With over 15 years of experience in capital markets and technology sector, Ali Farid Khwaja is currently the Managing Director at Khadim Ali Shah Bukhari (KASB) Securities Pvt Ltd and Managing Partner of Oxford Frontier Capital (UK). Previously, Khwaja served as a Partner at Autonomous Research in London, where he was responsible for coverage of European fintech sector. He has been the Group CFO of SafeCharge (a UK-listed Digital Payment Service Provider), as well as the CEO of SafeCharge Card Services (SafeCharge's 100%-owned subsidiary based in Dublin). Before that, he worked as sell-side equity analyst for technology sector, covering fintech, semiconductors, data centers, smart cards, telecom equipment and handset manufacturers at UBS and Berenberg. He obtained M.Sc. Financial Economics from Said Business School, Oxford, as a Rhodes Scholar from Pakistan. He also has a M.Sc. in Economics and a B.Sc. in Computer Science and Economics (double major) from LUMS.

BR Research recently spoke to the Fintech expert based in London on issues that are at the intersection of tech and finance in Pakistan. Edited excerpts from that telephonic conversation are produced below:

BR Research: Let's first take a bird's eye view. What is the current scale of digitization in Pakistan's economy?

Ali Farid Khwaja: Pakistan was late to launch 4G than other emerging markets, which is why internet penetration was very low until three years ago. However, now it is one of the fastest-growing markets with around 60 million mobile internet users. Over the next three years, the number of connected people should increase to over 100 million. There is rapid growth in peer to peer connectivity.

On the other hand, businesses are still slow to embrace digital technologies. Less than 10 percent of the organizations have ERP systems and there is hardly any penetration and utilization of advanced tech tools in areas such as AI, machine learning and robotics in the industry.

I think the fact that consumers are now connected will push businesses to also increase investments in adoption of digital technologies. Companies that are tech-enabled will be able to gain market share by reaching out to the digitally-connected population.

BRR: So what is your view on the nature of market opportunity in this space? This question is purely from an investment point of view.

AFK: The market is at a very early stage and the companies need capital as well as guidance and technical support. Pakistan presents a rare Greenfield opportunity. A Swedish Fintech fund manager said to me that they went to India and Brazil and found the valuations in early-stage tech to be very high. When they came to Pakistan, they found out that, on the contrary, there was nothing there to invest in. So, they got a group of entrepreneurs together and seeded them to start a Fintech company.

BRR: If the market is indeed in its infancy, what are the key factors – on both the supply-side and the demand-side – to help scale digital solutions, particularly in the payments domain?

AFK: The three main requirements are 1) availability of Internet, 2) availability of talent, and 3) access to capital. Let's review them one by one.

One, the scaling of digital solutions is driven by Internet penetration. The great thing about technology is that the adoption happens automatically. There are 45 million Facebook users in Pakistan, which is more than all the bank

accountholders. Yet Facebook has no office in Pakistan. Similarly, 15 million people use WhatsApp, yet WhatsApp didn't need to do marketing spending or training on how to use their products. There is a certain element of virality driven by network effect in tech. So, as long as Internet connectivity and electricity is available, products will get a network to scale.

Second, talent is a critical resource. Pakistanis are the third largest developer pool on freelance platforms such as Upwork – this shows that there is good local talent available. I think online MOOCs have really helped developers in staying up to speed with new developments and technologies.

And third is the area where we are lacking, and it is ‘access to capital'. In most markets, there are avenues for crowd-funding, incentives for backing startups and even junior markets for listing technology companies.

BRR: How does that digital landscape stack up against the region? Can you compare how far ahead – or lagging behind – is the country compared to comparable economies in South and Southeast Asia?

AFK: In the region, some markets such as India and Indonesia have emerged as the top destinations for investment in tech. The market cap of Tata Consulting Services in India is greater than the combined market cap of all the companies listed on Pakistan Stock Exchange. Another example is Paytm, India's largest mobile wallet, which is valued at more than $10 billion. In Indonesia, Go-Jek is valued at more than $5 billion.

The biggest deal in the same sector in Pakistan was for $167 million. So there is a magnitude of difference between Pakistan and the regional markets. Except for Zameen.com, Daraz and Easypaisa, there are probably no other tech companies with a valuation of more than $100 million.

The market size in Pakistan is small right now. But the opportunity will be more significant in the coming years.

BRR: You identified the $100 million-valuation threshold. Several prominent startups that have come up in recent years are seen mostly as digital intermediaries. Yet, not a single multimillion-dollar champion has emerged thus far. Why do you think that is the case?

AFK: It's too early, I would say. In the e-commerce space, Daraz has clear leadership. Similar in mobile wallets, Telenor's Easypaisa and Jazz Cash are dominant. All other startups are not well funded. At best they raise $1 million to $2 million.

