Digital banking ecosystem and policy uncertainties

In September 2023, The State Bank of Pakistan (SBP) awarded In-principle Approval (IPA) to five proposed digital retail banks (DRBs). This initiative will help develop a digital ecosystem, foster a new set of customer experiences, and provide affordable digital financial services, including credit access to unserved and underserved segments of the economy.

However, regarding financial inclusion, the success of the operational commencement of DRBs depends on the public’s intention to adopt digital payment methods and policy policymakers’ providing an enabling environment that facilitates customers’ switching towards fintech and thus facilitates increased documentation of the economy.

When we talk about the statistics (i.e., the second quarter fiscal year 2023-24 payment system review), the numbers are quite encouraging. For example, the number of internet banking users increased to 10.8 million at the end of the December 2023 quarter compared to 10.3m at the end of September 2023; similarly, mobile banking users increased to 16.3m from 15.1m, and e-wallet users increased to 2.7m from 2.4m.

However, Pakistan’s per capita digital financial literacy is one of the lowest in the world. Global evidence suggests that public trust in the financial system and adequate customer protection laws have proven to be more important than innovation for the underserved market.

Inconsistent government policies to achieve short-term objectives will not help the financial regulators’ efforts to decrease cash-based transactions

Unfortunately, at times, policymakers have initiated or threatened the public by putting sand into the gears of the efforts to adopt digital payment channels fully. The inconsistencies on the part of the government or surprise policies to achieve short-term objectives will not help the financial regulators’ efforts to dent the culture of cash-based transactions and mushroom growth of the informal economy in the short to medium term.

Secondly, the ruling class in Pakistan themselves makes billions of rupees every year from the informal economy. Hence, on the one hand, we see a greater push from the financial regulators to increase financial digital inclusion, whereas, on the other hand, the ground realities are different.

For example, to compel the public to come under the umbrella of active taxpayers, the government blocked more than 11,000 mobile phone SIMs of non-tax filers in the first phase. Although in Pakistan, there are implied penalties for non-tax filers, such as paying higher taxes while doing financial transactions, buying/selling a house or car, and receiving dividends/profits on investments, this step is unwarranted when automatic sanctions exist for non-filers.

In 2022, the Securities and Exchange Commission of Pakistan (SECP) issued licenses to digital nano-lending institutions, whereby potential borrowers can download the app and open an account by providing very little information (i.e., the bare minimum requirement of ‘Know Your Customer’ checks) can avail the micro- and small-loans.

However, a few unlicensed firms started soliciting customers by marketing their online apps. Once customers availed themselves of those loans, and in case of non-payment or not paying on time, those nano-lending digital companies threatened their customers with releasing their private data available on cellphones.

An incident of suicide and some cases of harassment were reported in Pakistan due to non-payment of loans on time. Unfortunately, SECP woke up very late and, with the help of the telecommunication regulator (i.e., Pakistan Telecommunication Authority) and Google apps, was able to remove those illegal apps that were soliciting poor people to avail financing facilities without license. However, the damage was done in the form of a loss of trust.

To conclude, the low-income and poor population of Pakistan has slowly and gradually started using digital payment methods for money transfer, availing small loans and bill payments, etc., but blocking the SIMs and not acting proactively as a regulator/public enforcer is like a ‘shot in the foot’ that can potentially reverse the digital literacy initiatives. Hence, technology will not be seen as the means towards financial inclusion and documentation of the economy.

The government and regulators must devise a persistent regulatory system that facilitates the general public’s intention to adopt FinTech.

The writer teaches at IBA, Karachi

Published in Dawn, The Business and Finance Weekly, July 15th, 2024