The market potential of Digital Finance Services in Pakistan will cross $36 billion by 2025, providing a 7% boost to the GDP, creating 4 million new jobs and resulting in $263 billion in new deposits.
These estimates were mentioned in the State Bank of Pakistan’s report titled “Digital Financial Services Innovation Challenge Facility”, which cited data from McKinsey’s Global Report, “Digital Finance for All: Powering Inclusive Growth in Emerging Economies” as well.
This potential can only be achieved through a robust and efficient DFS ecosystem. Though Pakistan possesses a nascent DFS ecosystem, in order to tap into its fullest potential, innovative solutions by FinTechs can help Pakistan leapfrog into the next generation of digital financial services.
It is clear that a vision of a technologically advanced, financially inclusive ecosystem cannot be achieved without the use of technologically innovative financial systems and solutions that give access of financial services to each and every citizen in the country without any limitations. The end goal is to use DFS to make markets so inclusive, that even small entrepreneurs in Pakistan, such as women making fruit relishes in rural Sindh, can sell it online across Pakistan and collect revenues digitally in their mobile wallets, SBP’s report said.
State of Digital Financial Services in Pakistan
The growth of digital mobile solutions is allowing the world to become more connected, and enabling masses to access and use services and opportunities conveniently, quickly and effectively. These developments are particularly on the rise in Pakistan. The country is home to over 145 million NADRA verified cell phone connections, with more than 48 million having 3G/4G/LTE connectivity, while cellular density remarkably stands at 71.4%, growing from 54.6% in 2008.
In order to leverage the cellular networks’ outreach for digital financial services, SBP issued a Branchless Banking (BB) regulatory framework in 2008, to facilitate synergies between telecom operators and banks. The BB industry now comprises of 11 licensed providers offering a wide array of alternate delivery channels to increase access and use of financial services in far-flung areas.
As of September 2017, more than 33 million BB accounts have been opened while over 420,000 BB Agents are serving as access points for financial services. This has allowed customers without a bank account in far-flung areas to receive and send remittances in minutes, pay bills using formal channels, and receive welfare payments on behalf of the government and non-governmental agencies. With high cell-phone penetration, high internet usage, enabling regulations, multiple mobile money operators and the majority population being under the age of 45 years, Pakistan has all the key ingredients to create a revolution in digital financial services and boost financial inclusion.
On the supply side, limited interoperability between the BB players, lack of open APIs at financial institutions, the high cost of doing transactions and reluctance by banks to collaborate with startups and financial technology companies (FinTechs) combined have greatly held back the takeoff of DFS ecosystem in the country.
Customer awareness also remains one of the biggest challenges for the successful uptake of DFS ecosystem in the country. Furthermore, though smartphone penetration is rising, it remains low in many parts of Pakistan and low-income customers still use basic phones at large. This challenge necessitates FinTechs to build more solutions that rely on USSD technologies.
On the demand side, since a large portion of BB accounts remain inactive, it demonstrates that the market does not have enough demand based products existing in the DFS ecosystem that can encourage customer activity. Hence, innovative, need-based products and solutions should be created that use the DFS technology effectively to cater to people’s financial needs and allows them to avail opportunities effectively.
At present, the current technologies for distributing financial services fall short and do not encourage all individuals to have easy and convenient access to even basic accounts. According to Access to Finance Survey (A2FS) 2015, access to financial services still remains low. Only 23% of the adult population has access to formal financial services, while merely 16% of adults have a bank account. Furthermore, only 11% of adult women have a bank account, compared to 21% of men having a bank account. Within the DFS sphere, out of the 33 million BB counts, almost 53% are inactive, while the average deposit balance in total accounts is around Rs. 340.