Pre-2008, Ahsan Ahmed, the owner of a small clothing store, would make biweekly trips to the post office to send a money order to his family in Lahore. After enduring traffic jams, slow customer service and filling out endless forms, his family would eventually receive the funds three to four working days later. His story points to the fact that before OTC money transfer services like Easypaisa and JazzCash entered the market, unbanked individuals in Pakistan had to put up with long-winded methods to perform basic financial transactions.Today, with a broadband penetration of 46% plus and a mobile penetration of over 85%, Easypaisa and JazzCash are able to offer a range of digital financial services to 20 million monthly users, and in doing so, have paved the way for the opening up of Pakistan’s fintech space.

The relative success of Pakistan’s fintechs is due to the fact that traditional financial institutions have lengthy and strict documentation requirements for opening accounts, taking out loans and performing other services. Fintechs, however, can operate as non-bank licensed entities and cater to individuals who lack the required documentation or do not have access to basic financial services. As a result, today there are more than 40 operational fintechs in Pakistan, the majority of which operate in the payment sector and approximately 30 to 40 million people use fintech apps to make payments on a regular basis. However, despite these numbers and the efforts made by the government and the regulators – the State Bank of Pakistan (SBP) and the Securities and Exchange Commission of Pakistan (SECP) – to facilitate the fintech space, Pakistan still has an average financial inclusion rate of only 21% – lower than the average 33% for lower-middle-income countries (source: Fintech Ecosystem of Pakistan). So what more needs to be done to further the effectiveness of fintech companies and increase financial inclusion in Pakistan?

What the Regulators Are Doing

To support the government’s target of enabling 65 million digital accounts by 2023, the SBP has drawn up new regulations for the sector. Fintechs fall into two main categories: payment service operators/payment service providers (PSOs/PSPs) and electronic money institutions (EMIs). In 2014, the SBP introduced the PSO/PSP category, whereby financial institutions other than banks, such as 1LINK and NIFT, could be licensed to operate in the payments space with a lower capital (Rs 200 million) than what is required by banks (up to Rs 10 billion). The game-changer came when the SBP implemented the EMI licence in 2019. The EMI segment aims to “promote digital payments, foster innovation in the payments space, increase financial inclusion and provide a regulatory framework to non-banking entities in the payments landscape,” according to SBP’s website. EMIs are given licences by the SBP to operate in three stages: in-principle approval, pilot operations approval and final approval. Currently, eight EMIs are in one of the three stages of the process and four are fully enabled (NayaPay, SadaPay, Finja and PayMax), as per the SBP’s wesbite. More importantly, EMI licences allow non-bank entities to operate open-loop wallets, online money transfers and e-lending. In addition to creating the PSO/PSP and EMI categories, the SBP has set up a new department called SBP Digital Financial Services (DFS), aimed at helping fintechs understand the regulations and whether to register as an EMI, PSO or PSP. As an SBP spokesperson explained, “banks are well-established, so they are familiar with our regulations and policies. Many fintechs are not as aware of the overall regulatory environment because they are new to the field. They are often not very clear about which category their business model fits into and it takes them time to understand the overall process involved.”

What the Regulators Should Do

Shorter Processes
Some fintechs believe the time period between the first and last stages of acquiring a licence is too long (it can take more than a year). However, the SBP for their part say that due diligence in other countries, such as Malaysia, takes the same amount of time. “As part of the evaluation process, we need to look at the overall viability of an applicant and given that many principal investors are usually offshore, the due diligence of the owners, the sponsors and the shareholders may take time – for example, if we give an ‘in principle’ approval to 10 fintechs, not all will be able to successfully complete the pilot operations and get the commercial licence.”

Localised Regulations
Another complaint voiced by fintech companies is that although the SBP and the SECP are trying to provide a conducive environment through better regulatory frameworks, these regulations tend to be ‘copy pasted’ from those applicable to other fintech markets and are not customised for Pakistan.

Different Expectations
Another consequence of these regulations is that once a fintech company is licensed by the SBP or the SECP, the expectations of the regulators mirror those expected from an established bank. In other words, once a fintech obtains a licence, all the requirements imposed are the same as those imposed on a 25-year-old bank – and there is no difference on the tax or compliance side either.

Centralised Data Systems
Fintech companies also emphasise the need for faster and less costly ways of ensuring Know Your Customer (KYC) compliance. The process as it stands now is that in order to verify a CNIC, a company has to pay a fee to NADRA. Collectively, dozens of financial institutions have to run KYCs on thousands of customers a day – and pay per KYC verification. The solution is a centralised data repository that all companies can access for different customer data points (banking, telecom, utility bill payments) to evaluate a customer’s creditworthiness. This would save both time and money.

What Fintechs Can Do

Even with regulatory support, industry insiders believe fintechs are not sufficiently focused on solving the financial inclusion challenge. Most offer payment services, and only a handful are actually targeting the unbanked population. New products that can cater to underserved segments are not coming into the market and the UI/UX is “not usually at the heart of product development” (source: Fintech Ecosystem of Pakistan), due to which individuals with limited financial knowledge and low tech savviness are not able to fully benefit. According to an SBP spokesperson, as of now, there are 11 PSOs/PSPs and 12 EMIs, all offering similar services within the payment space: “The government and regulators are trying to promote a conducive environment, but companies seem to keep wanting the same slice of the pie: i.e. e-wallets and cards issued by international payment schemes.” As a result, services other than payments – lending, saving and insurance services – are not receiving the attention required in terms of innovation. Savings have a direct impact on economic growth and this is arguably the need of the hour. According to World Bank and the Organisation for Economic Cooperation & Development’s national accounts data, Pakistan’s gross domestic savings as a percentage of gross domestic product stood at 5.8% in 2018, much lower compared to 21.2% in Sri Lanka, 22.8% in Bangladesh, 29.4% in India and 30.6 % in Malaysia. The issue is not that people do not save, but that they lack a formalised product or means to do so. A report published by Karandaaz Pakistan in July 2020, Savings in Pakistan, states that “people in Pakistan do save in the form of cash, gold, livestock and other assets, especially in rural areas, but the formal financial sector has demonstrated limited success in capturing these savings for purposes of intermediation and investment.” At present, the loan segment is made up of about 11 million active customers (barely five percent of the total population) and although some fintechs are addressing this gap, the problem is that some of them are not licensed by the regulators and charge exorbitant rates.

What Stakeholders Can Do

At the end of the day, until potential customers are made aware of the role financial services can play in their lives and understand how to use them, the rate of financial inclusion will stay at a standstill. Most people have a deeply ingrained preference for cash and tend to be wary of financial technologies. The long-term solution is to raise financial literacy through awareness by financial and government institutions. Furthermore, individuals need to be up-skilled in developing and marketing financial products in order to come up with innovative solutions for both the underbanked and unbanked segments and small businesses. Financial institutions and governments must also invest time in constantly raising awareness about the benefits and utilisation of financial products – starting at the school level.