The landscape of Pakistan’s fintech industry is undergoing a transformation, with local entrepreneurs urged to build their own payment rails rather than relying on international giants like PayPal and Stripe. CEO of Dukan and Chairman of Rozee, Monis Rahman, advocates for independence, stating, “We have the talent and ability today to build our own bridges and PayPals. It seems like a waste of time to wait for PayPal and Stripe when our fintech entrepreneurs should be focusing on building our own rails so we are independent of international whims that can hijack out digitisation agenda.”

Expanding on the issue of cybercrimes in the digital age, Rahman stresses the importance of educating consumers on basic principles to protect against social engineering fraud. Acknowledging the learning curve of the first digital generation, he notes that while fraud will always exist, effective measures can be implemented to minimise risks and ensure that the benefits of fintech far outweigh potential drawbacks.

design: Ibrahim Yahya

Abhi, a local fintech success story, introduces innovative solutions like Earned Wage Access (EWA), demonstrating the potential for growth in the industry. Abhi Chief Commercial Officer Mohammad Sultan Zaidi underscored that, “It is crucial to identify problems and solve them. In our market, there is a trend where service providers retain preconceived solutions and attempt to fit the same solution to consumer problems. One must understand the issues faced by consumers and the market, and then tailor products to provide effective solutions. We have embraced this model, contributing to our success. A successful company not only strengthens the economy but also benefits individuals.”

Zaidi also highlights the common pitfall of startups focusing solely on expanding their network without prioritising profitability from day one. This short-sighted approach often leads to business collapse, emphasising the necessity of sustained profitability for long-term success.

Pakistan, with its substantial unbanked and underbanked population, presents significant opportunities for fintech growth. Shahzad Shahid, Group CEO of TPS Worldwide and a member of the P@SHA central executive committee, noted that fintechs offering specialised services for specific customer segments are essential for increasing cashless payments. The regulatory focus on financial inclusion and the promotion of cashless payments acknowledges that achieving such a transformation cannot be solely accomplished by commercial banks. He underscores that the success of fintech depends on scalable and cost-effective technology, business focus, and understanding end-user preferences.

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“Additionally, the industry’s prosperity hinges on improvements in the overall business climate, the centralisation of economic documentation for policymakers, banks providing increased access to fintech, and the realisation of RAAST’s commitment to delivering low-cost, widely accepted digital payments,” he stressed.

In 2023, Pakistan’s fintech sector witnessed a diverse landscape, with some operators expanding for profitability, while others, even major players, retracted plans, notes analyst Muhammad Yasir. Notably, innovators like ABHI and Finja thrived, with ABHI’s advanced salary service gaining popularity. On the contrary, global names, Checkout and CareemPay, withdrew licenses, avoiding the local market amidst economic challenges. Recognising Pakistan’s unbanked status, Yasir suggests fintechs focus on tailored solutions for agriculture, SMEs, retailers, and overseas Pakistanis, advocating collaboration over competition. The upcoming RAAST person-to-merchant mechanism is anticipated to transform payment digitisation, offering unique opportunities for fintech innovation, insiders predict.

Distinguishing between Fintech and Branchless Banking (BB), it’s noted that Fintech offers a wide variety of financial use cases, including payments, banking, insurance, e-commerce, lending, and wallets. Leading fintech companies in the country include Abhi, Sadapay, Bazaar, Finja, Haball, and Keenu.

Branchless banking (BB), a type of fintech offering banking services through agent networks, includes examples like EasyPaisa, JazzCash, and UBL Omni. While BB focuses on physical locations for deposits and transfers, fintechs primarily cater to digital, tech-savvy, and internet-connected customers. The Branchless Banking Regulations introduced by the State Bank of Pakistan (SBP) in 2008 paved the way for mobile wallets and account opening.

The burgeoning fintech sector grapples with various challenges. Regulatory hurdles, encompassing time-consuming approvals and compliance processes, make fintech initiation and operation slower and more expensive than other startups. Once underway, these ventures often face untapped potential due to inadequate bank support, customer and merchant reluctance to pay for services, and intense price competition in a substantial grey market.

Fintech, facing funding constraints from global instability, contends with a lingering traditional mindset and a dearth of corporate culture hindering seamless evolution. Clients confront network disruptions, inflation-related concerns, and a reliance on two networks, Raast and 1Link. In Pakistan, cash persists for regular payments, hindering online payment adoption. Challenges include limited connectivity, add-on fees, and security concerns, impeding fintech’s broader acceptance.

Opportunities abound in Pakistan’s fintech sector, with room for innovation in products not yet available in the local market. The outlook for the future emphasises the shift to technology as people seek convenience, quick solutions, and comfort over traditional banking methods. The gradual transition from cash withdrawals to digital payments marks a significant milestone for Pakistan’s digital economy.

Three pivotal developments are set to catapult Pakistan’s digital economy through fintech. Firstly, SBP’s introduction of RAAST Person-to-Merchants (P2M) payments empowers small merchants to instantly receive payments in their bank accounts. This is facilitated by customers scanning a unified QR code provided by RAAST, drawing inspiration from the success stories of similar systems in India (UPI) and Brazil (PIX), resulting in exponential growth in digital payments.

These digital payments to Small and Medium-sized Enterprises (SMEs) not only create digital footprints but also contribute to credit scoring the local informal economy. Providing productive loans to SMEs holds substantial potential for a positive impact on Pakistan’s Gross Domestic Product (GDP).

Secondly, several license categories now permit open banking connectivity for startups. This shift enables startups to develop banking and financial apps using licenses from banking partners, promising to expedite innovation by leveraging the inherent agility of fintech operations, known for their faster execution compared to traditional banks.

Lastly, a notable shift in the ecosystem sees banks adopting a more receptive attitude towards collaborating with fintechs. This departure from the previous walled-garden approach signals a healthier, more dynamic relationship between traditional financial institutions and fintech innovators, fostering overall ecosystem growth.

In less than a decade, Pakistan’s fintech sector has undergone rapid and substantial evolution. The advent of mobile wallets, contributing to 90% of new accounts, reflects the transformative impact within this timeframe. Today, a majority of Pakistani adults possess Internet-connected smartphones, marking widespread technology access. Notably, digital payments have surged nine-fold over the past three years.

Crucially, SBP and the Securities Exchange Commission of Pakistan (SECP) have played pivotal and proactive roles in steering this evolution. The collaborative effort involving different licenses and private sector participation has been instrumental. This partnership has empowered fintechs to identify lucrative avenues and refine business models based on practical learnings, resulting in a dynamic evolution of the fintech landscape.

Published in The Express Tribune, December 29th, 2023.

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