Financial inclusion remains the bane for all emerging economies and Pakistan is no exception. In a country of about 220 million people, there are less than 10m active loan customers. Although the number of bank accounts has now reached 55 million, active accounts remain low.

Essentially we are a cash society with Rs6.3 trillion outside the banking system. We have yet to provide a credible solution for the market to shift from cash to digital. Even after a credible solution has been created, the inclusion in the tax net will be a challenge. So far the approach to reduce financial exclusion has mostly been by easing account opening, customers can now open a mobile wallet by simply sending a text message, and creating basic use cases at the customer level.

An alternative approach which could yield great success could be the digitalisation of the manufacturing supply chain and informal value chains. Till now the digitalisation of this supply chain has remained outside the focus of the digital financial providers.

This is primarily because the present solution set has focused on individuals, driven by bank accounts towards financial inclusion and an ineffective tax policy that allows informal value chains to continue without being taxed.

The current approach needs to be combined with the digitisation of the value chain of manufacturing, agriculture, construction and fast-moving consumer goods

The value chain of consumer goods in retail/distribution, agricultural and construction far exceeds the value chain of government agencies, financial institutions and telephone companies. The institutional structure, formal and informal, that enables the consumer good retail operations, agricultural distribution, and construction, has remained largely outside the digital financial landscape. Financial institutions target their infrastructure, marketing and commercial proposition for consumers while ignoring the unique needs of the value chains of the most pervasive segments of the business and society. Without being embedded into the aforementioned value chains it would be an immense challenge for financial inclusion to scale in a diverse country with a low literacy rate as well as low per capita income.

Imagine a digitised supply chain for vendors, manufacturers, distributors, wholesalers, retailers, banks and their branchless banking agents on a single platform. A platform that allows the combined resources of the entire value chain to work towards inclusion for the sake of efficiency and better liquidity. Recently, the market has seen startups digitally connecting manufacturers directly with the retailers. These platforms have obtained validation as they have been able to raise higher seed investments than the average. This institutional, top-down approach towards financial inclusion by digitising entire value chains can produce acceleration in the reduction of financial exclusion.

Corporations can use the disintermediation to reduce dependency on their distributors, reduce financial costs of collections and get retailer transactional visibility. The data generated by having visibility at the retailer level and then potentially at the end customer can be a force multiplier for financial inclusion. Distributors can use this as a means of convenient and fast payments to manufacturers, reduction in retail field operations team and reduction in the cost of collection. The retailers benefit from the convenience as retailers are usually sole proprietorships run by the owner or their family members and need to clear cash before closing shop.

Banks and wallet providers can use such institutional platforms for increasing deposit share and supply chain entrenchment. Licensed payment system operators and payment service providers use the digital supply chain platform as an aggregator of business-to-business and consumer-to-business transactions. Islamic banks/funds see it as a vehicle to reduce the operational cost of financing and getting data assurance on financing commodity trade.

The State Bank of Pakistan has recently worked in collaboration with financial institutions and fintech to encourage supply chain payments and financing under the National Financial Inclusion Strategy that aims to digitise entire supply chains to bring them into the formal sector.

It is evident that the current approach on focusing on just the end customer by easing account opening combined with a limited set of use cases by itself will not be enough to create a digital nation. The current approach needs to be combined with the digitisation of the value chain of manufacturing, agriculture, construction and fast-moving consumer goods. Other than the transparency of data, the actual conversion of cash to digital will also take place.

Published in Dawn, The Business and Finance Weekly, November 30th, 2020