Race to the digital banking licence

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

The SBP can work on an exclusion policy to come up with the best and most appropriate applicants for issuance. Midsized and big commercial banks are the first ones for SBP to exclude. They are already moving towards digital financial services within their existing license. The biggest bank CEO’s tagline 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 do 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 separate Islamic banking licenses are just trying to have a share of the market that is up for grabs. 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 into 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 that have the license to do anything under the sun. Let them reach a critical mass before they could think of acquiring a digital banking license. Some of these are not even applying, as they think that they are not mature enough, and perhaps it’s not prudent to come in competition with their partner bank(s). If they have not reached series B level funding (as none of them is), they should continue to do what they are. Some fintech is partnering with big banks for a digital banking license. SBP should evaluate their potential value addition as compared to others before nodding.

The third type is telcos. Two of them have done some groundbreaking work in enhancing digital financial services and have provided payment solutions to a large pool of a financially excluded population. Easypaisa and JazzCash are two notable names. They have managed to leverage their existing large base of mobile consumers for providing financial services. JazzCash has 16.2 million users with around Rs3 trillion worth of payments. Easypaisa is not much behind with monthly active users of around 10.5 million having a transactions volume of around Rs2.5 trillion.

They both are linking fast with RAAST. One advantage this sector has is that both are operated as part of microfinance banks, so they are familiar with 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 waiving IBFT charges in COVID and subsequently allowing lower charges 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 the financially excluded segment. They have a rich database to start with. They have a network of branchless banking, albeit mostly in payment solutions. All they need is the right license to leverage their hard work in providing lending and other financial services. SBP should consider these two seriously for the licenses.

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

They can use the experience to enrich digital banking in Pakistan. Opal is a global fintech with experience operating in Africa and Asia. They have an investment in 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 the 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 bringing experience from complicated economies like Brazil, South Africa, Nigeria and others. They are for long play and have patient capital. They are bringing the versatile experience to the market. Their technology is tried and tested. There are spillovers. That is a 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, conventional banks have limited success in it. The whole model needs rethinking. New players with strong digital arms and different mindsets can add immense value to what existing banks are doing. Good Luck, SBP!


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