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The Dawn of Pakistan’s Fintech Boom

Businesses leveraging technology to develop financial products and services are on the rise.
By Umair Rasheed

After spending 18 years in the commercial banking sector, Qasif Shahid recently quit his job and started his own company. He raised $1 million in venture capital to introduce a digital wallet that will allow users to minimize their reliance on hard currency.

The software app developed by his company, Finja, will be linked to the users’ current account, letting them make transactions at a range of partner retail businesses using their smartphones. There will be no need of a debit card anymore, he says.

In Brief

  • Financial technology or fintech firms are businesses that leverage technology to develop financial products and services. The major firms in this industry have been around since the early 1950s.
  • Some of the earliest technology-enabled products and services offered were Automated Teller Machines (ATMs) and non-cash modes of payment using debit and credit cards. Industry insiders refer to these firms as traditional fintech firms because they develop products and services for commercial banks.
  • Recent advances in information and communication technologies have facilitated the emergence of a new breed of fintech firms. These emergent firms are pioneering technology-enabled solutions on their own, rather than catering solely to the existing financial institutions.

The technology allowing smartphones to read barcodes (associated with bank account information) will enable them to be used as a replacement for debit or credit cards.

“Each user’s wallet is linked to a unique current account maintained at a partner bank and can be accessed through any smartphone that allows downloading an Android and iOS powered software application developed by his company,” says Shahid as he draws a flowchart on a transparent conference table, explaining his ideas about “disrupting the financial sector”. Facing his back, there is another conference table serving as a co-working space for a group of youngsters employed at his company.

Shahid’s venture has already signed up a few hundred businesses and around 25,000 users. It is a financial technology or fintech firm – businesses that leverage technology to develop financial products and services.

A 2016 PricewaterhouseCoopers (PwC) research study shows that there is an increasing interest among investors across the globe for the fintech sector. In 2015, funding for fintech startups more than doubled, reaching $12.2 billion from $5.6 billion in 2014. The study also contends that of all the various sub-sectors in financial industry, fintech firms are likely to have the most significant impact on consumer banking comprising services like current and savings accounts, disbursement of loans for non-commercial purposes, and transfer of funds.

Read more: With Global Trade Finance Gap at $1.5 Tr, a Third of Firms Studied Pin Hopes at Fintech

Fintech is not a new industry. The major firms in this industry have been around since the early 1950s. Some of the earliest technology-enabled products and services offered by these firms were Automated Teller Machines (ATMs) and non-cash modes of payment using debit and credit cards. Industry insiders refer to these firms as traditional fintech firms because they develop products and services for commercial banks.

In Pakistan, the use of ATMS and point of sale (POS) machines remains low compared to other countries in the region. In 2015, the World Bank calculated that there were 8.79 ATMs per 100,000 people in Pakistan, compared to 19.71 in India.

A study funded by Karandaaz Pakistan, a not-for-profit organisation, has found that there are 44,000 POS machines operational across the country. Seeding Innovation: A Framework for Rooting Fintechs in Pakistan study notes that the number of such machines recorded in other countries in the region with significantly lower populations is much higher (Turkey has a population of 78 million and number of POS machines operational there is 2.5 million, and Iran with a population of 75 million has 1.5 million POS machines).

However, the low penetration of ATMs and POS machines shows just one aspect of Pakistan’s financial sector and its potential for growth. The other aspect is linked to recent advances in information and communication technologies like the rise of broadband and wireless internet services and smartphone technology. These changes have facilitated the emergence of a new breed of fintech firms. These emergent firms are pioneering technology-enabled solutions for delivery of financial products and services on their own, rather than catering solely to the existing financial institutions.

The Karandaaz study suggests that with 32 million active internet users Ω 29 million of which access the internet through 3G/4G communication technology Ω and a third of its population in the youth age group, the country appears set to see growth of innovative financial products and services developed by emergent fintech firms, like the application made by Shahid’s company.

The Finja app lets users add money to their wallet from any current account. Since it is targeting a population segment already catered by a commercial banking sector dominated by a select few big players, the company has come up with an incentive structure to attract users: no fee on transactions made using the app. He says that one of the ways commercial banks make money is by charging their customers for transactions.

“Charging transactions is a foolish way of making money,” Shahid says. “We won’t charge a penny to the users no matter how many transactions they make,” he says. Instead, his company will make money through interest earnings on funds deposited by users in their current accounts at the partner bank and on loans it plans to provide to users at a later stage.

Smartphones for payments

Another innovative feature of digital payment platforms is that they allow interoperability between accounts maintained at different banks.

