Daily Times

For those interested in the changes and developments taking place in the financial sector, financial technology (fintech) is a subject of continuing importance. As part of a push for digitisation, new agendas and concepts such as Globalisation 4.0 promoted via the World Economic Forum have been translated into action in recent years through developing of alternate channels, represented by Fintech. Here we have a simple concept, which is to use new technology and software to replicate human functions, in an attempt to serve society better by trying to overcome what many see are barriers to access and obstacles to the effective delivery of services.

Context and background factors

In Pakistan, there is an enormously applicable context for this formula, with a variety of problem scenarios that could possibly be addressed, and in future, eradicated through the strategic and sustainable provision of alternative financial services that meet public need.

Several macro level problems are present that can be addressed through developing a working fintech ecosystem with collaboration of major stakeholders. This includes SME finance, increasing inward remittances, reserve funds deficit, accountability in payments, and prevention of illicit financial activity. A key strategic context for the introduction of the licence for PSO/PSPs was to enable international payments through service providers other than traditional banks, with relation to the amount of unaccounted money sent offshore through unofficial agents.

In 2004, Chairman of Bank Al Falah, Sheikh Al Nayhan, commissioned a study to find out why Pakistan was lagging in home remittances. In contrast to the $8.6 billion sent by 3.2 million Filipino immigrants, 3.5 million Pakistani workers abroad had sent around $900 million by around. An issue connected to that is remittance of black money to purchase offshore assets through the notorious hundi/hawala agent system. While some large telecommunication companies facilitated the sending of money abroad through mobile payments, the launch of PSO/PSPs was designed to digitise and widen access to official and regulated remittance channels to prevent the flow of black money, the sort of which garners attention from bodies such as the FATF. The success of that initiative is another subject entirely.

Aside from nationally significant issues, there are factors that equally affect citizens on the consumer level. There is the underbanked population-those who lack documentation, credit history, or suitability for even small loans; those who are termed blue collar salaried workers, run out of their monthly income by the third week of the month, and turn to unofficial loan sharks for small sums of around Rs 2,000, which are repaid at a rate of around 120 percent annually. The cycle of debt is hugely damaging to a large segment of the population amounting, to 85 percent of adults.

Regulatory bodies and relative development/challenges In Pakistan

The focus with in regard to the central bank has been on payment services development mostly, which is why many of the new fintech startups have focused their efforts on services related to facilitating payments between whichever entities the transaction seems profitable. It should be stressed that the initiative behind PSOs was partly to offer space for third party providers to offer alternative payment methods than traditional FIs. The reason behind all of these initiatives on a general level has been only one-to facilitate payment and banking outside of traditional spheres, allowing flexibility and opportunity for customers.

Innovations in Pakistan for fintech have been limited by the regulatory guidelines for doing so, and since 2007, these have been restricted to payments through various acts, including: 1) The Electronic Funds Transfer Act of 2007; 2) Branchless Banking Regulations of the following year (for Telcos), 3) The PSO/PSP Licence of 2014, 4) E-Commerce Regulations (around 2018-19), and 5) the EMI Regulations of 2019.

The EMI is an entity that is the closest step towards independent, digital-only challenger banks. It is not permitted banking capabilities by design [internationally], but can offer current accounts and can issue/redeem e-money, which is an electronic representation of hard currency used for e-commerce. Even this model requires a two million dollars ongoing balance and is not able to handle the funds directly, so it would never really be a challenge to traditional providers and would never be an option for grassroots entrepreneurs.

Several macro level problems are present that can be addressed through developing a working fintech ecosystem with collaboration of major stakeholders

Types of fintech models

The types of fintech model that need to be designed and then integrated within the format of an ecosystem are several, and planning on these on behalf of the regulators is as yet very unclear. This includes the full range of models being used internationally, such as: 1) Banking, 2) Lending, 3) Insurance, 4) Payment Services, 5) Compliance, 6) Investment, and 7) Integrating data analytics into this system strategically.

The major types of fintech operating in the world are two, the first is payment services, of which there is Ant Financial Services, Paypal, and Stripe, which is of growing importance. The second types are related to banking, the most common example being EMIs, which allow for opening of current accounts, and companies like Ant are able to offer supplementary services in collaboration with partners. In China, Ant and Tencent are both offering a major portion of the population with savings and investment services. In the UK, there are a few digital banks operating, such as Monzo, N26 and EMI Revolut, which many are treating as a full challenger bank. Each of these started as current account providers, and later upgraded to full banking licences from the Financial Conduct Authority, migrating clients from restricted accounts held by a trustee bank onto migrating customers to their own regulated platforms.

In Pakistan, PSOs are the most common, with the only licensed EMI being Nayapay, and no sign of introduction of digital bank models in sight. On top of that, there is a timeline for the delivery of digital currency by 2025. The only exception to this rule is Tez Financial Services, which provide micro lending to the underbanked, and operates as a digital NBFI, which is a unique licence that could possibly be opened to other entities in line with the broader SBP-PSD agenda for financial inclusion.

Key stakeholders and responsibility for the project

If the introduction of these models is to be done with any lasting, sustainable impact, it will have to intersect and be operated by all key stakeholders within the financial system, including 1) Regulators, 2) Credit Bureaus, 3) Building Societies/NBFIs, 4) Payment Service Providers, 5) Wealth Management Funds, 6) Existing FIs and their digital platforms, and 7) Startups innovating in the fintech space, including companies like Planet N group, which operates Tez Financial Services. The main concern for each of these stakeholders is how they are going to manage a fintech ecosystem alongside existing activities, and identifying separate jurisdiction for existing activities versus innovative solutions to be designed.

Moving forward

Key planning concerns for each entity involves identifying: i) Market Approach, ii) Service Range, iii) Core Banking Technology, iv) Funding and Financing, v) International Expansion and most importantly, vi) Cyber security and AML/CFT concerns. Most likely, the system will have to be jointly planned and initiated, with fresh regulations governing the build of new fintech models, with a focus on banking services and perhaps using Islamic finance concepts to target the underbanked population.

The writer is a research consultant with the Financial Services and Technology Division at Pathfinder Group