The Cool Confidence of Banks

It was late 2008. The so-called irrational exuberance practised by big banks and Wall Street firms for decades was coming to a screeching halt. Newspapers front-paged bankruptcy filings almost every day. TV screens showed images of intelligent-looking, gym-going investment bankers walking out of Manhattan high-rises with white cardboard boxes – a trope for mass layoffs – for months on end. Hundreds of thousands of redundancies were declared in the financial sector alone. Seasoned bankers who took home bonuses to the tune of millions of dollars a year were let go on one day’s notice.

The economic trough unwittingly brought about three immediate changes. One, the regulators became conservative overnight and forced banks to adopt extremely cautious, inward-looking business approaches. Two, a sizeable number of experienced finance professionals found themselves without jobs. Three, the tech revolution accelerated after the launch of the first iPhone a year before. These three simultaneous changes gave birth to what we call today fintechs – start-ups that improve the delivery of financial services through technology.

In an ideal world, there would be no fintechs. Banks with bloated balance sheets would have identified the gaps in service delivery, dedicated resources to develop solutions and rolled out the new tech-enabled platforms nationwide. After all, there is very little that fintechs do for their customers that well-established banks do not – or cannot – already offer.

Yet, the raging debate on I.I. Chundrigar Road is about whether these up-and-coming, technology-led start-ups will be able to pitch their tents on the turfs of the mammoth commercial banks and their unmatched financial muscle.

Are big banks threatened by these teeny-tiny start-ups with other people’s money (mainly venture capitalists) on taps? How true is the widespread notion that conventional banks are inherently less agile than the super-quick start-ups that operate free from the tangles of long-existing bureaucracies? “So far, the big banks have not taken any hit on their revenue or profit because of fintechs because they still have to take their use cases to maturity and scale”, says Sharjeel Shahid, Group Executive, Digital Banking Group, United Bank Ltd (UBL). “Fintechs may have caused some disruption and captured a mass market in one or two small segments, but that is not what you call sustainable success. They need to build financially sustainable models and use cases and not look for early exit opportunities.” Shahid continues, referring to one of the top payments services in Pakistan that has been formally up for grabs for a couple of years.

In the same vein, he draws attention to the fact that global venture capitalists have pulled the plug on numerous Pakistani start-ups in recent months even though these ‘disruptive’ firms were riding the PR-propelled wave of popularity.

Iqbal Fazal AliKhan, Group Head, Digital Transformation and Innovation, Meezan Bank, says that it is true that banks lag behind fintechs globally in the payments sphere. “In Pakistan, however, fintechs are struggling to maintain their agility. There are few to no examples of innovative, technology-laden solutions that may excite and attract the common man. The type of payments [handled by] fintechs is proving to be very expensive.”

The verdict was a lot harsher from Abrar Mir, Chief Innovation and Financial Inclusion Officer, Habib Bank Ltd (HBL). “Hype is one thing; reality is another… we have seen lots of new entities come with ambitions in the last five years but given the dynamics of our country they have not, so far, found it easy to scale and become relevant. Most of the fintechs we see so far are operating in a very narrow niche.”

Mir believes it’s unfair to accord JazzCash and Easypaisa – top players in the payments sphere – the lofty status of a fintech. They are primarily microfinance entities with a licence to carry out branchless banking. In his opinion, they operate predominantly in the airtime top-up sphere, a product sold by their respective parent companies. “Currently it is small-ticket transactions that were previously cash-based and take place through a retailer; now they are done through an app. They are continuously working on other use cases. However, at this point, their customers have smaller financial muscles and their ticket size is small. Given the regulatory mandate under which they operate, the nature of their offerings will remain less sophisticated.”

In that sphere, HBL is actively increasing its footprint via Konnect, a branchless banking entity they own. So why have HBL, with unmatched financial firepower at its disposal, let smaller players like Easypaisa and JazzCash take the dominant position in branchless banking?

One reason is that Easypaisa and JazzCash have been around for 13 and 10 years, respectively, while HBL’s Konnect is in its fourth year, is how Mir explains this. “Yet, we enjoy a 12 to 13% market share. The share of the largest player is between 40 and 50%. We will soon be among the top three players even though we do not have large captive SIM card customers like the telco-led branchless banking competitors.”

AliKhan believes fintechs are “undoubtedly” more agile than banks, but they lack the depth of knowledge, revenue streams and existing relationships. “They learn through trial and error, which is expensive and many a time, they burn through their funding.”

According to Shahid, his bank is collaborating with as many as seven fintechs to engage customers in segments where large banks have traditionally lagged behind. “The realisation among banks came in 2015-16 that rather than fighting turf wars with fintechs, the big lenders should collaborate with them.”According to Shahid, the digital banking experience offered by large Pakistani banks like UBL is as good as anything offered in any other developed country. He adds that UBL ensures that kind of digital experience for its customers because of the fintechs it works with.

The emphasis here is on the preposition ‘with’. As a matter of policy, UBL have not bought shareholding in any of the seven start-ups it relies on for a seamless banking digital experience for its customers and that is because if a bank owns a stake in a fintech, it becomes difficult for it to not act like the owner, says Shahid. “You kill creativity and independence by taking equity. Instead of fintechs helping the bank become more agile, the bank ends up influencing fintechs which may not help the cause.”

As a result, UBL prefers to work with the multiple fintechs – that operate in design, cyber security and payments segments – through service-level agreements. “We let fintechs do their thing. We don’t try to control them.”

Mir has a different view. In his opinion despite their bureaucratic red-tape, large Pakistani banks remain incredibly agile. Citing the example of the recent floods, he says the government asked HBL to set up service counters in branches across Punjab, Sindh and Balochistan in order to disburse cash among the catastrophe-hit population. “We started making payments the next day, although our own staff was equally affected by the floods. Fintechs may not have had access to be able to mobilise a workforce with sufficient cash availability across three provinces within 24 hours. This demonstrates that we have the ability to be agile at scale when needed. At other times, the complexities of some of our products, the regulatory requirements and competing demands on limited resources by a large number of product groups, force us to prioritise and manage risk, hence making us relatively less agile from the end customers perspective.”

Fintechs cannot replace banks, he maintains. They can’t be expected to grow big enough – at least in the foreseeable future – to do investment and corporate banking, float bonds, run large-scale complex treasury and foreign exchange desks, manage cross-border trade payments as well as carry out government-to-people payments for bottom-of-the-pyramid customers.

Mir concludes, “I don’t see fintechs posing a threat to large banks as far as deposits are concerned.”

Kazim Alam is a staff member of Dawn. kazim.alam@dawn.com