In August last year, a Rs100,000 online payment was made from the salary account in a globally acclaimed bank to pay off the credit card bill of another hot-shot bank known for its discounts. Imagine the dismay when the money went poof — numbers on the screen that disappeared into the unknown.

Months of frantic calls and emails later, including to the State Bank Mohtasib, the amount was finally credited, though not before the person swore of online banking and reverted to the cumbersome comfort of cold hard cash. As Twitterati regularly lament, this case is not an isolated one in Pakistan. If the infrastructure of basic online banking is so weak, what then of the licenses for digital banks that is in the works?

Out with the old

“Only the façade is digital, the system at the back is analogue,” says Fawad Abdul Kader, head of digital financial services at National Institutional Facilitation Technologies. “They build their architecture on switches bought for ATMs in the 2000s. When you build new technology stacks based on older architectures, it is bound to conflict and therefore the challenge of online banking not performing according to customer’s needs.”

A digital banking license is the evolutionary next step for unicorn fintechs but it is premature in the Pakistani market

The banks have conventionally graduated from one stage to the other, from cheque books to ATMs to internet banking to mobile banking. But the legacy architecture has not been improved.“All the more reason for the licenses to go to banks that have been built from the ground up on a digital framework,” he says.

“The ones that will bring meaningful change are the ones that will start from scratch,” concurs CEO Paysys Labs Karim Jindani. “Adoption of new technology is not the forte of legacy banks. It would be difficult to scale up any of the top five banks compared to organisations like Telenor’s Easy Paisa — one their stakeholders is Ali Baba so they can bring their technology very easily which is why Easy Paisa’s app works very well with a larger customer base,” adds Mr Jindani.

More variety in your kiryana store

“The shopkeeper around the corner can buy products worth Rs5,000-10,000 from three to five distributors at a time because that is all that he can afford,” says OneLoad CEO Muhammad Yar Hiraj. “They do not have the collateral to borrow or finance their working capital needs.”

His company has received in principle the approval for an electronic money institution (EMI) license and intends to apply for a digital banking license as well.

“We focus on micro-retailers. Your neighbourhood kiryana store will be able to accept digital payments if and when we get a digital banking license. Currently, we have 55,000 active stores and feel the number is 10x that. We will be able to use the digital banking license to increase financial inclusion of small shops and intend to reach half a million in the next three years or so.”

“Traditional institutions have not been successful in servicing the needs of the mass market such as small shops. If you give licenses to similar institutions again, it defeats the purpose. To really allow more room for innovation, there should be more room for experimentation,” he adds.

A premature step?

Not everyone is convinced that digital banking licenses will lead to change at any level.

“A digital banking license is the evolutionary next step for unicorn fintechs but it is premature in the Pakistani market,” says Omer bin Ahsan, CEO of Haball and regulatory lead of the Pakistan Fintech Association.

“Payment system operators/payment services providers, EMIs and unregulated fintechs are still in their establishment phases. International digital banks, branchless banks and some traditional banks with risk appetite should be the first ones to try it out,” he says.

A consensus among various stakeholders seems to be that the digital game belongs to new kids on the block and not the traditional big banks that seem unable to always successfully transfer money from one bank account to another. And why should they invest in technology beyond the optics when their existing business models are so beautifully profitable. On the other hand, fintechs may be too young at this stage.

While it remains to be seen whether digital licenses are anything more than a move by State Bank to appear more progressive in theory than in fact, it is also true that digital payments is a growing business and attracts a lot of foreign capital. If nothing else, growth in this space will make some founders of fintech very rich indeed.

Published in Dawn, The Business and Finance Weekly, January 10th, 2022