IT is not news that Pakistan suffers from financial exclusion. Commercial banks, insurance companies and others have focused on, and will continue to focus on, the salaried urban population.
Commercial banks gorging on the government’s insatiable appetite for debt continue to invest in treasury bills and Pakistan Investment Bonds. The conventional financial industry neither understands nor is it interested in the dynamics of the long customer segment. Sated with lazy lending, commercial banks and insurance companies have not come up with innovative products in recent memory.
But irrespective of what the old banking school is doing, a silent financial revolution is taking place in Pakistan. New players have entered the financial industry and are offering solutions tailored to the needs of the average man and woman. This technology-driven disruption will change the level of financial inclusion within five years. In all likelihood, the largest retail bank in terms of number of customers, touch points and transactions will be a branchless banking player as opposed to one of the big five commercial banks.
New players have entered the financial industry.
Financial inclusion starts with having a bank account. This is followed by payments, retail purchases, credit and then other services like insurance, pension and other value-added services
The technology-based impact has already started for a simple mobile bank account, which today can be opened within a minute. Three years from now the branchless banking industry would have opened 50 million mobile wallets, substantially more than what commercial banks hold. These M wallet holders are being provided an ATM card. Within six months these ATM cards will be converted into debit cards. The vision is to create 500,000 merchants in Tier 2 and 3 cities over five years for the acceptance of these debit cards.
Again the change in technology will be the accelerator. Instead of expensive point of sale (POS) machines, smart phones which cost less than Rs5,000 will act as POS. This will have a material effect on financial inclusion as 50m of the hitherto unbanked along with 0.5m merchants will enter the formal economy, improving the savings and tax-to-GDP ratio.
With over 50m M wallet holders, person-to-person transaction is expected to increase geometrically. Two developments will drive this change, bypassing the traditional payment railroad.
First, we are already experiencing a slow but steady switch from over-the-counter domestic transfers to M wallet, with volumes increasing from 15,000 to 1m a month in the case of one player alone. Throw in a social payment application which allows low-value payments to be made via WhatsApp, line or a local application, and payments become as easy as sending a message.
Currently, the industry is experimenting with new algorithm-based lending programmes that can assess credit risk based on data generated by the behaviour of an M wallet holder using a scorecard. Once the industry follows suit, the bulk of savers holding an M wallet could become eligible for a credit facility based on their score. This will have an exponential impact on financial inclusion. Even if 20pc of the target users become eligible it will be a multiple of the current credit users in the formal system. Score cards already exist for merchants. When the merchant score card is developed and implemented for the proposed 500,000 new merchants, the lending for microenterprise as well as SMEs will increase.
The last development, which will be driven again by technology and the digital payments railroads, will be financial inclusion through e-commerce. At present, it is estimated that there are around 100,000 e-merchants with less than $100m business transacted.
By comparison, the Indian e-commerce industry is estimated at $4 billion. However, with smart phone prices dropping below Rs5,000 and 3G/4G availability in rural areas, this activity is poised to explode as well. When rural e-merchants sell to buyers in Tier 1 cities, the emerging middle class, especially in Tier 2 cities, is estimated to increase the e-commerce activity to $1bn within three years.
Financial exclusion is expected to reduce materially in the next three years. This silent financial revolution has already started rolling out with the advent of the one-minute account. This account will in turn drive payments, retail purchases, credit and e-commerce activity. The days of Pakistan being at the lowest rung of financial inclusion for developing countries will no longer be the case. The sky will quite literally be the limit.
The writer is founder/CEO of Tameer Microfinance Bank and chairman, Pakistan Microfinance Network.
Published in Dawn, November 4th, 2015