a dynamic, yet secure financial system. The priority areas identified by the SBP are the development of robust payment systems contingent on technological innovations and increasing financial inclusion, primarily through branchless banking.

S.H. Irtiza Kazmi, EVP/Head Global Home Remittance Management Group, National Bank of Pakistan (NBP), points out that the financials posted by the sector deserve to be highlighted even more because the prevailing interest rates are at an all time low in 42 years; he explains that “reduced interest means reduced profitability of banks.”

According to Salim Raza, Former Governor, SBP, reducing interest rates was a monetary policy decision made in an attempt to kick-start the economy, because “high interest rates are prohibitive for microfinance-based entrepreneurial ventures.”

In addition to creating a start-up friendly culture, low interest rates have forced commercial banks to diversify their investments. A gradual shift from high-yielding government treasury bonds (constituting 83% of banks’ investment portfolio) to developing innovative payment mechanisms has been witnessed, the objective being to incentivise Pakistan’s unbanked population to use formal banking channels.

Technological innovation
The banking sector in Pakistan has witnessed an increasing convergence between technology and financial products and services in the last two years. In fact, the term ‘Fin-Tech’ has become the buzzword when referring to technological innovations that have made financial services more accessible across multiple platforms over a 24-hour cycle.

Muhammad Humayun Sajjad, Head of Innovation, United Bank Limited (UBL), highlights that with more than 54 million internet users in a country of almost 200 million (indicating an internet penetration rate of almost 27%), technology acceptance and adoption rates are higher than what would be expected for Pakistan. It is also noteworthy that Pakistan’s ecommerce industry, currently at $30 million, is expected to increase to $600 million by 2017 (Source: Economic Survey of 2015-16). Currently, Cash on Delivery (COD) payments account for more than 95% of online purchases, but Inter Bank Fund Transfers (IBFTs), online merchant accounts, internet banking and other forms of digital transactions are on the rise.

Recognising this lucrative opportunity of digitising payments, on August 13, Pakistan saw a first-of-its kind initiative with the launch of Masterpass, a new QR code-based digital payment service launched by UBL in partnership with MasterCard that in the words of Sajjad, “has the potential to revolutionise the retail payment mechanism in Pakistan.”

In order to use the service, all UBL customers need is to have the UBL Phone Banking app downloaded on their smartphones. What follows is a three-step process: make an online purchase; at the checkout stage use the smartphone to scan the QR code of the transaction; and input an authorising PIN code in the app to confirm the payment and have the account balance debited in real-time. While the service has been launched nationwide, UBL is in the process of bringing more retailers on-board. Ali Habib, Head of Corporate Affairs and Marketing, UBL, adds that although the technology has been made user friendly, there is a sophisticated technology setup at the backend supporting it, making the on-boarding process between merchants, bank and Mastercard necessary. Hence, a time lag is anticipated before the service is accessible everywhere.

Taking things a step further, UBL entered into an agreement with Pakistan Railways, whereby UBL customers can make online reservations and payments for railway tickets through its mobile app, internet banking and debit and credit cards. According to Habib, “UBL has made the process reliable, efficient and timely.”

Abrar A. Mir, Chief Innovation and Financial Inclusion Officer, Habib Bank Limited, is of the opinion that an important element of realising the SBP’s Vision 2020 is contingent on developing customised tech-based products, keeping in mind accessibility, convenience and security requirements of the Pakistani customer.

A success story in this regard was the revamping this year of NBP’s Foree Remittance Programme. Inward home remittances have become the second highest source (in terms of value) of foreign exchange for the country (as of June 2016, remittance figures were at an all-time high of almost $20 billion). NBP, according to Kazmi, “wanted to take advantage of its well-distributed branch network across the rural-urban divide and facilitate the beneficiaries by creating increased access points to receive payments.”

Although a dedicated in-house remittance group had been in existence since 2009, it is only recently that a concerted effort was made to establish tie-ups with authorised international payment and exchange companies and ensure that all 1,400 or so NBP branches are online and able to receive and disburse payments.

“The primary incentive,” points out Kazmi, is that “there are zero transaction charges for both senders and recipients.”

