krn team - karandaaz pakistan...analysis future of digital financial services in pakistan pakistan...
TRANSCRIPT
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We would like to recognize the contribution of the following people without
which this production would not have been possible:
KRN Team
Nabeel Malik (FinSurgents Advisory Board)
Sandeep Dhar (FinSurgents Advisory Board)
Muqeet Salam (FinSurgents Advisory Board)
Yasir Ali (FinSurgents Advisory Board)
Atiya Shah
Mughees Tanvir Butt
Sherazam Mazari (Sabre Group)
Tahira Dosani (ACCION)
William Cook ( Digital Payments Consultant)
Aamir Atta (Pro-Pakistani)
Obaid Saleem (GSMA Pakistan)
Munib Myers (Ex-CEO Daraaz.pk)
Purpose of the Study
• Provide a context of the Pakistani market in which the study is conducted
• Predict the future of Digital Financial Services (DFS) in Pakistan
• Overview of the existing financial services landscape to spot opportunities for DFS
• Study FinTech hubs around the world to identify components of a developed FinTech
ecosystem
• Provide overview of the salient aspects of regulatory environment in Pakistan
• Suggest the role of regulators in promoting FinTechs in Pakistan
• Analyze the startup ecosystem and identify gaps to make recommendations for
creating necessary support for FinTechs
• Outline the model for growth of a FinTech ecosystem in Pakistan and its components
• Identify FinTech verticals for investment by Karandaaz and the preferred characteristics
of a FinTech business
• Devise a mechanism for Karandaaz for investing in FinTechs
• Identify the risks and suggest mitigation strategies for the investments
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Following four knowledge sources were referred to for this study:
1. Primary research data gathered from 57 interviews conducted with senior managers
from a range of industries relevant to the FinTech ecosystem – commercial and
microfinance banks, mobile financial service providers, insurance companies,
incubators, accelerators, FinTech technology services providers and consulting
companies
2. Over 3000 surveys conducted from the above-mentioned industries
3. Insights gathered from in-depth research into global FinTech ecosystems and verticals,
as well as local market reality
4. Use of FinSurgents domain expertise and knowledge base
Methodology
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Introduction to FinTechs: Context & Background
We are entering an age where the sociological, financial and technological changes over the last decade have led to the creation of Emergent FinTechs. Emergent FinTechs will not only unleash innovations resulting in a series of large-scale behavioral changes but also re-invent the relationship individuals have with their money. It seems that this change will be the most pronounced in emerging markets.
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• Digitizing the financial services value chain in the Emerging Markets will enable FinTechs to displace cash, digitize payments and document the economy
• Startups are expected to morph into FinTech hubs once they realize that incumbents are open for collaboration
• Digital credit revolutionizes conventional lending and emerges as one of the most compelling use cases for digital payments
• Large-scale behavioral transformation occurs when large segments of societal needs are unmet
• Banks are not capable of disruptive innovation; they only make incremental innovation
• What mobile apps are to smartphones, FinTechs will be to financial services providers
Introduction to FinTechs: Insights
Only 29% of women in Pakistan have smartphones, as compared to 77% of
men
Insight: We expect FinTechs to empower women by architecting products and
propositions uniquely suited to their needs
Market Context: A Peek Into Pakistan
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Market Context: A Peek Into Pakistan
Pakistan’s
financial
services sector
and
communication
and identity
infrastructure
provide the
necessary
enablers and
drivers for
digitization and
further growth.
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Small companies and startups redefining the financial services value
chain through digitization
Traditional FinTechs collaborate with incumbent financial service
providers as their technology providers through traditional pricing
models
Emergent FinTechs are a new category of FinTechs that partner with
bank through new engagement models or simply displace financial
institutions
What are FinTechs?
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Market Research
Source:
FinSurgents
Primary Research
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Global FinTech Trends
Payments and lending have
the highest number of FinTech
Unicorns
Global FinTech investment is
soaring
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Source: FinSurgents research and
analysis
Future of Digital Financial Services in Pakistan
Pakistan is largely a cash-based
economy
Paper-based transactions in
Pakistan
Adoption of DFS will be encouraged
by the FinTechs and other service
layers to achieve an inclusive
economy.
2010 PKR 80.68 million
2015 PKR 127 trillion
Collaboration between
incumbents and FinTechs is the
New Winning Strategy and the
Way Forward!
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Market Readiness, Opportunities & Gaps
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With the world’s 5th largest young population and an increasing
internet and smartphone penetration, Pakistani consumers are now
ready to adopt and consume digital services. The new use cases
are expected to be created by the FinTechs leveraging the
incumbent platforms. These FinTechs will engage not only the
existing customers but also invite the unbanked to utilize these
services.
