Background Factors The pathway towards establishing digital services, as a part of the financial system, appears to have been in the construction for a significant period. A research paper referred to during the writing of an internal report outlining feasibility for the expansion of ATM management services offered some insight into the growth of banking channels outside of the branch environment. In this paper, an academic from the University of Sindh describes some of the challenges facing Pakistan and the possibility of upgrading technology and services in the ATM sphere. Bank branches posed limitations to service offering even to their clients, due to restrictions on opening hours, which offers little hope for the vast majority of underbanked users. Some of the innovative shifts away from traditional banking included that it eradicated the need for a person to carry a wallet or use cheques to withdraw money. Without having to enter a bank branch or engaging with a cashier, a customer was able to access their funds directly. The function of withdrawal via ATM thus can be seen as the first example of using technology to outsource human functions. Later, machines were developed to also include deposits as part of this scenario. Banks themselves were the early adopters of this technology, realising it would help them retain a client base that was being neglected due to internal factors, such as branch opening times, and procedures, etc. The expense in opening a bank branch was also a key contributing factor in this, whereas electronic payments, ATMs and later e-banking offered a significant advantage to banks who took advantage of these. In today’s environment, banks are also having to adopt technology-based service offerings, as stimulated by the emergence of digital-only neobanks, in the form of digital account provision. They are being encouraged towards this by consulting firms, tech companies, their customers, and other forces; both due to factors of competition/survival as well as for reasons of financial inclusion. The shift isn’t just away from traditional bank branches, but also away from the use of cash, as is being carried out by the State Bank of India. What seems to be the trend in South Asia or at least the subcontinent is the development of a new layer of financial services operating outside the ambit of traditional banks, who in future will facilitate transactions for both existing and new customer sets, and perform transactions using state-backed digital currency. This has been a direction in which things have been moving ever since the ATM situation was highlighted, i.e. poor access/quality of service in rural areas, illiteracy of customers, unavailability or poor quality of banknotes, security issues and so forth. Key factors towards which the banking industry is having to shift its activities include things such as security; convenience; price; reliability and responsiveness. These key factors link directly with customer satisfaction and based on this trend, the future of the financial service industry is being transformed by technology and alternate pathways. 1- Overview of Regulatory Initiatives The activities of the newly licensed EMI models may be influenced by a variety of initiatives that preceded it, including different new regulations towards advancing digital finance, such as the EFT Act 2007, which defined terms of electronic money transfer as under traditional banks; followed by the Branchless banking regulations as revised in 2016; introducing concepts such as the Delivery Channels models and partnerships of different entities within a DFS ecosystem; also not forgetting the further development undertaken through e-commerce policy, which EMIs contribute to significantly, and lastly, the capabilities and role of the PSO/PSPs within this framework. Each of these regulatory initiatives gives context to the development of DFS infrastructure in Pakistan, and the strategic elements of each of these regulatory agendas can be incorporated into models designed in future. 2- Development of the Regulatory Framework behind Digital Financial Services Phase 1- In the Context of the Electronic Funds Transfer Act of 2007 Under this act, definitions were given to certain fundamental concepts, and rules were issued with a specific focus on the safety of these mechanisms. Here, there is a definition of the Electronic Money Institution given, nearly 12 years before the actual release of the guidelines for this specific entity. Here, EMI is defined as ‘an entity which issues the means of payment to customers who use e-money for retail transactions or to conduct business’, and in this regard, use of e-money for online payments is the main focus. Electronic money in this context is also described as ‘monetary value as represented by a claim on the issuer, which is stored in an electronic device or Payment Instrument, issued on receipt of funds equal to the monetary value issued. There is a risk associated with opening payment capability to new entrants, and there is a concept that new instruments, which are harmful to the public, or the integrity of the Payment System, in general, should be prevented from market entry. However, there is a way to regulate in the interest of safety, yet still, provide a set of guidelines or a sandpit environment through which innovation is possible. From the outset, this depicts a perhaps overly cautious scenario which is in a way limiting to the extent of innovations possible in the space of payments. Phase 2: In the Context of the Branchless Banking Regulations The regulations for branchless banking created further room for development and opened the door for initiatives such as that of Electronic Money Institutes. The Branchless Banking regulations were the first step towards introducing banking services outside traditional branch locations and allowing other commercial players to facilitate financial services. The key apparatus utilised during this phase was that of a) telcos/mobile operators and b) retail payment agent networks. To this day, these entities play a key role in facilitating a more flexible brand of banking service. Not that there is use in repeating an argument that nobody wants to hear, but it should be highlighted that the ethos behind the initiatives here mentioned indicate a clear-cut direction away from traditional banking, and the logical conclusion of that trajectory is the type of activity facilitated through new models, such as EMIs, which serve as a placeholder for the fully equipped digital banking services of the future. The key moment signifying the passing of a torch from traditional banking services towards an ecosystem of independent fintechs was the introduction of licences for alternate PSOs and models such as EMIs. This is because whereas innovations such as branchless banking were designed to be led by traditional FIs, new models are designed to be led by private entities who offer alternate services, leveraging the advantage of flexible delivery channels and more incentive to meet consumer needs. In today’s environment, banks are also having to adopt technology-based service offerings, as stimulated by the emergence of digital-only neobanks Phase 3- Branchless Banking The concept of the ‘delivery channel’ introduced through branchless banking regulation played an important role in showing a path to the future, where alternate services could be arranged as a result of strategic partnerships between key entities, looking at how to leverage each others’ strengths and target the maximum number of