With commercial banks and branchless microfinance players pushing forward their respective digital agendas, and the emerging DRB NOC winners getting ready and awaiting in-principle approvals, here are the top 5 predictions of what to expect in Pakistan over the next 3-5 years in this fascinating space that has the potential to change the lives of masses of Pakistan for the better.
Please note the scope of this piece does not include EMIs and NBFCs, and their contributions, as they will be the subject of a separate article.
DRBs will likely focus on setting the right foundations, getting to operational readiness for pilots, and subsequently in the transition phase, prioritizing their shareholder customer segments & partnerships (representing distribution, agri, and youth organizations) as opposed to mass scale.
After all, Rome was not built in a day! While this may be a shocker to those who believe DRBs will move the needle as early as 2024, this time will be used to re-evaluate customer and profitability/valuation strategies, deal plans, etc. We may also see attempts for partial ownership changes (subject to approvals).
According to some reports, as of last year, over 90% of ‘Neo Banks’ globally had still not made an organic profit with breakeven points generally being between the 6-10 year mark. However, valuation /deal multiples have been high for such Neo Banks, especially in the US and Europe while in markets such as Africa, the premiums /deal multiples haven’t been as relatively lucrative.
This will also be a dilemma for the DRB NOC winners in Pakistan. The Policy rate, PKR USD parity, and other indicators were notably better when shareholders submitted license applications and the definition of ‘value creation’ will come under discussion.
The likely approximately Rs 4-5b needed at the operational readiness stage (Rs 1.5b MCR and Rs 2-3b outlay) will require both an understanding shareholders and a leadership team will a clear route to creating value. It will be interesting to see whether shareholders believe the global model of high valuation multiples and long periods of losses will be the route to follow in our bumpy economic climate, especially when the impressive Telenor ANT financial deal multiple is now widely considered to be a one-off.
Alternatively, and these are not mutually exclusive, shareholders could ask teams to shorten the break-even cycle, and focus on day 1-unit economics. DRBs can no doubt transform customer journeys and have the potential to innovate and scale financial inclusion, yet they too will inevitably have to address these questions, especially in their nascent years.
Likely ceilings on Nano lending pricing may be a blow to branchless banking microfinance players in 2024 which could mean the need for further support from telco owners. While also an opportunity to diversify revenue streams, regulatory interventions may also be needed to support these players who have tangibly scaled financial inclusion across the country and moved high digital volumes.
With draft regulations likely to cap the pricing of nano consumer loans, Branchless microfinance players may face margin pressures in 2024. Such draft guidance has so far not included DRBs in their scope, yet I do expect applicability to them as well a year or two after the others. Let’s not forget that nominal IBFT fees, nano lending revenue, and float revenue on customer deposits are two main drivers of the financial viability of these players, players who have played a large role in scaling inclusion and moving high single digit of Pakistan’s GDP in payment volumes. Recently these players have
reduced customer acquisition spending and the ‘customer washing machine effect’ with an enhanced focus more on customer engagement. More of this can understandably be expected.
Commercial banks’ digital banking assets will scale, with such banks moving more of their ‘existing’ business to digital assets with a ‘digitizing the core’ focus. While there will still be battles between digital and non-digital segments, I do anticipate somewhat improved harmony and execution.
Even though the cash cow of commercial banks will most definitely be elsewhere, I do expect more harmony in how commercial banks approach digital banking. Digital banking of such Banks will still be challenged to stand on their own two feet and what we are likely to see is an increasing focus on such digital assets supporting core business.
I don’t believe that the “separate wallets strategy” for digital customers and branch customers of such commercial banks will continue on a widespread basis. Onboarding large numbers of ‘new to bank’ customers (especially in lending) directly on digital assets of commercial banks though, may still be a while away.
As digital platforms are developed and scaled, it would be naïve to underestimate the importance of robust governance and control processes.
DRBs for instance, are required to comply with the Code of Corporate Governance for LISTED companies, and as start-up banks, they will need to start preparing for this from now on. The importance of good governance practices, risk management practices, internal controls over operational processes, financial reporting and especially customer data privacy and protection, cannot be undermined for DRBs, Branchless players and Commercial Banks alike.
We may see some hiccups here in the overall ecosystem, which is natural on such journeys, yet the key will be to avoid catastrophes.
Of this I’m sure. Be it trial and error, a push due to competition or innate ingenuity, digital retail banking in Pakistan will get better for the benefit of Pakistanis over the next 3-5 years. DRBs, branchless players, and commercial banks will all continue to play a pivotal role in better customer journeys, experiences and also impactful and innovative use cases.
Who will take the cake? Well, that really depends on who better can combine a customer lens with unit economics, and leverage data holistically AND granularly. I believe there are many opportunities to be pursued both at a strategic and operational level, with some examples below:
About the author: Sardar Abu Bakar was COO of Mobilink Microfinance and joined Raqami and was tapped as CEO few months ago. He has left Raqami end of July.