BRR: But can limited access to capital alone explain this apparent lack of local digital startups breaking out in a massive way? Don't you think there are inherent problem with companies building “scale" in Pakistan?

AFK: I have observed that rules and regulations in Pakistan favor larger companies. Take the Fintech sector, for instance. The minimum capital requirement for a payment service provider is $2 million; in Europe, the lowest category has an MCR of is $40,000. Because of that, only large financial institutions can participate in this segment here.

The problem becomes worse when large companies don't re-invest the money in the business. Companies feel more comfortable taking the money out, while paying the rest through dividends, as per stock market regulations. So, those are the problem with building scale. Instead of becoming multibillion dollar firms, companies are happy staying at $100 million.

BRR: How do you view the recent entry of Alibaba and its payment affiliate (ANT Financial) in the Pakistani e-commerce and digital-payments market? Will this shake up the local market?

AFK: These two transactions have put Pakistan on the map of large tech investors. I am very confident that their entry will trigger the interest of other global tech investors and companies to Pakistan.  The other good thing is that now these companies will most likely expand their operations and invest across the value chain. So there should be increase in M&A activity as well as job-creation and technology import.

The risk is, of course, that these companies are too big and have come too early to allow domestic competition. For example, will companies like Yayvo be able to compete with Alibaba? Or what are the odds for SimSim against Tencent?

BRR: You mentioned regulations earlier. Specifically, what are the key regulatory barriers in the way of digitization? Since the theme is at the intersection of tech and finance, is a purely financial regulatory framework – as is the case in Pakistan – conducive to growth?

AFK: Regulation in Pakistan is typically with the mindset of policing and customer protection. It is almost never with the aim of promoting growth. Someone said to me that the regulatory regime believes in regulation via restriction. This is very true, since we mostly associate regulation with a long list of “don'ts". The job of the regulatory body boils down to inspection and monitoring to ensure companies comply with the “do not lists". For companies, this typically means higher operational costs.

In the UK and the US, the regulator deliberately stays behind the curve in order to promote growth. Take the example of bitcoin and crypto-currencies, for example. While most regulatory bodies have highlighted and warned against their risks, in most of the developed world, the regulators have not only allowed it but have also promoted their growth. Mature regulatory regimes understand that it is better not to regulate a growth sector, unless it possesses a systematic risk to the economy.

BRR: Based on your own experience with Fintech overseas, what can the aspiring Pakistani Fintech startups learn from success stories in Europe and the UK?

AFK: The single biggest determinant of success for early-stage tech companies is access to capital to fund future growth. This is a standard rule and Pakistan will be no exception. The tech winners in Pakistan will be companies that can successfully build partnerships with either local or global investors to attract additional capital. The other approach could be to focus on a narrow problem and build strong domain expertise.

There are quite a few success stories in Pakistan in areas such as computer games, ERP systems, and data analytics. The problem that I see in Pakistan is that there are far too many companies who aim to be too broad (“WeChat of Pakistan", “YouTube of Pakistan" “square of Pakistan", “eBay of Pakistan"), without having similar access to deep capital. The model of cloning global success stories only works when there is ample capital available and a clear path to exit. There are very few companies who aim to build real, specialized domain expertise. I think areas such as AI, machine learning, quantum computing, computer vision, and robotics are very interesting and quite promising.

BRR: What message do you have for the new government?

AFK: There is a lot of optimism. My first advice is that they need to induct people with significant experience in important regulatory roles. Second, there should be accountability, but it must be targeted; otherwise it may start hurting genuine investors. Third, bureaucratic paperwork is a nightmare for foreign investors to invest in private companies. A lot of this is due to dealing with the archaic rules. I really hope that things will change.

BRR: In the end, tell us a little bit about Oxford Frontier Capital's specialization, its clients, and its association with Pakistan?

AFK: Oxford Frontier Capital specializes in emerging technologies and frontier markets. Our aim is to connect global capital with growth companies in frontier markets such as Pakistan. I am the Managing Partner and I have among my partners some extremely well-respected professional from the world of finance and technology. They include Hank Uberoi, who was the global CTO of Goldman Sachs; Christian Angermayer, a Fintech investor and Hollywood movie producer; and Simon Chisholm, the CEO of Feros Advisors.

We currently have a team of twenty people and 9 partners. Our clients include some of the biggest global institutional investors based in the US, London, Hong Kong and Singapore. In Pakistan, Oxford Frontier Capital has taken a 37 percent stake in Khadim Ali Shah Bukhari Securities. KASB is Oxford Frontier's local partner for Pakistan.

Copyright Business Recorder, 2018