Pakistan has one of the largest unbanked economies, with more than 50% of adults being financially excluded. This is one of the biggest problems for the mass population but is also an opportunity for entrepreneurs to enter this space and establish a ‘fintech’ and fulfil the country’s banking and financial transactions need through a technology solution.

What is a Fintech?

Fintech is a segment of industries consisting of technology-focused companies with innovative products and services traditionally provided by the financial services industry. The services provided by these companies are a wide range. They include payments, funds transfers, personal finance/loans, insurance, wealth management, etc. These companies aim to improve financial inclusion in an economy and bring a seamless experience to the users of financial services.

Why is financial inclusion important?

Financial inclusion in the economy provides multifold benefits to individuals, regulators, governments, and other stakeholders in the economy as well. Some of the primary benefits that can be derived from financial inclusion can be seen in the form of:

• Transaction facilitation to the customers
• Investment opportunities for remote segments of the population
• Regularizing economic transactions and curtailing grey channels
• Broadening of the market for financial service providers
• Improving access to credit
• Allocation of capital efficiently among competing uses

Why Fintech in Pakistan?

Besides a large majority of the adult unbanked population, the following factors contribute to a favourable fintech environment in Pakistan:

1. Per the latest telecom indicators, Pakistan has more than 195 million cellular subscribers, i.e., 88.21% tele density. This number has grown from 140 million subscribers in 2016-17 to 195 in 2022, a growth of 40% in the last five years. Further, the penetration of 3G/4G subscribers is 54.35%, and Broadband subscribers have 55.62% penetration. All these factors show a healthy number of mobile and internet users across the country who can be targeted for fintech services.
2. The target market of these fintech services is mostly middle-class families working hard to meet ends meet and who want to save costs and time in account opening or similar activities in banks or other financial institutions. Per some estimates, Pakistan’s middle class (individuals earning over USD 300 per month) is roughly between 20-40 million. This provides a sizeable market for the fintech companies to target.
3. Pakistani banks have a risk-averse mentality where most deposits are invested in attractive government lending to avoid the risk of loss and non-compliance imposed by SBP.
4. Supportive regulations by the State Bank of Pakistan (SBP). SBP has proven progressive in digital finance and has taken many initiatives to promote branchless and mobile banking.

Challenges

It’s not all plain vanilla, and though the hype and opportunity are honest and excellent, however, there still exist challenges that the fintech founders should be mindful of.

1. Quality of IT services – Pakistan has over 1500 IT companies making their name in the international landscape and providing a hefty foreign exchange to the ex-chequeen; however, the quality of services is still yet to be upgraded to a level required for the operations by financial institutions which are prone to more significant security risks and privacy policies.
2. The larger banks with the required reach and infrastructure are still reluctant to dive into the fintech space.
3. Even though the SBP has been very proactive in creating an environment to attract new players in the fintech industry, obtaining the required licenses is still cumbersome; international investors usually get a big turn-off when the process is unnecessarily delayed.
4. The change of mindset of the users. The users still believe they neither have the trust nor value of the services offered by Fintech. The portfolio of services required significant enhancements, and target products must be launched to target the unbanked community.
5. Fear of being documented. Fear of being in the tax regime and the complexities that it brings with it is one of the biggest reasons why individuals and small businesses deal in cash only. Tax laws and consistency of policies are required to gain the confidence of financially excluded individuals.

Conclusion

Recently we have seen movements on both internal and external fronts. Internally, regulators have given approving nods to many startups to provide various financial services through smartphones. On the External show, funding in Fintech has also seen a rise, where 25 out of 83 funding deals in 2021 were of fintech startups. Fintech companies are revolutionising the financial services industries worldwide, and Pakistan should not be any different. But we are still far behind others by all standards and must work hard to make a name in this area.