A decade of unprecedented growth in the fintech landscape

KARACHI:

Pakistan’s fintech industry landscape is undergoing a transformation, with local entrepreneurs encouraged to build their own payment rails instead of relying on international giants like PayPal and Stripe. Dukan CEO and Rozee Chairman Monis Rahman advocates independence, stating: “We have the talent and capability 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 that we are independent from international whims that can derail the digitization agenda.”

Extending the issue of cybercrimes to the digital age, Rahman emphasizes the importance of educating consumers on the basics of social engineering fraud protection. Acknowledging the learning curve of the first digital generation, he notes that while fraud will always exist, effective measures can be put in place to minimize the risks and ensure that the benefits of fintech far outweigh the potential downsides.

design: Ibrahim Yahya

Abhi, a local fintech success story, is introducing innovative solutions such as Earned Wage Access (EWA), demonstrating the potential for growth in the industry. Abhi’s Chief Commercial Officer, Mohammad Sultan Zaidi, emphasized that “it is vital that we identify problems and solve them. In our market, there is a trend where service providers keep pre-made solutions and try to adapt 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 prioritizing profitability from day one. This short-sighted approach often leads to business failure, emphasizing the necessity of sustained profitability for long-term success.

Pakistan, with its significant unbanked and underbanked population, presents significant opportunities for fintech development. Shahzad Shahid, Group CEO of TPS Worldwide and member of the P@SHA central executive committee, noted that fintechs that offer specialized services for specific customer segments are essential to the growth of cashless payments. The regulatory focus on financial inclusion and the promotion of cashless payments recognizes that achieving this transformation cannot be achieved by commercial banks alone. It highlights that fintech success depends on scalable and cost-effective technology, business focus and understanding end-user preferences.

Reading IT experts call for improved fintech infrastructure

“Furthermore, the sector’s prosperity depends on improvements in the overall business climate, the consolidation of economic evidence for policymakers, banks providing increased access to fintech and the realization of RAAST’s commitment to provide low-cost, widely accepted digital payments”, he emphasized. .

In 2023, Pakistan’s fintech sector saw a different landscape, with some players expanding for profitability while others, even major players, withdrew plans, notes analyst Muhammad Yasir. Notably, innovators such as ABHI and Finja have thrived, with ABHI’s advanced payroll service gaining popularity. Instead, global brands Checkout and CareemPay withdrew licenses, shunning the local market amid economic challenges. Acknowledging Pakistan’s unbanked status, Yasir suggests fintechs focus on customized solutions for agriculture, SMEs, retailers and overseas Pakistanis, advocating collaboration over competition. The upcoming RAAST person-to-merchant mechanism is expected to transform payments digitization, offering unique opportunities for fintech innovation, insiders predict.

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

Branchless (BB) banking, a type of fintech that offers banking services through networks of agents, includes examples such as 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 growing fintech sector faces several challenges. Regulatory hurdles, including time-consuming approvals and compliance processes, make getting fintech up and running slower and more expensive than other startups. Once started, these ventures often face untapped potential due to insufficient banking support, reluctance of customers and merchants to pay for services, and intense price competition in a substantial gray market.

Fintech, facing funding constraints from global volatility, faces a lingering traditional mindset and a lack of corporate culture that hinders seamless evolution. Customers face network outages, inflation-related concerns and reliance on two networks, Raast and 1Link. In Pakistan, cash remains for regular payments, hindering the adoption of online payments. Challenges include limited connectivity, add-on fees and security concerns, which hinder the wider adoption of fintech.

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 emphasizes the shift to technology as people seek convenience, quick solutions and convenience over traditional banking methods. The gradual transition from cash withdrawals to digital payments marks a major milestone for Pakistan’s digital economy.

Three critical developments are set to catapult Pakistan’s digital economy through fintech. First, SBP’s introduction of RAAST Person-to-Merchants (P2M) payments enables small merchants to receive payments directly into 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 the exponential growth of digital payments.

These digital payments to Small and Medium Enterprises (SMEs) not only create digital footprints but also contribute to the credit rating of the local informal economy. The provision of productive loans to SMEs has significant potential for positive impact on the Gross Domestic Product (GDP) of Pakistan.

Second, many license classes now allow open banking connectivity for startups. This shift enables startups to develop banking and financial applications using licenses from bank partners, promising to accelerate innovation by leveraging the inherent flexibility of fintech operations, which are known for executing faster than traditional banks.

Finally, a notable change in the ecosystem is leading banks to adopt a more receptive attitude towards working 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 emergence of mobile wallets, which account for 90% of new accounts, reflects the transformative impact in this timeframe. Today, the majority of Pakistani adults own smartphones connected to the Internet, signaling widespread access to technology. In particular, digital payments have increased ninefold in the last three years.

Crucially, the SBP and the Securities and Exchange Commission of Pakistan (SECP) have been instrumental and proactive in guiding this development. The collective effort involving different licenses and the participation of the private sector has been decisive. This collaboration has enabled fintechs to identify profitable avenues and improve business models based on practical knowledge, resulting in a dynamic evolution of the fintech landscape.

Published in The Express Tribune, December 29^u2023.

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