Expatriate Pakistanis can visit any of the authorised financial partners – including Western Union – and transfer the amount directly into a Foree Remittance Account at NBP, for which a free ATM card is issued to account holders. Non-NBP account holders can use the service by visiting any branch, show proof of identification and the secure transaction ID, and collect their funds. Thanks to the global outreach and foreign partnerships that NBP enjoys, the service is available in more than 180 countries and this number is likely to increase in the coming months.

Kazmi stresses that the most integral component of the programme is ensuring that people, particularly those in remote rural areas, have 24/7, instant access to funds. However, since NBP controls the lion’s share of inbound remittances, to ensure seamless money transfers, the backend system needs to be efficient enough to process the massive volumes.

“We are in the process of procuring a state-of-the-art system that will cut down the turnaround time for each transaction from 15 minutes to almost five minutes, bringing an end to the queue-culture often associated with NBP.”

Kazmi is particularly proud of the fact that NBP customers can now pay their taxes online with a single click.

Other banks too seem to be well-cognisant of how crucial it is to develop tailored financial instruments for the ease of the customer. This has been reflected in the establishment of biometric ATMs in Pakistan (for which you do not have to carry an ATM and all that is needed is to input your CNIC number and thumb print to perform transactions).


Although Pakistani customers may have leapfrogged into the Fin-Tech domain, the lack of communication and product-related information sharing between banks and customers will continue to be a potent threat unless adequately addressed.


Security is key
The evolution of a digital ecosystem has put increased responsibility on banking institutions in terms of information security and customer protection when using Fin-Tech products, particularly when it comes to the high incidence of mobile phone snatching and the general concern regarding the confidentiality of personal data required for online transactions.

Sajjad cites the institution of multifactor authentication protocol in ecommerce transactions in Pakistan as a much-needed (and welcome) security measure. Firstly, phone apps do not allow users to stay logged in for extended durations and secondly, a unique transaction PIN has to be entered to confirm each payment from the account. As an added layer of protection, whenever a digital transaction is made, customers receive a text alert and an in-app notification with the billed amount, and a date and time stamp.

Moving towards financial inclusion
For both the Government of Pakistan and the SBP, increasing financial inclusion is a crucial goal in ensuring profitability for Pakistan’s banking sector, by increasing its customer base. To this end, in May 2015, the National Financial Inclusion Strategy (NFIS) was launched. In addition to promoting digital transactions by increasing financial access for Pakistan’s adult population (from the current 16% to 50%), the NFIS goals include taking banking beyond brick and mortar structures, enabling financial institutions to operate secure and seamless transactions for the unbanked population, increasing SME financing (from the current seven percent to 15%) and financial literacy by 2020.

Sajjad explains that “Pakistan has a high proportion of unbanked population and the SBP’s goal is to have more than 50 million bank accounts by 2020.”

In his view, achieving this target is only possible by expanding the scope of digital technology and mobile payments, both of which form the foundation of branchless banking. Interestingly, while the use of digital financial instruments and formal banking channels in Pakistan is relatively low, the country is leading the way in branchless banking initiatives. The SBP estimates that nearly 100 million Pakistanis are unbanked, but the percentage of mobile account holders in the country is six percent, four percentage points higher than South Asia’s average.

This discrepancy is attributed to the high mobile phone penetration, even in rural areas, where people are already aware of, and accustomed to, using mobile funds transfers (while shying away from the extensive documentation required for opening bank accounts). The SBP has attempted to rectify the situation by introducing Asaan Accounts that have an extremely simplified account opening process and require only a nominal opening deposit. This has been done specifically for unbanked people with limited incomes and financial awareness.

Several cellular service providers recognised early on that substantial revenues can be generated by catering to this un-serviced segment of the population, and launched their own branchless banking products, with more than a 100 million transactions amounting to approximately Rs 500 billion being conducted per quarter. At this point it is important to include an extremely pertinent observation made by Raza regarding this increasing overlap between the services offered by cellular companies and banks. He considers the merging of both service industries to be a significant threat for the banking sector. This is because when people opt for non-banking institutions for money transfers, banks lose out on a substantial transaction fee they can charge. Despite this, the number of branchless banking initiatives currently offered by commercial banks remains limited. Mir admits that “most banks, including HBL, are in the process of streamlining their technological operations before rolling out branchless banking products.”

