AURORA: You have transitioned from being a professional banker into a digital start-up entrepreneur. How did the journey evolve?
NADEEM HUSSAIN: I spent 27 years at Citigroup as a consumer and corporate banker, working in eight countries. After 27 years, I decided to return to Pakistan and create something. Although I did work in Pakistan as head of consumer banking at Citibank and launched many products, I had not created anything which changed the industry, nor had I created a Pakistani company which, from a global lens, could be viewed as being among the top three in the world in a particular category. I wanted to do something that would create a legacy; that was the ambition. When I came back, my core expertise was finance and the only banking licenses available from the State Bank of Pakistan (SBP) at the time were for Islamic or microfinance banks.

I looked at both, as theoretically I could do both, although practically I had done neither. The microfinance license was for $10 million and the Islamic bank one was for $100 million; there was no way I could raise $100 million, but $10 million I could manage. When I researched microfinance, I came to the conclusion that although there was a huge market there, no institution was looking at it from a Double Bottom Line (DBL) perspective – social impact and financial sustainability. I thought that if I got this right, I could create something that would stand out regionally, if not globally. Last year, when I exited from microfinance after 11 years, Tameer Bank was the most profitable microfinance bank in Pakistan. It was among the top 25 in the world and Easypaisa, the product I developed in collaboration with Telenor, was the only product made in Pakistan by Pakistanis; it was ranked globally at number two and it changed the industry. People, who were using the hawala system or the post office for their domestic remittances, switched to Easypaisa because it was the most convenient form of local transfer. Easypaisa was able to move six percent of Pakistan’s GDP in a year. It was huge. As a consequence, other entities followed and there are now five or six companies providing the same service.

A: Was it not unconventional for a microfinance bank to adopt such an idea?
NH: When I went into microfinance, it became apparent to me that contrary to what people thought, default was not the biggest risk factor when lending to poor people. Our default rate was under one percent and globally it is under three percent. That was not my challenge; it was how do I sell one sachet of tea at a time, as opposed to a carton, and make money? When you give a loan of Rs 25,000 to 30,000, there are no financial or audited statements; we have to physically go to customers and assess their ability to repay. So, if on a Rs 25,000 loan, I make Rs 5,000 and my cost of acquisition is Rs 7,000, I am not going to make money. It was then that I started to think about how to put in place a revenue stream that would be independent of the loan income. This is how Easypaisa came into being. It was the pressure to move away from a loan-earning stream. This was also how I was exposed to the digital world because we realised that a digital method of sending money would be a key part of our business. It was also how we got into payments; microfinance banks typically are not into payments; they are into lending, savings and providing insurance cover. We were successful because of two revolutions that took place in Pakistan. The first was the introduction of the mobile phone, as a result of which the population to phone density ratio in Pakistan went from 120th in the world to the top five; the second was the introduction of the smartphone.

Pakistan has a great trajectory ahead. The GSMA have projected that 90% of Pakistan will be under 3G and 4G coverage by 2020. The potential of digital is huge; it reduces time and cost and it will mainstream rural Pakistan, which constitutes close to 55% of our population.

In Pakistan, 99% of airtime is sold through prepaid cards and with that sort of percentage you need agents to sell prepaid cards, which is why the telcos had to develop agent networks. When I started looking at agent networks, I was looking at banking density versus phone density and in Pakistan, banking density is 22% and phone density is 70%. The total number of bank branches is 12,700 and the total number of unique agents is about 90,000 and multiple agents are about 133,000. The total number of ATMs range from 6,000 to 7,000 and the total number of bank customers is under five million; 1.8 million for commercial banks and 4.7 million for microfinance. Clearly the bulk of Pakistanis are not in the banking net. The idea was to develop an agent network where anyone could open an account, deposit, withdraw and transfer money, and in that way, create a bank for people who do not need sophisticated systems. Suddenly, instead of a country with 12,700 bank branches, which close on the weekend and work half days on Fridays, there were neighbourhood networks open 16 hours a day, seven days a week. However, this was manual not digital; a digital ecosystem is where you transfer money mobile wallet to mobile wallet. Once I got into payments, I started looking at digital banking concepts and this introduced me to other avenues of digital lending.