end-users. Stakeholders with interest in this space include: 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. This involved terminology such as ‘One-to-One’, ‘One-to-Many’, and ‘Many-to-Many’ as different types of stakeholder arrangement. A key principle in this scenario is the responsibility held by stakeholders who are capitalising on the Financial Inclusion agenda through their services. We find that it is necessary for all stakeholders who operate under these newly released licences to share responsibility, according to their capacity and means to facilitate the banking process for their clients. In this context, it is equally inevitable that individual stakeholders map out their respective scope of possible involvement in the financial technology scenario, and make agreements with one another to the full extent that participation is possible. In the end, the work leftover will inevitably become the burden of the next generation of financial technology providers, whose services need to be designed to facilitate the needs of the other 85% of the population not currently using banking services. Whereas in branchless banking, we had a market approach where banks had to scramble for partners whose user base would be utilised as a target market for provision of mobile account services; in the new wave of fintech innovation, there is a possibility of further, dynamic collaboration, with possibility for economies of scale along more factors of significance to all parties concerned. The end formula which could potentially lead to the success of building a working fintech ecosystem in Pakistan involves usage of a multiple-player, many-to-many model, with all key stakeholders coming together on a single platform, to collaborate and design services with the intention to onboard the largest possible number of unbanked customers. In this situation, there is a possibility for economies of scale along with multiple strategic factors, i.e. as mentioned in the previous article: service design; market approach; technology solutions; security; user base; financing processes and international expansion. Phase 4- A Push for E-Commerce Regulation There is greater strategic usage of EMI models with relation to the general push for financial inclusion and digital finance development in Pakistan via e-commerce. Through the development of a working e-commerce system, more of the underbanked who are either not registering taxes or are unable to integrate with the mainstream financial system can be targeted. E-Commerce regulations introduced have created more space for the activities of NBFIs who leverage new delivery channels. The push here is to create a more broad culture of the utilisation of online payments for small businesses and merchants, and the rewards to the end-users also indicate movement in an upward direction for the underbanked segments living in rural areas. One of the main imperatives visible through the push for greater usage of e-commerce is quite clearly the need to try and facilitate payments taking place through SMEs run by the underbanked population segments, and to extend another pathway for these groups to run their businesses with the support of some type of official financial services. It is clear by this stage that this has been the general imperative behind all of the digital finance initiatives from the SBP, however, e-commerce facilitates these agendas in a more specific way, which lends significant weight to the activities of the newly proposed models, such as EMIs. Some of the key directives behind the push for e-commerce include the agendas to 1) Create an enabling environment for the growth of existing e-commerce enterprises 2) Allowing and encouraging new entrants 3)Facilitating local and cross-border trade and 4) Enhancing competitiveness and developing the overall digital economy. Current Phase- EMI License Introduction To facilitate these goals within the space of digital economy, the development of EMI services to act as a buffer between different stakeholders carrying out a variety of payment activity and also using different Delivery Channels and methods is a logical and necessary contribution to the wider digital ecosystem. The VRG model when designing commercial services as relates to merchant accounts will take into consideration the need for the development of the digital economy, and will incorporate these development goals into new payment and transfer services that can create ease for a variety of entities carrying out commercial activity online in Pakistan. All of this will be underlined to facilitate business/personal account solutions to members of the underbanked population who operates small businesses as their main source of income, as well as for salaried workers of large companies, who will later derive benefit from the provision of lending, investment and insurance type services. With the context provided by the previous DFS initiatives, the environment has reached a level where: a) In 2007, terms like E-Money, EMI and Payment Instrument were established, b) Branchless banking marked the first shift away from traditional bank branch operations, and opened the door for strategic collaborations [FI/Telco] and alternate delivery channels [Mobile App/POS/ATM] and c) through push for e-commerce, the agenda for building a working digital finance ecosystem in Pakistan has been clearly identified as one where the system can only be built by successfully integrating the target market, i.e. non-bank users who operate SMEs and are using mobile technology into the same type of official financial services offered to average citizens. When it becomes possible for these groups to use an account where they can store their money earned from small-scale buying/selling activities, and from which the process of making online payments is facilitated more easily–a real turning point will be witnessed in the financial environment which would be the fruit of all the previous initiatives. Conclusion At that stage, potentially a vast range of financial transactions will shift from over the counter methods to documented, regulated and digitally enhanced services; which means that the foundation for banking of low-income, non-bank users who operate SMEs will be laid. It may be seen in this context that the simple introduction and popularisation of an EMI model, which facilitates precisely these activities for the target users, would form the building block around the formation of the fintech ecosystem in this country, and whose services would constitute the majority of payment/banking activity for the target demographic well into the next 20 years. The processes of onboarding and upgrading the level of financial services offered to this type of client, first through a) EMI models and b) through the inevitable Digital Banking services, including lending, insurance and investment should take place swiftly, to capitalise on the momentum gained; and should be a process which takes place in two main phases, within a window of 5-10 years of launching the individual licenses. All other setbacks and security concerns can be handled via periodic sweeps, with regulatory supervision, in the event that any major repeat incidents take place, and a separate unit should be assembled to specifically target these issues for the new wave of digital finance providers, in order that we do not witness a situation where a few setbacks result in sabotage of the entire DFS project in this region. The writer is a research consultant with the Financial Services and Technology Division at Pathfinder Group.