Market Readiness, Opportunities & Gaps Insights
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• Digital payment infrastructure and not cash distribution infrastructure, will lead the transition to the new age of financial products and services
• Branchless banking interoperability will provide further impetus to move from cash to digital
• M-wallets trump plastics (credit and debit cards) as the digital payment method which can truly enhance customer experience and give a further boost to growing m-commerce
• As we transition to the first level of behavior change of digital payments, the new wave will be digital credit
• Increased connectivity of devices has made it possible to make insurance more personalized
• Microfinance banks can now create virtual sales teams for the distribution of products. Sales persons can become trained via an online digital presence
• Pakistanis are increasingly adopting smartphones which are a source of information, communication, education and entertainment
5th largest young population offers new age financing opportunity
Gen Y adopts new technologies early, and financial products built over Social, Mobile,
Analytics and Cloud (SMAC) are fast and effortless to use
Low financial inclusion ratio indicates a wider canvas for DFS
Pakistan has a financial inclusion ratio of 15%, compared to an average of 33% for
lower middle-income countries
Low contribution of financial services towards GDP with a narrow focus on top
of the proverbial pyramid only
The banking sector represents 80% of the financial services but serves only 15% of
the population
Market Readiness
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Talent in IT sector is growing, but quality is lacking
1500 registered IT companies in Pakistan and technology services exported to other
countries equate to $1.6 billion of total sales
Improving ICT accessibility through 3G/4G
Pakistan has low ICT access due to low per capita bandwidth and high entry level
prices for fixed broadband plans
Consumer movement towards mobile and social platforms
Pakistan has 32 million active internet users and 16.2 million of these users
access social networking via a mobile device
Ease of doing business and Investment to GDP ratio are low. Improvement in
financial markets needed.
Pakistan ranks at 138 among 189 countries in the ease of doing business and has
an Investment to GDP ratio of 15% compared to a 32% ratio of other emerging
countries
Market Readiness
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Opportunity to leapfrog to next generation payments for the world’s third largest cash-
based economy
Pakistan only had 7.33 ATMs per 100,000 people in 2014. However, it can leap to the next
generation of digital payments infrastructure and bypass the physical payments infrastructure
Real use cases for m-wallets can accelerate m-wallet uptake and enhance online
banking engagement
With 132 million biometrically verified SIMs, issuing wallets is possible through the click of a
button
Providing an impetus to the digitization of currency through branchless banking
interoperability
12 players in Pakistan have branchless banking licenses of which none has interoperability
among their wallets
Digital Financial Services Insights
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Digital lending services can provide the missing link to formal lending
‘Digital credit’ will take place at three levels of lending- individual, small merchant and supply
chain
Supply chain digitization can provide SME financing
SMEs account for 98% of all enterprises in the country and their workforce comprises of the
largest share of the rural and urban population
Insurance has a chance to become relevant and affordable
The insurance sector contributes to only 1% of the GDP. Pay-As-You-Go insurance can change
this.
Microfinance banks can be redeemed from the limitation of physical reach through
physical channels
Microfinance banks lack an extensive distribution system which can be overcome wallet based
payments and a virtual sales team
Digital Financial Services Insights
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Digitizing international remittances, an opportunity for FinTech led value addition
Pakistan is one of the top 10 markets for remittances, but currently, these can only be collected
from bank branches
Formalizing savings by introducing need based products
36% adults save in Pakistan and only 4% save with a formal financial institution
Opportunity to disintermediate insurance and wealth management through digitization
Insurance companies want to reach customers and make sales via online channels as well as
collect premium payments digitally
Online commerce is creating demand for enabling digitized payments
Pakistan’s e-tail is expected to grow to EUR 746 million by 2019 EUR 1.9 billion by 2024 - a
2.3% penetration
Digital Financial Services Insights
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The urban and urbanizing: Potential for FinTech adoption
Pakistan is considered to be almost 73% urban or urbanizing; these areas are connected
physically and electronically and promise a high rate of FinTech adoption
Mobile technology facilitating digital adoption
With a mobile penetration of 69%, Pakistan is quickly becoming an economy reliant on mobile
phone technology
Online commerce growth will lead to a rise in digital payments
Pakistan’s e-tail has a projected growth of up to USD 600 million by 2017 and is forecast to
reach 2.3% of the market by 2024
Smartphones are capturing an increasing share of the market, aided by the growth of
mobile internet services
Smartphone adoption is expected to rise from 16.6% in 2016 to 51% by 2020
Re-Defining the Lens
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Re-Defining the Lens
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Ecosystems: Railroads and Infrastructure Insights
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This chapter looks at the global trends along with local market findings in a comparative context to arrive at the recommendations for developing a FinTech conducive environment in Pakistan.
The four key elements include: Regulatory Measures, Financial Institutions, Startup Environment,
and FinTechs themselves.
