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The State Bank of Pakistan is the process of issuing digital banking licenses in Pakistan. SBP has received around 20 applications, and the central bank is eyeing to issue 5-7 licenses in the first round. The main objectives for digital banks are to promote financial inclusion, provide credit to unnerved or underserved, provide affordable digital financial services, encourage financial technology and innovation in banking, and foster customer experience and to overall develop the digital ecosystem.

In simple words, SBP wants digital banks to have full-fledged banking without branches i.e., digital first. That is to depart from conventional relationship-based banking in Pakistan. The process was started in the previous Governor’stenure and now there are some delays in the timelines due to change in the top management. Hopefully the new Governor to exhibit similar zest, as deputy governors and teams are really excited about this new digital banking regime.

The question many have that who should be getting these licenses, and what value they would add to serve the SBP stated purposes. There are different types of applicants. One is existing conventional commercial banks. Second is existing fintech operating in Pakistan. Third are telcos that are leveraging their large consumer base in digital financial services. Fourth are international banks. And fifth are international fintech.

The SBP can work on exclusion policy to come up with the best and most appropriate applicants for issuance. Midsized and big commercial banks are the first one for SBP to exclude. They are already moving towards digital financial services within their existing license. The biggest bank CEO’s tag line is that the bank is a technology company with a banking license. If that is the case, the bank (and others) should spend the e licensing fee on acquiring technology and enhancing outreach. Nothing is stopping them. If they cannot innovate in the current set up, what is the surety that they would with a new license.

An analogy can be drawn from the Islamic baking licenses. The superstar is Meezan Bank because Islamic banking is in its DNA. Conventional banks with Islamic windows or with sperate Islamic banking license are just trying to have a share of the market that is up for grab. On the other hand, success stories are Meezan and other Islamic banks that are made for the very purpose.

That is why SBP should be picky in issuing digital banking licenses to existing banks. There are some which are applying. And at the same time these banks are investing in digital financial services. There are risks of cannibalizing. There are conflicting views amongst top management. SBP should not ignore this. The objective is to foster innovation and financial inclusion. Bring fresh blood in the sector. Commercial banks are saturating.

The second tier is of existing fintech – such as Haball, NayaPay, Keenu and Finja, to name a few. They are growing organically. Most of them are toeing themselves with big banks. They are technology and solution partners with banks who have the license to do anything under the sun. Let them reach a critical mass before they could think of acquiring digital banking license. Some of these are not even applying, as they think that they are not matured enough, and perhaps it’s not prudent to come in competition to their partner bank(s). If they have not reached to series B level funding (as none of them are), they should continue to do what they are. Some fintech are partnering with big banks for the digital banking license. SBP should evaluate their potential value addition as compared to others before nodding.

Third type is telcos. Two of them have done some groundbreaking work in enhancing the digital financial services and have provided payment solutions to large pool of financially excluded population. Easypaisa and JazzCash are two notable names. They have managed to leverage their existing large base of mobile consumers for providing the financial services. JazzCash has 16.2 million users with around Rs3 trillion worth payments. Easypaisa is not much behind with monthly active users around 10.5 million having transactions volume of around Rs2.5 trillion. They both are linking fast with RAAST. One advantage this sector has that both are operated as part of microfinance bank, so they are familiar withSBP regulations. A full-fledged license will ensure that they can move ahead faster and build on their existing success. Then the focus of the segment is on gender inclusion. That is heartening to see.

And with waiving of IBFT charges in COVID and subsequently allowing lower charge has hit the bottom line of these companies. They need some support from the regulator. They have revolutionized the telecommunication business in Pakistan without making adequate money. Still their sponsors are interested in expanding. SBP must appreciate that. Technology and innovation are in their DNA. With two decades of experience, they understand the psyche of financially excluded segment. They have rich database to start with. They have the network of branchless banking, albeit mostly in payment solutions. All they need is the right license to leverage upon their hard work for providing lending and other financial services. SBP should consider these two seriously for the licenses.

The fourth and fifth categoriesare international banks and international fintech; these have multiple advantages. One is that these to bring FDI at a time when the country is in a dire need of non-debt based external financing. These to bring the global experience. These to build soft image of Pakistan. Some names are DBank, TymeBank and Opay. Dbank has investment of Sequoia and looks promising. TymeBank has a success of South Africa to show and now have entered Philippines.

They can use the experience to enrich digital banking in Pakistan. Opay is a global fintech with experience of operating in Africa and Asia. They have investment of SoftBank and are a unicorn. The company has done some good work in Nigeria and Egypt and has started its operations in Pakistan. It could be a good choice for SBP to have in digital banking bouquet.

SBP should give bonus points to those companies that are bringing foreign set up in Pakistan. This has multiple advantages. Some of these players are brining experience from complicated economies like Brazil, South Africa, Nigeria and others. They are for long play and have patient capital. They are bringing versatile experience in the market. Their technology is tried and tested. There are spillovers. That is beneficiary for the overall digital financial ecosystem.

Digital banking is important for solving the puzzle of financial inclusion in Pakistan. Many other emerging economies have used the digital route. Pakistan can be no different. For the past seventy-five years, the conventional banks have limited success in it. The whole model needs rethinking. New players withs strong digital arm and different mindset can add immense value to what existing banks are doing. Good Luck, SBP!

Comments

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Dr Mufti Oct 03, 2022 04:40pm
Digital Banking requires a Technology Solution to differentiate between Fraudulent and Legitimate Email. ICIL can provide LexisNexis Emailage - a patented & proprietary solution
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Sohaib Umar Oct 03, 2022 06:37pm
Th article provides good insight, value-add and analysis of the situation of digital banking licenses in Pakistan. However, what happened to the standard of English in BR? I am not used to reading such poor English in BR. Perhaps it is the new norm.
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Naveed Ahmad Oct 04, 2022 12:58pm
Another aspect of digitalisation of the economy could be revamping the tax system. We have a large cash based economy due to red tape culture in the tax system. Our tax system is all about how to discourage the people from paying direct tax.
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OK Oct 04, 2022 02:50pm
Whoever wrote this article and whoever proofread this at BR need to either be let go or put on probation. I hope this is the exception and not the rule with BR articles. Horrible.
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Bushra Yousuf Oct 04, 2022 11:08pm
@Dr Mufti , Thank you, it is an honour to have this feedback from you. I work at LexisNexis & manage Pakistan territory. I am currently working with Pakistani banks to have our fraud risk solutions like Emailage.
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