Enticed by disruptive and yet innovative technology, the financial system is reorganising itself to regain its robust health, reduce costs and make its services more efficient and affordable after the 2008 crisis. Fintech is ushering in a silent revolution.

Its outreach is expanding and it now embraces activities that can be broadly categorised into: Lending tech, Payments tech (billing/remittance), Crypto currencies (bitcoin), Wealth Management (Robo advisors), Crowd funding, Insurance and Regtech (regulations).

Pakistan’s financial sector has responded to the challenges of applying these new technologies by strengthening its human resource and developing customer interface platforms. Most banks now have Chief Innovation Officers or Digital Initiative departments.

Various online Payment Systems and Mobile Apps have been developed to encourage footfall in branches.

The demand for a swift payment mechanism is evident from the quick adaption of digitisation efforts and rising e-commerce platforms. The latest State Bank’s Annual Performance Review states that “e-Commerce is picking up with 571 merchants offering their products online. During FY2017, 1.2 million transactions valued at Rs9.4 billion were processed through e-commerce”.

The SBP report further states that “25 financial Institutions provide internet banking and 18 have mobile apps. During FY17, 25.2m internet banking transactions were processed valuing at Rs969bn. Mobile banking accounted for 7.4m transactions valuing Rs141bn, representing an annual volume growth of 32 per cent and 12pc respectively”.

Pakistan’s financial sector has responded to challenges by strengthening its human resource and developing customer interface platforms

The slower uptake of mobile banking may be attributed to frequent technical errors. High speed internet connectivity is a much desired pre-requisite for internet and mobile banking.

Moreover, concerns of data hacking through misplaced/snatched phones are barriers in the mind of consumers.

To counter some of these issues, HBL is among the first to offer a biometrically enabled mobile app. Bank Islami has also recently launched its own biometric app.

To further tap this market, social advisory is also on the cards. Apps using location will be able to advise the user of the closest ATM, and the discounts that the banks provides. Currently, a tech start up is providing proximity discount alerts on HBL’s mobile app.

The other aspect gaining traction is the process re-engineering to increase efficiency. For example, a Letter of Credit can soon be opened electronically, reducing the time from three days to four hours.

Similarly, FIs are also simplifying the process of getting a basic, low transaction volume account through biometric verification in just an hour or so. This is the first step towards financial inclusion.

Bank Islami has recently launched its biometric banking, enabling opening accounts with biometric impressions. Given the large segment of the population seeking Shariah-compliant financial services, the product may have better penetration.

However, globally the discussion isn’t about process reengineering, it’s about change in the model itself.

Conversations on tapping digital stamp on trading goods and services and cash management terminal access to clients are some of the examples. For large international customers, cash management and foreign exchange swaps are now being traded through the company’s own terminals — making them the most affected revenue streams for financial institutions. The gurus in the field are hinting at digital platforms, making the current model redundant.

In the context of Islamic financial institutions, this presents a tremendous opportunity as they don’t have a legacy problem. Islamic banks can develop Shariah compliant products more in line with their way of doing business.

One such low hanging fruit is auto and housing finance, if digitisation efforts for quicker turnaround and greater reach are introduced.

Crowd funding, which is perhaps closest to Islamic financial institutions’ mode of doing things, is not encouraged by the regulator as various Modaraba scams have burnt consumers’ fingers. Little work has been done and, even in better regulated jurisdictions like Singapore, Malaysia and the UK, there are only a few Islamic Crowd funding platforms.

A challenge faced by Islamic banks is the increased spending on research and development which is already high due to cost of training personnel and product development needs.

The harbingers of innovation in the financial sector are the non-financial telecoms with huge data of biometrically verified customer base and their payment history. Telecoms are already offering payment services and telebanks micro-credit services.

The use of m-wallets (over 27m as of June 2017) for microfinance lending is also being experimented with. However, given the upper limit of Rs 50,000 for SMEs, telco banks may be entering into traditional bank’s space and may give them a tough competition.

On the collection side, there is a need for the financial sector to develop products so as not to lose out to some unconventional sectors. In China, for example, Alipay (a company of Alibaba) has created a money market fund from the change left in the accounts after payments. Perhaps companies like Careem can do the same, given the scale and regulatory support in due course.

Beyond banks, Al Meezan Investment’s app lets you draw funds out of your mutual funds account and credit to your Meezan bank account which can be withdrawn at the ATM within half an hour. This in principle serves as an alternate to keeping ready cash/deposit with the banks.

On the technology side, there are several Fintech startup firms in Pakistan. However, according to Mr Rehan Akhtar, Director Digital Financial Services, Karandaz, a lot of Fintech start-ups need to build deeper understanding of financial system to be able to disrupt them adequately with their solutions.

Data is another aspect of technological development. Some large financial institutions are hiring Data Analytics teams and software specialists to assess, innovate and design new product offerings. Needless to mention, collaboration is the buzz word here.

With estimated ownership of 40 million smart phone users and 120 million millennials as per various press reports, the growth in this field is unprecedented. Dynamic changes in the job environment and skill set demands that educational institutions also respond and upgrade curriculums. Synthesising the subject matter with technology driven programmes may give students a competitive edge in exciting times to come.

The writer is Senior Manager at IBA Centre for Excellence in Islamic Finance.

sahson@iba.edu.pk

Published in Dawn, The Business and Finance Weekly, December 18th, 2017