A: How do you see the evolution of digital in Pakistan?
NH: Pakistan has a great trajectory ahead. The GSMA have projected that 90% of Pakistan will be under 3G and 4G coverage by 2020. The potential of digital is huge; it reduces time and cost and it will mainstream rural Pakistan, which constitutes close to 55% of our population. My aim is to develop a platform, maybe not on the scale of Alibaba or WeChat, but similar, and establish a number of companies that will enable me to understand customer behaviour, use data analytics, algorithms and artificial intelligence. There are already 20 companies within the Planet N Group which are using the digital railroad which is being created.

A: What has to be done to create this digital railroad?
NH: Firstly, access to broadband and WiFi should be a right, just like access to water or air is. I am not saying free, but it should be available to anyone, anywhere in Pakistan and this involves two things. The telcos need to put up more towers and the government needs to go to those locations where the telcos will not go because of profitability reasons – and the government policy needs to incorporate this. Secondly, you need data centres; most SMEs cannot afford data centres so they need to go onto the Cloud and this means there has to be enough data storage capacity. Once you are on Cloud, you can start thinking about automating your financials and your orders, finding customers and so on. But you cannot do any of this without data storage. The government needs to have a policy to assist cloud computing and data capacity. Thirdly, you have to understand data analytics. When you use Netflix, Google or Facebook, the algorithms pick up all your behaviour. We live in glass houses and there is no privacy left. All this data exists with the telcos, the banks and on peoples’ smartphones, and companies ought to know how to use this data and provide more focused offerings. However, there has to be a balance between consumer privacy and misuse of information and the government must also draw up a data privacy policy. Fourthly, at the end stage is the internet of things (IoT).

The biggest application at the moment is digital banking. This is not about a commercial bank converting to automation without a human element; that is neither practical nor scalable and it doesn’t work. Digital banking is about connecting with customers remotely, figuring out their needs and creating solutions and services at a fraction of the time they currently take.

A: Specifically what is the digital railroad?
NH: The smartphone and it doesn’t matter who makes the smartphone; I am agnostic, but based on what is on your smartphone, I should be able to provide you with a range of services. The thing is to look at the problem statement and see how digital can solve it; digital has to create something which is more effective and faster. It doesn’t have to be cheaper, but it must lead to value creation. The biggest application at the moment is digital banking. This is not about a commercial bank converting to automation without a human element; that is neither practical nor scalable and it doesn’t work. Digital banking is about connecting with customers remotely, figuring out their needs and creating solutions and services at a fraction of the time they currently take. In October, we will be launching a nano loan project called Tez Financial Services.

A: Nano in what sense?
NH: Today, processing a loan application takes between 20 and 30 days; we say it should be a five to 10-minute process. There is enough data on your smartphone to enable me to make a credit decision. If you allow to me to access your smartphone and carry out a risk assessment, there are 12,000 data points I can take. Let me give you the easiest one. If your contact list consists of 10 people and your friend’s list consist of 1,000 people, your friend has a better credit risk profile, because, he or she is more networked than you are. The same goes for travel; credit risk improves with people who have a regular, as opposed to an erratic pattern, or if your phone is on 24 hours a day versus 12 hours a day, then you are a better risk. These are all data points that have been established by machine learning and algorithms. Once we launch this service and defaults happen, the machine will learn and correct the weightages we give; the algorithm learns as it goes along. The idea is to offer customers Rs 5,000 to 10,000 loans, repayable after a month and eventually after three months. All they have to do is download our app and with their consent we will be able to tell within 10 minutes whether they are eligible for a loan. In Pakistan, the total number of people who have access to credit is about six million, yet there are 30 to 40 million people who are eligible but do not have access to credit. Going further; I approve the loan, but I want to send the cash electronically. Seventy million people have a mobile account and can access cash through an ATM or an agent and the loan is repaid in the same way. If they don’t have a mobile account, based on the fact that NADRA is automated and that every SIM holder is biometrically verified, the SBP rules allow me to open a remote account for them in less than a minute. I call this the ‘one-minute account’, because in one minute, I can open a level-zero account that will allow you about Rs 25,000 worth of transactions a month, which is what the bulk of Pakistanis require.