Hasnain Sheikh of Inov8, another fintech company, is set to soon launch Fonepay, a super application that also offers the use of smartphones to make payments – but at a larger scale. It doesn’t require users to transfer their funds deposited with existing commercial banks. Instead, Sheikh’s company is signing up banks as partners, alongside major businesses in the transport, retail, foods and beverages, entertainment sectors and utilities like electricity and telephone services and natural gas providers . He says 12 major banks are already on board as he demonstrates the various features available with the Fonepay app.

While Sheikh’s company has moved to the business-to-consumer model only recently, it has been around in the Pakistani market since 2004. Sheikh recalls that he and his co-founder had set it up after spending 10 years in the financial services sector in the United States. They had started off on a business-to-business model. In 2006, they had signed an agreement with a leading cellular service provider, utility service providers and major commercial banks for deployment of a software allowing digital payments. The cellular and utility service providers could have used the application to digitally transfer funds from bank accounts where they would be deposited by consumers. However, by the time the company was set to launch the service, they hit an unforeseen roadblock: the regulator intervened and stopped them from proceeding with provision of the service. “We were told that there aren’t any regulations under which we could be allowed to offer the service. We were clearly ahead of our times back then,” he explains.

Read more: CreditFix – Approving Borrowers That Other Lenders Have Missed

Sheikh says the regulator sought a year to study the digital payments mechanisms and its impact in the country’s financial sector so that it could come up with regulations needed for the purpose.

“This disrupted our operations and sent a bad signal in the market affecting major players’ perception of our work,” Sheikh says.

The CEO at Inov8 says his company soon recovered from this setback. “We developed a payments service method allowing interoperability between major banks. The company signed up major cellular service providers for use of the service.”

Then, Sheikh said, his team developed software products allowing branchless banking and secured deals for it with several banks. In 2015, the company was valued at $1.8 million and it managed to raise $5.4 million in various rounds of funding to finance plans including use of artificial intelligence (AI) technologies for developing financial products and services.

Ahmed Jibran runs Szaram Digital Financial Services, a company that provides customized solutions to the needs of businesses by bundling financial products and services already available in the market. He says the company is “bridging a knowledge gap” between service providers (commercial banks) and users (businesses). “The sales departments at commercial banks don’t do extensive studies of the local market. This means they don’t know the exact needs of many of their potential customers,” he said.

Jibran had set up this company only after spending a couple of decades in the commercial banking sector in different cities across the globe. This allowed him to see many technology upgrades taking place in front of his eyes. Facilitation of digital payment mechanisms was one of these. It has been promoted specifically in economies with small segments of their populations connected to the commercial banking sectors, he says.

For digital payments to become viable, sustained cooperation is needed between telecommunications and financial services providers. The former have the infrastructure and technology needed to extend the facility to the underserved segments and the latter has the regulatory oversight needed to offer the service. An example of the earliest use of this facility in Pakistan are mobile payment solutions like Easypaisa, Jazzcash, and UBL Omni.

Financial inclusion

Shahid and Sheikh had taken leaps of faith and left their careers to leverage technology-enabled solutions for testing their ideas. But budding entrepreneurs seeking an entry into the fintech sector now have the advantage of securing seed funding and expert advice from a loose network, ecosystem in tech lingo, of non-profit organizations and incubation and acceleration centers.

Karandaz Pakistan is one such not-for-profit company. It was formed in 2014 with funding from the UK’s Department for International Development (DFID) and the Bill and Melinda Gates Foundation. Its mandate is to promote financial inclusion. Bilal Qureshi, a manager with the digital financial services section at Karandaz Pakistan, says that funds received from UK Aid and Gates Foundation are being used to give out grants to promising startups in the fintech sector. To select startups, Karandaz has conceived a Fintech Disrupt Challenge competition.

A second edition of the disrupt challenge held in May 2017 has been won by CreditFix, a startup aiming to use digital data to give out loans to those not catered to by commercial banks. The runners-up in the competition were Invoice Wakalah, UniKrew, and Agrigate.

Alongside access to financial services, Karandaaz had solicited ideas in four other thematic areas this year, Qureshi says. These were e-commerce, payments, interoperability, and early stage ideas related to mobile-wallet use cases, education of financial services through technology, customer experience and engagement, micro credit, and digital savings.

The first competition had taken place at the premises of the Lahore University of Management Sciences (LUMS) in 2016. Qureshi says they had received 60 applicants that were vetted by an in-house panel of judges. Of these, 20 were shortlisted for the competition which was won by Ricult Pakistan, PublishEX, and Paysys Solutions. These startups received grants of $100,000 each to work on their ideas.

