Daily Times

Fintech is causing a silent revolution in global banking industry. Rapid changes are visible in financial sector owing to a nexus between finance and technology. The term “Fintech” stands for producing user-friendly, automated and efficient financial products & services with modern and innovative technologies. Fintech has evolved in the aftermath of 2008-global financial crisis and has picked momentum in recent years. According to an estimate by Accenture, the global investment in Fintech has rose to US $ 27.4 billion in 2017. When an online purchase is made using Google Wallet, PayPal of Apple Pay, the commercial retailor, the client and the bank involved in this money exchange are, in fact, using Fintech.

Pakistan banking sector has positively responded to the Fintech phenomenon that is an opportunity in the garb of challenge. Innovative technological and digital solutions are direct challenge to the traditional financial institutions but the window of opportunity opens in the amalgam of both. It works when an overseas Pakistani customer of NBP makes online payment of utility bills in Lahore through NBP Digital while sitting in Sidney. UBL Omni does not bother customers to visit branches for their basic bank transactions. HBL Pay Col speeds up collection and invoicing process for institutions. Similarly, MCB e-Gate routes e-commerce transactions of its customers.

In fact, Fintech is expanding its horizons continuously by embracing more activities broadly categorized as Wealth Management (Robo advisors), Payment Tech (billing/remittance), Lending Tech, Crypto Currencies (bitcoins), Crowd Funding, Insurtech and Regtech (AML/KYC regulations) etc. As a result, most of the Banks in Pakistan are now maintaining digital initiative departments under Chief Innovation Officer to tap the infinite potential of Fintech. It has been rightly realized by the banking leadership that with 120 million millennials including 40 million smartphone users in Pakistan, Fintech should be taken as a boon, not bane. In this context, the following issues require realistic analysis in order to avail the opportunities dormant in Fintech challenge:

“Fintech is not a foe but friend of banking. Do not misconceive this development as “Fintech disruption” rather it has to be embraced as “Fintech transformation”. It is an organized and systematic way of transforming the traditional I.T base of financial institutions into the high-tech and innovative digital tools executing financial transactions while saving time, space and cost. So, be sure Fintech complements but does not compete.

“It must be realized that reaping the benefits of Fintech require intensive capital investment in the financial technology. Banks are vying with one another to evolve the Fintech and digital solutions in high demand. Best option is to outsource the development of these financial products and services. NBP entered its contract with the Virtual World for online customer care services. MCB has signed a deal with Invo8 for covering mobile, G2P and P2G payments. The same way, BOP has upgraded its existing technology by switching to IRIS.

“Banks must be well aware of the fact that due to Fintech, customer behavior and expectation have gone a sea change. As a result, the traditional customer loyalty has vanished. Attitude of the customers has democratized. These days, clients run after the digital tends. If their associated bank is not able to offer what is hot in the market, they have the luxury to transact with another bank or service provider. This trend in the clientele is a clear warning to the financial institutions that they will certainly lose business, if they do not adopt technological advancements.

“A massive challenge faced by our banking industry is converting Fintech into an effective tool for achieving the financial inclusion of 100 million adult population of Pakistan who have no access to banking. Through its National Financial Inclusion Strategy, the government aims at facilitating banking access to 50% adult population by 2020. Here comes the scope for banking the unbanked mobile phone prone public through Fintech applications and solutions. In the second quarter of 2017, total number of mobile phone banking transaction was 1.2 million at the value of Rs.26 billion.

“Proliferation of Fintech is also accompanied by very serious issue of cyber security. The criminals may manipulate bank card numbers, PINs and even emails as in case of JP Morgan, to materialize their ulterior motives. As a result, loss of customer and business is faced by the victim of cybercrime. Therefore, investment of time and money is required to safeguard Fintech solutions from external threats and networking vulnerabilities.

” Adequate regulatory framework is a must for Fintech in banking. Being aware of the potential risks of Fintech, State Bank of Pakistan has already issued certain regulations like “Rules for Payment System Operations (PSO) and Payment Service Providers (PSPs)” in 2014, 209 207 CDC’s Newsletter, October-December 2016 18 CDC’s Annual Report and 2016 209 PSO/PSP etc. However, SBP must avoid overreacting to all perceived risks. Any over-regulation could stifle innovation. Monetary Authority of Singapore can be a good regulatory inspiration in this context.

Fintech is going to revolutionize the Banking sector of Pakistan in coming time. The challenge of Fintech is full of opportunities. The innovative ideas, applications and solutions offered by the Fintech firms appear to pose a challenge to the traditional brick and mortar structure of the banks. But they would settle as supporter to the established mainstream of financial institutions.

The author is a banking expert and currently serving as Country Manager of JSC Subsidiary Bank NBP Kazakhstan (Foreign Subsidiary of National Bank of Pakistan).

Published in Daily Times, April 4^th 2018.