Pakistan is a paper-based economy. The majority of our records in the financial, health, education or agriculture industry, are paper-based. A patient still carries his medical records in a file when visiting his doctor; a prospective employee still has a paper copy of his university degree. We love paper and are reluctant to change.

In my last board meeting at a top business school, I strongly suggested that we do away with the hard copies for the board meeting but was not supported by my fellow board members.

We are also a nation of manual processes. It’s no wonder it takes banks up to two months to decide on a credit card or personal loan for a new-to-the-industry customer. Similarly, it takes banks a couple of months to open a checking account for a private limited company.

We have so far managed to improve the front end (customer app) materially. However, the back end is manual without a hint of customer personas being built on the different services a bank customer uses. And there is a deep absence of artificial intelligence or the use of big data or robotic processing for repetitive transactions.

A world-class tier cloud service will have a far superior cyber security and recovery plan than a bank would typically have

This results in horrible customer journeys, very low financial inclusion, a high number of staff workers and high costs. As these inefficiencies are masked by the earnings made by lending to the government through treasury bills, Pakistan investment bonds and commodity lending, hence there is no pressure to digitalise.

Recognising this state of affairs, the State Bank of Pakistan (SBP) invited applications from the market for a new license: a retail digital bank license.

The SBP objective was threefold. Firstly materially increase financial inclusion. Currently, the entire commercial and microfinance industry only has 11 million active loan customers in a country of 220m people.

Secondly, the SBP hoped that the digital banks would significantly improve customer journeys and build better use cases to improve customer interaction with the financial industry. Currently, while there are over 50m mobile wallets, it is estimated that less than 10 per cent are active.

Lastly, it hoped that if the digital banks succeeded in doing this, commercial banks would be forced to follow suit. The precedent is the case of Easypaisa. Easypaisa brought about a financial revolution in domestic transfers, utility bill payments and branchless banking. The industry, after a while, followed, and financial inclusion improved.

If digital banks are to be data-driven, paperless and with no manual process, then they will need to store Terra bytes of data, have a very high usage of artificial intelligence and big data, harness blockchain where applicable and have an open API [application programming interface] architecture.

This will be possible immediately for those digital banks which do not have legacy tech software and are building from scratch. Creating data warehouses or data lakes are a serious challenge for institutions with legacy systems. The question then arises as to where this data will be stored. Should digital banks create on-premise data centres or use cloud computing services?

Globally the majority of digital/neo banks use cloud computing as opposed to physical on-premises data centres. There are three reasons for this.

Firstly digital banks are customer driven and want to focus constantly on the customer journey by improving the software rather than focusing on the hardware. An estimated 70pc-plus of a traditional bank’s IT budget is spent on its physical infrastructure rather than its software.

Secondly, cloud computing reduces latency and, at the same time, allows the ability to manage temporary spikes in transaction volumes. Thirdly, a world-class tier cloud service will have a far superior cyber security and recovery plan than a bank would typically have.

Given the high dependence on data for a digital bank, cyber security risk trumps any other risk. A good cloud service will not only provide the physical infraction but also advances analytics and cutting-edge software.

Before a regulated entity enters into a cloud computing agreement, it must be cognizant of the regulations associated with customer data protection. Pakistan is no exception, and there are restrictions on customer data being held outside the country and the cloud providers’ data centre being housed in hostile countries.

The SBP, recognising the importance of cloud computing in its latest regulation, has allowed banks to keep all their data in an in-country cloud computing service for material customer information. For data held outside the country, additional conditions have to be met.

Last week an international (top three) cloud service provider partnered with a local group and announced the provision and in-country cloud service. This is a great step towards the digital Pakistan journey.

The writer is the Chairman of the Pakistan Fintech network.

Published in Dawn, The Business and Finance Weekly, July 24th, 2023