Read more: Finja Receives $1.5 Million in Series A Funding

Ricult is using the grant to build a mobile-wallet through which payments will be made and received for products sold at their online marketplace for the agriculture sector. The marketplace lets farmers connect with sellers of agricultural inputs and buyers of crops. Using the app, users can make digital payments for these products. The team plans to extend the products and services available through their app to easy and cheap access to credit, soil testing, and advisory services for higher yields.

Budding entrepreneurs seeking an entry into the fintech sector can secure seed funding and expert advice from a loose network, ecosystem in tech lingo, of non-profit organizations and incubation and acceleration centers across the country.

“The marketplace connects farmers to farm input sellers; farm produce buyers, bank creditors, insurers, veterinary services, farm advisory services and everything that can help them have better farming,” Ricult CEO Usman Javaid was quoted as saying in an interview given to a newspaper on announcement of competition winners in 2016.

Using the grant money, PublishEX is developing a direct carrier billing platform through which users will be able to make payments at retail businesses on panel with their cell phone credit. PublishEX has already signed up three of the four telecommunication companies (Zong Pakistan, Warid and Mobilink). In future, the startup plans to expand its portfolio letting users make payments through mobile credit for Google PlayStore and Netflix as well.

Paysys Labs is using the grant to introduce a convenient biometric identity verification solution. Using the app being prepared by the startup, users can do biometric verification of fingerprints using images and photos taken from their smartphones’ cameras – not needing a biometric device anymore.

Prior to their participation in the disrupt challenge, Ricult Pakistan had been accelerated at MIT Enterprise Forum and PublishEX at Planet N, a group that provides acceleration and seed funding to startups.

Besides PublishEX, Planet N has five fintech startups under its supervision, says Saif Akhtar, chief executive officer of Planet N’s initiative 10xC which caters to startups needing small grants upto PKR 1 million.

Akhtar says that currently all the fintech startups with Planet N are working on their ideas independently but the plan is to bring them together at a later stage on a digital banking platform called Tezz Financial Services. This platform, operational entirely through a smartphone, will offer not just digital payment services but also a range of other financial products and services being pioneered by fintech firms at Planet N.

Some of these products currently under development are Tezz Committee (rotating savings and credit service) and Tezz Beema (small loans to meet end of month needs). Tezz Committee will use AI technology to pool funds from a number of users and then select the recipient of the entire sum through bidding, explains Bilal, who looks after business development for Tezz Financial Services team.  Unlike a traditional rotating savings and credit association, Tezz Committee will not need to rely on trust or social capital between users who will pool funds. In fact, a user won’t even be able to tell who else is participating in any particular rotating saving round. The AI-powered application will group users together and automatically select the recipient for every month through bidding. The lowest bid will receive the payment for that month and the remaining amount will be added to the fund to be distributed among remaining users in the subsequent months, he says.

Similarly, Tezz Beema will use AI technology to disburse small loans among users. “The target audience will be social media users. We will soon run an online campaign to publicize the product,” Bilal says. He says that unlike loans received from banks, Tezz Beema will not require any collateral for disbursement of loans. “We will develop a close relationship with our customers. We will tell them that they could build their credit profile by paying back on time and will be eligible for higher loans in future,” he says.

“One thing is quite clear, fintech firms will have to eventually engage with a mainstream bank. They are set to grow further because of their innovative ideas and technology solutions, but their role will settle as that of a supporter to the mainstream financial institutions,” says Bilal Qureshi of Karandaz Pakistan.

Saif Akhtar says that the loan disbursement program will also make use of an algorithm developed by another company in the Planet N group that allows evaluation of prospective customers for their creditworthiness. This AI-based algorithm has a self learning mechanism that lets it learn from default cases, reducing the chances of error with time.

He adds while fintech startups at Planet N will be launching their services shortly, the comprehensive digital banking platform may take some time owing to regulatory barriers to entry for aspiring financial institutions.

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As emergent fintech firms are hailed for their potential to introduce innovative products and services, none of the relevant stakeholders expect them to completely alter the rules of the game in the financial industry. “One thing is quite clear, these firms will have to eventually engage with a mainstream bank,” says Qureshi of Karandaz. He says fintech firms are set to grow further because of their innovative ideas and technology solutions, but their role will settle as that of a supporter to the mainstream financial institutions.

Even fintech firms don’t see a future without major banks. For instance, Shahid says that if firms are successful in promoting usage of digital wallets, commercial banks – whose brick and mortar infrastructure induced inertia prevents them from going branchless and cashless – will feel the heat and proceed in that direction as well. This way, Pakistani economy will go cashless at a far quicker pace than in a situation without fintech firms but it will take that route with fintech firms and commercial banks both as important stakeholders in the process.

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