The IT, technological, and financial service providers will now be allowed to set up or sponsor a digital bank, as the State Bank of Pakistan (SBP) has launched its new licensing and regulatory framework. SBP will accept applications till March 31 and will initially issue five licenses.
Various companies operating e-wallet and eCommerce firms could avail this opportunity to set up a digital bank separately or through collaboration as they maintain a family of high customers base.
SBP, the banking regulator, has made it mandatory for the new players planning to enter into the banking sector through a digital bank to have an experienced staff who are capable of leading the bank as per defined rules and regulations.
According to the SBP framework, any other person having a minimum of three years of experience in the financial services, financial technology, telecommunication, merchant aggregation technology platforms, Information Communication Technology (ICT), or other pertinent digital or innovative financial and non-financial domains should — when applying to form a digital bank — be a minimum five percent equity participant in the proposed digital bank.
In line with international best practices and assessment of the overall banking situation in Pakistan, SBP has decided to initially issue up to five digital bank licenses, which essentially means that SBP is looking to attract players with a strong value proposition, a robust technological infrastructure, sufficient financial strength, technical expertise, and effective risk management culture.
Who Can Set up Digital Banks?
The banking regulator listed down the eligibility criteria for entities seeking to set up a digital bank or avail its license. A traditional bank that has a minimum of one year of experience in delivering Digital Financial Services (DFS) in the retail customer segments may apply either individually or with other equity participants.
However, SBP may advise an extended period of experience if the traditional bank’s performance is not considered satisfactory. An international bank or international DFS entity having a successful track record of a minimum of three years of delivering DFS in the retail customer segments may apply either individually or with other equity participants.
An Electronic Money Institution (EMI) seeking conversion into a digital bank that has a minimum of one year of experience of delivering DFS in the retail customer segments may also apply. However, SBP may advise an extended period of experience if the EMI’s performance is not considered satisfactory by SBP. Furthermore, the pilot phase operation period of an EMI may be counted towards one-year operations required for an EMI seeking to transform into a digital bank.
Those holding a majority stake in or exercising control over an MFB [Micro Finance Bank], EMI, international bank, or international DFS entity having a successful track record of a minimum of three years of delivering DFS in the retail customer segments, may apply either individually or with other equity participants.
Traditional banks or those with a majority stake in or exercising control over MFBs and EMIs are encouraged to collaborate with an established entity(ies) or investor(s) who can effectively contribute as sponsor(s) in collectively delivering innovative, robust, and sustainable digital bank value proposition, when applying for a digital bank license.
A group, as defined under the Prudential Regulations for Corporate/Commercial Banking, already owning one traditional bank shall not be eligible to apply for a digital bank license, except where the digital bank is proposed as a subsidiary of the traditional bank.
The applicant shall deposit a sum of Rs. 1,000,000 (One Million Rupees) as a processing fee along with the application.
According to the SBP framework, there will be two types of digital banks:
- Digital Retail Bank (DRB), which may deal with retail customer segments.
- Digital Full Bank (DFB), which may deal with corporate, commercial, and retail customer segments.
DRB and DFB licenses may have conventional and Islamic variants. Further, a conventional variant of DRB and DFB may also offer Islamic window operations as per existing practice after obtaining the specific approval of SBP.
This framework is primarily designed for the setting up of a new digital bank. However, based on a viable business case and satisfactory Digital Financial Services (DFS) experience, traditional banks/Micro Finance Banks (MFBs) may request SBP for conversion of their institution into a digital bank.
In this regard, the applicant bank/MFB shall submit a tenable and comprehensive policy/ transformation plan for its conversion into DRB/DFB. Nevertheless, the applicant bank/MFBs shall be required to fulfill the prescribed capital requirements during the transition or progression phases.
The paid-up capital for the Digital Retail Bank has been set from Rs. 1.5 billion for the first year to Rs. 4 billion for the fourth year. The requirement of Digital Full Bank stands at Rs. 6.5 billion from the beginning which will be revised up to Rs. 8 billion in the third year of the operations.
Infrastructure of Digital Banks
Digital banks are not required to establish any branch. Moreover, digital and electronic means (e.g. mobile phones, internet, own and other banks’ ATMs, CDMs, digital kiosks/pods) and contact/call centers shall be the primary channels/ access points.
Digital banks may leverage the following physical channels/ access points after seeking prior approval of SBP where applicable:
- Sales and service centers owned by the digital bank
- Agents of the digital bank or other banks
- Other banks’ branches (including of parent bank)
- Any other channel as permissible under the applicable laws, rules, and regulations
With respect to own smart branches, sales & service centers, ATMs, CDMs, and digital kiosks/pods, digital banks shall follow relevant and applicable requirements of the Branch Licensing Policy in relation to the process for application and approval, along with general instructions on operations at these places. However, provisions not relevant in the context of digital banks such as geographical distribution shall not apply.
Business Plan and Exit Strategy
The applicant shall submit a comprehensive feasibility study, business, and enablement plan that shall include detailed financial projections and underlying assumptions, covering a period of at least five years from the commencement of commercial operations.
In case the break-even period exceeds five years, the projections shall cover the extended period. The business plan shall include justifications if the financial projections signify a consistent or rising loss trend without a clear and tenable path to profitability, or indicate a breakeven period exceeding five years from the commencement of commercial operations.
Every digital bank shall have an exit plan covering a minimum time horizon of the business plan addressing different stress scenarios as well as the digital bank’s likely responses. The exit plan shall also provide for adequate protection of customer/ depositor interests as well as responsible and effective communications with the concerned stakeholders.