Globally, the rush to unbundle banks started more than 10 years ago.

The understanding was that physical presence was no longer essential as different generations wanted to interact with a retailer or bank differently. Amazon built its business on this premise and replaced Walmart as the largest retailer.

There are many neo-banks that have reached a unicorn status, but they are yet to replace a major bank. The Amazon moment for financial services has yet to be achieved globally. In Pakistan, it may be decades away.

Pakistani banks provide their retail customers with five essential services: physical location for customer interaction (branches), payments (interbank fund transfers, cheques), lending (credit cards, personal loans, auto loans and mortgages), deposits (current accounts, savings and term deposits) and information.

Anybody, including fintechs, should be able to offer banking products on a core banking application, which is modular, scalable, lightweight and efficient

Banks have less than two million lending customers and 57.6m bank accounts, 16,067 branches and 15,252 ATMs. The core banking technology stack is decades-old and is neither efficient nor scalable. The customer journey is the same for all generations. The back office and credit underwriting have yet to encounter automation or big data. It still takes a month to get a credit decision for a credit card or personal loan and two weeks to open a simple full-service banking account.

Banks make the bulk of their income from the interest rate arbitrage between their low-cost deposits and the rate offered on Pakistan Investment Bonds (PIBs), treasury bills and commodity financing. Hence, while some banks are making efforts to automate their back office and innovation labs at present, they have yet to do anything either meaningful based on generation interaction or new to industry customers.

Pakistan’s fintech industry is largely driven by person-to-person (P2P) payment companies, followed by digital lending (nano and some small-store). There is no significant activity in the savings or investment space.

Total investment raised by these fintechs is estimated to be less than $150m. No fintech has raised a Series B round. Other than the telco-based bank fintech, payment and digital lending, no other individual fintech has even reached a million customer base. Fintechs are long on innovation and light on capital. It is difficult to see a fintech achieving scale without raising at least $100m or in deep collaboration with an existing bank.

The opportunity lies in each player playing to their strength. Fintechs are better in designing new customer acquisition and retention. They have started to design customer journey based on generational needs. Pakistan’s median age is 22. Clearly an opportunity for designing a financial institution for generation Z.

The other main opportunity lies in the core banking technology stack. Most commercial banks have legacy systems. Software houses should consider unbundling the core banking as a Saas-like service. Anybody, including fintechs, should be able to offer banking products on a core banking application, which is modular, scalable, lightweight and efficient.

The principal service a bank branch offers its retail customers is the ability to make deposits, withdraw funds, transfer money and obtain financial instruments. All of these activities can be done at non-bank physical locations. Secondly, some aspects don’t even require a physical interaction.

The alternative to bank branches started with Tameer Bank using Telenor’s airtime agents as branchless banking (BB) agents. At a BB agent, a customer can deposit, withdraw and transfer funds. However, the next stage of development — acceptance of digital payments for physical goods and lending based on digital data points — has yet to take place.

Banks have been bypassed in the lending business on two fronts. Firstly, through P2P lending, where a bank’s balance sheet is not required. ANT Financial Services is a prime example of this. In Pakistan, we do not at present have regulations that allow crowd lending.

The other avenue is to create a non-banking financial institution under a licence from the Securities and Exchange Commission of Pakistan (SECP). The challenge in this route is funding as this licence does not allow retail deposits. The ideal solution would be a partnership. The fintech’s customer on-boarding, retention and big data analytics abilities combined with the bank’s balance sheet and funding ability.

A similar solution set can be envisioned for the savings services. The bulk of Pakistanis save outside the banking system. They save through the committee system, in gold and livestock. All of these transactions have cash on the other side. There is Rs6.5 trillion outside our banking system. The opportunity lies in providing services to this segment.

Fintechs in Pakistan have tremendous opportunity to disrupt the existing financial eco-system as it is not customer-friendly, does not use the customer lens for either product development or interface and is based on a legacy tech stack.

However, given the dearth of capital that fintechs face, it will not be possible without collaboration.

The writer is a technology entrepreneur

Published in Dawn, The Business and Finance Weekly, November 16th, 2020

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