However, the bank that has championed branchless banking in Pakistan – and is also credited for being its pioneer – is UBL, with its star brand, Omni.

According to Arif Akmal Saifie, SVP, Financial Controller and Head of Investor Relations, UBL Omni originated as a hobby pilot project in 2007, when Pakistan was hit by floods that caused widespread destruction and displaced thousands of people. It was during this time that UBL issued plastic cards to displaced individuals who could then use the card assigned to them to access their designated share of aid disbursements. Saifie says that “this was the first time that scores of people who had never set foot inside a bank experienced first-hand the safety, security and most importantly, the convenience of plastic money.”

From an aid disbursement tool, Omni today has evolved into the only full-fledged, branchless banking setup in Pakistan, operated by a full-service commercial bank. The scope of the service has been expanded to include approximately 40,000 authorised Omni dukaans, as well as the issuance of Omni ATMs through which cash withdrawal is possible via the 1-link ATM network that is in place across Pakistan.

Not only that, in 2016, Omni has gone beyond merely being a fund transfer tool; it is playing a crucial role as a secure payment platform in both UBL Masterpass and the e-ticketing collaboration between Pakistan Railways and UBL.

Sadeed Hassan Barlas, Group Head Credit Policy, Research and Operational Risk, Risk and Credit Policy Group, UBL explains that “it is important to remember that the primary target audience of Pakistan Railways stem from the rural and suburban areas, most of whom are unbanked, so Omni offers the ideal payment interface by enabling Pakistan Railways to make its services more accessible for them.”

The opportunity of capitalising on the unbanked population is massive. However, Kazmi believes that the greatest challenge in achieving financial inclusion is overcoming the lack of awareness regarding the financial products and services people have access to and the value-addition they offer.

A case in point is the extensive usage of the hawala/hundi system for remittances that is ingrained within our culture. Despite the zero-charge remittance facility that is now available, Kazmi estimates that close to $20 billion worth of annual remittances still come through undocumented channels. If banks are able to grab a share of this, not only will it translate into consistent, incremental profits (as remittances typically follow a monthly payment cycle), but will also ensure that customers are not defrauded of payments and that the funds are not connected to money laundering or other illegal practices.

Sajjad and Kazmi concur that industry-wide promotional campaigns, on-ground and in-person awareness activities as well as word-of-mouth will go a long way in disseminating information, thereby helping develop a relationship of convenience, trust and understanding between the banks and people.

The road ahead
Given the strong financial growth that Pakistan’s banking sector has registered on the back of investment-friendly monetary and fiscal policy measures, the massive – and as yet untapped – potential of the industry cannot be overestimated.

While the primary industry stakeholders, particularly the SBP, are aware of the fact that with the increasing cost of doing business affecting the industry’s overall profitability, banks have no other option but to focus on leveraging digital payment technologies to achieve the financial inclusion goals that have been set forth in the SBP Vision 2020 and the NFIS. Furthermore, given that Pakistan has been included in the list of the 25 countries the World Bank Group and partners will be focusing on in their efforts to reach Universal Financial Access by 2020, the future does seem promising.

According to Barlas “if banks succeed in shifting the unbanked population to the formal banking sector, this expanding customer base will automatically translate into greater revenues in the long-run.”

When questioned about whether the banking industry will be able to maintain and build on the turnaround that it has achieved, the response is one of cautious optimism. Sajjad reiterates that the increased integration between digital, mobile and financial solutions is what will enable the SBP Vision 2020 for the banking sector to be fully realised. There is a general consensus that the opportunity lies in enhancing the scope of digital payments. However, what must not be forgotten is that fact that although Pakistani customers may have leapfrogged into the Fin-Tech domain, the lack of communication and product-related information sharing between banks and customers will continue to be a potent threat unless adequately addressed.

Ayesha Shaikh is Business Development Executive, The DAWN Media Group.
ayesha.shaikh@dawn.com