Telcos are spearheading the global transition into the digitisation of financial services, assisting countries boost financial inclusion in a way never experienced before. This is particularly true for emerging markets where telecoms are leveraging their digital power to mitigate the problem of physical distance between their customers living even in the most remote location without any bank branches, ATMs or any other non-digital means to access financial services.

Unlike conventional banks, telcos use mobile technology and the internet to make it easier for the large unbanked population to connect with numerous financial services and products via their digital wallet. Africa and Asia-Pacific are the two prime examples of increasing telecom penetration in the arena of the services that once were the exclusive domain of banks. Telcos allow customers to send and receive money, pay their bills, receive remittances from abroad and offer several other services.

In a nutshell, telcos are rapidly optimising the convergence of banking and telecom markets across the world by integrating finance into their ecosystems. With telco financial services growing worldwide, industry experts have predicted that banks will ultimately have to merge with telecommunication firms over time to expand their footprint. Banks will have to offer expanded hybrid services involving mobile banking in countries like Pakistan.

Telcos in Africa and elsewhere are partnering with conventional banks and launching their own solo banking ventures to diversify into financial and banking services. It wouldn’t be incorrect to say that the rise of telco-backed mobile money services is fast blurring the lines between firms that can offer financial services.

Pakistan has less than three per cent of the world’s population but 8pc of its unbanked adults

With mobile telecoms-based banking gaining traction globally, the future evolution of this relationship in Pakistan is also inevitable for tapping a massive unmet demand for financial services from a huge unbanked population across the country. This is especially crucial to serving and financially including women, smallholder farmers, and small businesses.

This synergy between telcos and banks is vital because Pakistan is less than three per cent of the world’s population but 8pc of its unbanked adults. This imbalance, according to a study by Tabadlab, an Islamabad-based research organisation, is reflected in the nation’s low topline financial inclusion indicator that has stagnated at 21pc for the last many years. Despite several market developments that include introducing new regulations, digital payment systems, launching market infrastructure like Raast, entry of fintechs and favourable pricing structures for online interbank transfers, stagnation continues.

In absolute terms, the total financially included population has in fact, increased slightly from 28 million in 2017 to 31m in 2021. That means a vast majority of people in Pakistan remain financially excluded in spite of more adults reporting to have made or received a digital payment but do not, or cannot, access formal savings or credit solutions.

However, between 2017 and 2021, the number of women using digital payments has more than doubled from 5pc to 11pc, in line with growth in female account ownership, indicating the link between digital payments and financial inclusion.

A report by BPC, a payments solutions company, and Fincog, a fintech consultant, underlines that digital wallets like Orange and M-Pesa have played a pivotal role in enhancing financial inclusion in the Sub-Saharan countries like Nigeria, Tanzania, and Ethiopia, where 53-75pc of the adult population is unbanked.

Credit and debit card penetration is even lower at 3pc and 18pc. But mobile and internet penetration has paved the way for regional distribution of alternate digital financial services. According to the findings of the Global System for Mobile Communications Association, the Sub-Saharan region now accounts for a total of 548m registered mobile money accounts, with 150m monthly active users.

In the last decade or so, digital wallets offered by telcos like Jazz, Telenor and others have also gained remarkable success in Pakistan. With nearly 194m mobile phone subscribers, including 120m smartphone users, digital wallets have great potential in banking the unbanked and reinforcing a cashless and branchless economy.

These wallets are already linked or being linked with Raast to offer instant end-to-end digital payments to their customers under stringent State Bank of Pakistan (SBP) regulations. The two leading players JazzCash and Easypaisa have more than 26.5m users, with 80pc of them active users every month. They have contributed to a total transactions of Rs5.5 trillion through their massive ‘branchless banking network’ spread across the nation.

These wallets are transforming the digital financial landscape of Pakistan by digitalising payments in key development sectors like agriculture and micro to small businesses, as well as empowering women through their disbursements, collections and cash acceptance points nationwide.

Whether Pakistani telcos, heralded as a vehicle for financial inclusion in Africa, will continue their advance into other areas like savings, loans, investments, and insurance largely depends on their ability to transform themselves into digital banks.

About 55pc of unbanked Pakistanis aged 15 and above have a mobile phone. That means mobile-based digital payments have the potential to unlock the broader digital economy, and telecoms firms can play a key role in this. With five to seven new digital bank licenses up for grabs, the SBP has received around 20 applications from local and foreign banks, local and international fintechs and telco-backed digital wallets.

The SBP objective is to provide affordable digital financial services, offer credit to the unserved and under-served segments of society, encourage financial innovation and technology in banking, and aid the overall development of the digital ecosystem. Many argue that telcos’ digital wallets are the best candidates for digital banking licenses due to their deep and extensive network penetration and a large countrywide customer base to develop digital branchless banking infrastructure to increase financial inclusion.

This will also develop the much-needed synergies between the two sectors, like the rest of emerging markets, for contending with the new challenges both face.

Published in Dawn, The Business and Finance Weekly, October 24th, 2022