Components of a FinTech Ecosystem
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FinTech Ecosystems: Mature Hubs and Emerging/Nascent
Environments
A Mature Hub is differentiated by:
• Higher level of startup and investment activity
• Large volume of bets (number of deals) in almost every vertical
• Late stage funding deals for established verticals.
Emerging or Nascent FinTech environments:
• Do not have enough concentration of FinTech activity in one city to
qualify it as a hub.
• Activity is thinly spread across multiple cities.
• Key elements are either absent or underdeveloped.
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A Comparison of the Mature and Emerging/Nascent FinTech
Ecosystems
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Global trends aiding FinTechs
Regulation
s:
Balancing
innovation
with
oversight
• Balancing innovation and regulation: Promoting
FinTech collaboration and increasing customer
confidence
• Regulatory Sandbox: Flexible experimentation
while minimizing risks
• Industry input: An inclusive approach to
determining obstacles to innovation
• The two types of mindsets: Progressive and
Restrictive
• Flexible policies: Promoting FinTech businesses
• RegTech: Using technology to reduce the cost,
complexity and time in regulatory reporting
• International cooperation: Diminishing
geographical boundaries in the digital world
Progressive regulator
examples: FCA-UK,
MAS Singapore, ASIC
Australia.
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Key Regulatory Initiatives in Developed and Emerging Countries
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Developed countries are
focused towards facilitating
innovation and consumer
protection + risk reduction
while emerging market
countries are focused on
financial inclusion
• PSO’s and PSP’s to act as platforms for
FinTechs
• Focus of the State Bank of Pakistan on
financial inclusion
• Regulations facilitate financial institutions
but restrict small companies
• Payment regulations are the most evolved
Pakistan’s Current Regulatory Environment
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Source:
FinSurgents
research and
analysis
A closer look into the Regulatory Initiatives in Pakistan
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Recommendations
• Banks acting as platforms take the
regulatory burden while FinTechs
innovate
• Clear directives for the two types of
FinTech models
• Creating a dedicated FinTech
Regulatory wing
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Insights
• De-hinging banking innovation from legacy
structures
• FinTechs have shifted partnership dynamics from
licensing to profit sharing
• Banks and FinTechs have an independent
relationship
• Small banks - FinTech Partnerships to lead the
process of reducing transaction charges
• Eliminating connection between incumbent
acceptance and small companies’ survival
• Creating winning examples
• ‘FinTech collaboration is inevitable’ for large
players, but small players have a different
perception
Financial
Institutions
(FIs)
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• Large players are keen on owning FinTech incubators, but internal
challenges can hinder execution
• Views on FinTech collaboration challenges vary with FinTech readiness
• Banks face talent shortage to capitalize on FinTech related opportunities and
consider FinTechs as a talent source
• Insurance companies see themselves as technology driven, but they have a
limited outlook on FinTech collaboration areas
• FinTech companies are more open to cross-industry collaborations
• Telecoms are more inclined towards FinTech collaboration
Market Research Findings on FIs
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• FinTech coaching for all players
• Building FinTech awareness
programs and collaboration
platforms
• Eliminating the regulatory ambiguity
• Need for a FinTech consortium
Recommendations
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Startup funding is mostly local and
at an early stage, but there appear
to be early signs of international VC
funding coming to Pakistan
Overview of
Investments in
Pakistan
Startup
Environment
Source: FinSurgents Secondary Research 41
1. The startup ecosystem in Pakistan is currently emergent, but it is gaining pace
2. Accelerators and incubators are scattered across four cities – Karachi, Lahore, Islamabad,
and Peshawar
3. According to startups and banks, there is a lack of collaboration platforms in Pakistan where
FinTechs and incumbents can come together
4. Startup incubators see very few entrepreneurs interested in financial services products
because of the perceived regulatory uncertainty around this space and recommend the same
to incubated startups
5. Startup activity is thriving in the software and services sector of Pakistan
Findings
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• Need for neutral FinTech incubators
• Betting on the right FinTech leader profile
• So far FinTechs are geographically concentrated in the cities of
Karachi and Lahore
Recommendations
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FinTechs
Unreceptive attitudes of large players, complicated
regulations and deficient early stage funding cited as the top
challenges faced by FinTechs
Finding
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Areas believed to be impacted the most by FinTechs
The Emerging Markets Innovation Stack
Emerging Market Innovation Stack
Emerging market FinTechs must be
less capital intensive and serve
multiple segments
FinTechs enable the creation of payment rails within
emerging markets by enabling retail and online
payment acquisition and the aggregation of available
payment options, they create the foundational layers of yet another ecosystem – the startups.
A lower CAPEX allows FinTechs to break-even faster;
the non-linear growth of FinTechs enabled through
technology, makes them an attractive investment.
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Thank You!
Qasif Shahid
+(92) 300 200 9669
Lubna Razaq
+(92) 337 047 3874
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