When external investors start coming to Pakistan, they will see the opportunity and if you already have a platform with five million customers, you are the first port of call. Digital Pakistan is efficient because of the smartphone and because NADRA has automated everybody’s signature and SIM cards are biometrically verified.

A: What about recoveries?
NH: In this kind of lending the default is 10%; so I have to price the service in a way that it covers my default. I am not using people, so my costs are reduced. In microfinance, the largest cost is people; in digital banking the biggest cost is the default. In case of non payment, I send an SMS, but not a legal notice, because it will cost me more than the amount owed. I will just blacklist the person and they will be barred from the major credit markets because their name will appear on the credit bureau list. The point is that I will also have customers who want to borrow on a regular basis and they are the ones I can move from Rs 5,000 to 10,000; from one month to three-month repayment schedules. The same principle applies to life or health insurance. These are the financial implications of digital. If in three years’ time I acquire five million customers – and I think I can – I will be bigger than any commercial bank, where the total lending is only for 1.8 million customers. All the large commercial banks put together, inclusive of personal autos and housing loans, don’t have more than two million customers. So, again I am creating an industry; an industry that is one level below the microfinance industry. When external investors start coming to Pakistan, they will see the opportunity and if you already have a platform with five million customers, you are the first port of call. Digital Pakistan is efficient because of the smartphone and because NADRA has automated everybody’s signature and SIM cards are biometrically verified.

A: What are the opportunities beyond the banking aspect?
NH: Let’s talk e-health. There are two problem statements here; one you cannot access your doctor after hours and two, you physically have to go to a reputable pharmacy to buy your medicines. To deal with the first problem, we asked doctors, what if patients who need to access you after working hours were to WhatsApp you with their problem and you charge them a monthly fee equivalent to one visit. This service is called Superdoc and we already have about 50 doctors on board. In terms of the second problem, we said let’s create an online pharmacy. We approached manufacturers supplying genuine medicines. The result is that you can call dawai.pk and have your medicines delivered anywhere in Pakistan. This is the largest online pharmacy in Pakistan and others will come up.

A: How big is the potential of e-commerce in Pakistan?
NH: E-commerce has an initial potential of a billion dollars, yet we are sitting on a couple of hundred million dollars because customer confidence has not been built and the returns policy is not strong enough. This is why cash on delivery (COD) accounts for 90% of the business and you cannot grow a business based on it.

A: How can this be overcome?
NH: Globally, there are institutions that rank e-commerce providers. Then there is the Alibaba model. Initially they created an escrow account where the buyer’s money was held for seven days before it was transferred to Alibaba; if buyers returned the goods within that period the money would be returned from the escrow account. This is how confidence increases. You start with the escrow account option and eventually dispense with it once confidence builds up. Another bottleneck is that most banks do not allow their debit or credit cards to be used automatically to make these purchases and this is the biggest failure. We need to come up with an anti-fraud customer protection mechanism. Elsewhere in the world, they have cracked this problem, why can’t we crack it here? We need to create the enabling environment.

In India, people can buy a cup of tea, or take a rickshaw with their mobile account and this needs to happen here. There are three trillion rupees in circulation outside the banking system’s net and once we go digital, a lot of this cash will start coming into the system.

A: How far are we from a real breakthrough in terms of a meaningful Digital Pakistan?
NH: Three developments have to be in place. Firstly, the one-minute account. There are about 17 to 20 million level-zero accounts in Pakistan and it took the banking industry from 1947 to 2016 to get to about 40 million accounts; it took branchless banking five years to reach 17 million accounts and in a few more years they may go up to 20 to 30 million. Secondly, there must be, what I call ‘the six-kinnow digital purchase’; you should be able to buy six kinnows using your mobile account. In India, people can buy a cup of tea, or take a rickshaw with their mobile account and this needs to happen here. There are three trillion rupees in circulation outside the banking system’s net and once we go digital, a lot of this cash will start coming into the system. Thirdly, there is the ‘five-click on-boarding’. Masooma bibi in interior Sindh makes great achaar; she should be able to become an e-commerce player anywhere in the world in five clicks. We have our work cut-out, but these things will happen and the people who take the risk now will ride the wave.

Nadeem Hussain was in conversation with Mariam Ali Baig. For feedback, email aurora@dawn.com