HARDLY any sector of the economy has been left untouched by the global IT revolution. Ever-increasing market competition, along with an almost astronomical pressure to increase efficiency and margins — and cutting costs — has forced governments and private firms alike to rethink how they operate.

And technological advancements, rising internet and cellular densities, urban migration and an expanding middle class have all upended the status quo as far as modern retail banking is concerned.

Pakistani banks realised in the early 2000’s that the technological advancements presented them a unique opportunity to reach out to millions of the unbanked population, something that only years earlier had largely remained a dream.

However, in order for this to happen, the banks themselves had to become more integrated with each other.

TPS, a software company, is the owner and provider of the core ‘payment switch’ technology of 1-LINK — a payment processing network that interconnects 38 commercial and microfinance banks in the country and makes inter- and intra-bank transactions possible.

The company’s CEO, Shahzad Shahid, told this writer that “it was not easy to convince the banks in the early 2000’s to interconnect their ATM networks and allow other banks’ cardholders to withdraw cash from their ATMs. [But] people now realise that the [inter]network is a real strength”.

Digital transactions: While it has been almost 15 years since the advent of 1-LINK, paper-based transactions continue to dominate the landscape (accounting for around 34pc of all retail payments in FY15), according to the SBP’s latest payment system report. However, their overall volume declined for the first time in the country’s history in the last fiscal year.

The primary measure of the usage of debit/credit cards at retail outlets — point of sale transactions — grew by a healthy 38pc in value to Rs171bn in FY15

Simultaneously, the number of ATMs swelled to 9,597 by end-June (from 5,200 in 2010-11). The volume of ATM transactions grew 16pc to around 300m in FY15, while their value rose 21pc to Rs3.2tr. Cash withdrawals contributed 96pc to total volume and 83pc to overall value of all ATM transactions. These transactions, in turn, formed 11pc of retail electronic payments during the fiscal.

And the primary measure of the usage of debit/credit cards at retail outlets — point of sale (POS) transactions — grew by a healthy 38pc in value to Rs171bn in the year.

Yet, the continued usage of bank branches by a clear majority of people for routine tasks like paying bills creates a visible burden on bank branches; for instance, many of them have created designated windows where only bills are accepted and long lines of people waiting under the sun are a routine site as payment due dates approach.

According to a poll conducted by the job portal Rozee.pk in November 2013, 60pc of the over 3,000 respondents said they visit bank branches to pay their utility bills. Meanwhile, roughly 8-10pc of the respondents said they paid them each through internet banking, mobile banking and ATMs.

While these numbers are quite low, their general upward trajectory has given confidence to industry executives that digital payments will catch on with a majority of people in the near future.

“Pakistan’s banking industry is even more poised for disruption due to a perfect storm brewing in the connectivity infrastructure: the advent of 3G, sub-Rs5,000 smartphones, and a progressive [regulatory] approach,” noted Monis Rahman, chairman and CEO of Naseeb Networks Inc., which owns Rozee.pk.

“Today, digital banking or alternative channels are considered to be core activities of a bank. There is no resistance [on the banks’ part] now. The mindset today is more [towards] innovation and digitisation than what it used to be in the past,” said TPS’s Shahid.

Banks’ approach: A lot depends on a specific bank’s strategy when it comes to offering digital services. At this point, virtually all private commercial banks offer online banking facilities.

However, some of the mid-sized banks rely more on their digital footprint to lure in new clients and ensure that their existing customers stay loyal with them.

“Our cost of deposit is the lowest and our deposits-per-branch are the highest in the industry. And this is not because [the clients] think that we’re a foreign bank. One of the main reasons is the ability of our clients to interact with us through alternative channels, whether it is our online real-time framework or our ATM network with 97pc up-time. This digital ecosystem makes deposits sticky and makes our clients stay with us,” Shezad Arif, head of retail clients at Standard Chartered Bank Pakistan, told this writer.

He added that 75pc of all cash disbursements at the bank take place through ATMs, and only 25pc through branches. SCBP had 183 ATMs till last month, a network Arif said they are keen to expand.

On the other hand, banks with large branch footprints stress that they want to give their customers the maximum number of available choices and let them decide how they conduct their transactions.

“We believe that if our customers want to come to a branch, they come to a branch; if they want to go to an ATM, they go there; if they’re internet-savvy then they use the internet through their desktop, tablet or smartphone. Or they can conduct transactions through a basic Nokia phone. If they don’t want to use even that, or if a branch is far away, then they can go to a nearby [branchless banking] agent and get it done,” said Faiq Sadiq, head of payments at Habib Bank Ltd.

Industry executives also acknowledge that digitisation, though a capital-intensive exercise, also results in significant cost savings. Arif said it costs his bank, on average, one-third to conduct a transaction through digital means (online or mobile) than through a branch.

Branchless banking: Another facet of digitisation in the financial services industry is the rapidly growing branchless banking (BB) segment. Some of the larger banks, after witnessing the breakout success of Telenor’s Easypaisa, decided to enter the segment after 2008.

This franchise system relies on neighbourhood shopkeepers and small retailers who have partnered with cellular and banking companies alike and allow people to pay bills, maintain deposits, transfer money and receive remittances etc. By end-2014, the number of active BB agents stood at 159,500 and the number of BB accounts at over 5.4m.

A relatively new entrant, HBL has partnered with Warid Telecom for its mobile wallet service and with Nadra’s ‘e-Sahulat’ centres for its BB arm, HBL Express. This has given the bank access to over 8,000 BB agents, said Sadiq.

UBL continues to dominate this space among banks with its Omni, and MCB also has a largely independent BB operation. Meanwhile, virtually all cellular service providers have either partnered with microfinance banks or gone solo to provide BB services.

Published in Dawn, Business & Finance weekly, September 14th, 2015

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