Pakistan’s Digital Finance Revolution: Progress, Challenges, and the Road Ahead

Pakistan’s Digital Finance Revolution: Progress, Challenges, and the Road Ahead

Pakistan is on the brink of a great leap forward in digital financial services, which holds the promise of better products and services for the banked and unbanked alike. The building blocks are beginning to fall into place to underpin a world-leading payments and banking ecosystem, which is critical for the country’s future economic success.

One metric indicative of the progress made thus far is the substantial ramp up in digital payments over the past few years. According to the State Bank of Pakistan’s (SBP) most recent statistics, digital payments now constitute 82% of the total volume of payments in the first quarter of this year, an increase of almost 20% compared to the previous quarter.

It is a convergence of several central bank initiatives that have facilitated this surge in digital payments, and which are also laying the foundations for greater competition and innovation. One is the launch of the Raast Instant Payment System in February 2022, which enables users to instantly transfer funds between accounts at different financial institutions at no cost. Initially, for bulk transfers and person-to-person transfers, it was expanded to person-to-merchant payments in December 2023.

Importantly, in addition to rolling out faster rails, the SBP has put in place a regulatory framework to protect consumers, which is important in light of the increase in online fraud. Over 30,000 complaints of financial scams were reported in 2022.

Last year the central bank mandated commercial and microfinance banks to improve their digital fraud protection controls and procure fraud management systems, or be held responsible for the loss of any customer funds. Many banks have struggled with this mandate because of the time and effort involved in procurement and implementation, but BPC is working with several institutions to help them deploy real-time fraud detection technologies.

As well as deploying the faster payments rail, the SBP has progressively opened up the payments and banking sector to new players. Within the scope of its electronic money institution (EMI) licence created in 2019 and revised in June 2023, there are now five EMIs collectively serving around 2.7 million e-wallet users, an increase of 15% during the quarter.

More recently, the central bank launched a licensing and regulatory framework for setting up digital banks as a separate and distinct category. In January 2023, the SBP issued five digital bank licences to three non-bank entities and two banks, Mashreq Bank and Raqami. The latter plans to launch a digital-only Islamic bank, tapping into the boom in faith-based financial services.

While none of the new digital banks are live as yet, the increased market competition is compelling incumbent banks to accelerate their own digital transformation. For example, the largest Islamic bank in Pakistan, Meezan Bank, has partnered with BPC in developing its 10-year transformation roadmap and modernising its technology stack to compete with EMIs, digital banks and fintechs.

The SBP is also pushing forward with its Open Banking Framework, first launched in 2019, which enables financial data from banks to be accessed and utilised by third-party financial service providers through application programming interfaces (APIs). Open banking supports the central bank’s objective of increasing competition and innovation, as well as improving financial transparency.

For example, commercial banks can use open APIs to provide banking-as-a-service (BaaS) to third parties, such as fintechs, which can resell the financial services to the end customer. This will help reach more customers and increase financial inclusion, another objective of the central bank.

The SBP is in the midst of drafting open banking regulations. It launched open forums with the C-levels of the banks and financial institutions to brainstorm about what needs to be part of the regulation, which is expected to be in play by the end of 2024.

To support greater innovation, the central bank launched draft guidelines for a regulatory sandbox in December 2023. A regulatory sandbox is where fintechs and financial institutions can test new open banking services and business models.

Despite the progress made to date, there are a few areas that need to be addressed before financial services can truly be transformed. I will highlight three things that the central bank should examine to drive this step change.

First is the inclusion of person-to-government payments and collections in Raast – this is a large portion of transactions that should be digitised as quickly as possible using the new rails. If that happens, people will need to come into the regulated financial services sector, which increases financial inclusion.

Second is changing the data localisation regulations to allow large international cloud providers into the market. As per the regulator, all customer data must remain within the boundaries of Pakistan, including open banking data. However, today there are only a few domestic cloud providers in the country which do not have the level of security or technological innovation that large international players have.

If a bank is opening up to non-bank institutions or fintechs, it needs to have robust security standards. Therefore, the regulation needs to be modified in such a way that it allows international cloud providers to bring a higher level of security and technology into the Pakistan market.

Third is easing the restrictive measures on outward remittances. Because of the overall country’s cash flow situation, the central bank only allows two types of international transfers: educational and health payments. But many fintechs and EMIs are funded by venture capitalists (VCs), who expect to receive a return as investors. Thus, VCs have reduced their investments by 90% over the past year because fintechs are not allowed to send profits out of the country.

The central bank needs to give VC-funded EMIs and fintechs flexibility to remit profits to other countries if they are to attract the next round of investment in their businesses to reach exponential growth.

While recognising the impressive progress made so far by the central bank, these are a few things that need to be looked at to take Pakistan’s financial services sector to the next level.


Writer is Furrukh Ali Baig, Country Head for Pakistan at fintech firm BPC.

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