The emergence of a digital financial services ecosystem, combined with a favourable regulatory framework, has created opportunities for Fintech businesses in Pakistan, which now number over 40 and offer a variety of ideas, products, and services.
Financial institutions are increasingly recognising Fintechs’ potential, and the necessity to provide user-centric and innovative products and services to the country’s massive unbanked population is becoming more apparent.
According to Karandaaz Pakistan’s report “Fintech Ecosystem in Pakistan,” there are over 40 significant Fintechs active in Pakistan in the following seven mainstream specialised fields.
- Payment Service Providers
- Digital Credit/Savings
- Payment Independent Software Vendors (ISVs)
- Merchant Aggregators
- Wallet Services
- Insurance Tech
- Identity Services
Payments are the most prominent, followed by infrastructure, investments, and insurance chances. This development also reflects the worldwide objectives of Fintechs, which have seen a growth in the payments market, particularly since the pandemic began.
The survey also revealed that regulatory support for Fintechs has improved significantly in recent years, with the State Bank of Pakistan (SBP) and the Securities and Exchange Commission of Pakistan (SECP) showing increased interest (SECP).
As a result of the epidemic, there has been a substantial shift in the adoption of digital financial technology on the demand side. Both the volume of mobile banking transactions and the volume of online banking transactions has increased by 102 percent and 42 percent, respectively.
Similarly, smartphone adoption has doubled in the last two years, with 81 million units sold by the end of 2019. (49 percent of mobile connections). By 2025, it is expected to have risen to 70%. This demonstrates a significant shift in consumer preferences and a lucrative market potential for Fintechs.
Investors of Fintechs in Pakistan
Despite the lack of statistics on Fintech investments in Pakistan, the analysis found that traditional angel and venture capital investors have been cautious with Fintech investments.
As a result, corporate houses are increasingly recognising this possibility, in accordance with worldwide trends. Large corporations are making direct investments in Fintech start-ups or funding them through their venture capital arms. Zong, NayaPay, Avanza Payment System, Keenue, VRG, and other companies are among them.
According to a study of 24 Fintechs, corporate entities were responsible for 54.2 percent, venture capitalists (VCs) for 21%, and angel investors for 12.5 percent.
Corporate investments will continue to climb, followed by a boom in VC and angel investor investments. Because of the SBP’s favourable modifications, the latter’s investments are most likely to rise (such as modernising foreign exchange regulations).
The payments industry, in line with global investment patterns, will absorb the majority of these investments in the foreseeable future.
Prevailing Challenges in Fintech Innovation
Even with legislative support, access to innovation finance, relatively strong infrastructure, and a youthful population, these start-ups are not yet targeted toward addressing the financial inclusion problem.
Only a few Fintechs, out of hundreds of start-ups launched in the last five years, are focused on financial services innovation. A minimum of these limited Fintechs is aimed at the underserved population. This could be because, to far, innovation efforts have been focused on enhancing the ‘delivery’ of existing financial products rather than developing new products that reach underserved portions of the population.
However, despite the focus on the delivery of existing financial products, the user experience is not usually at the heart of product development. Consequently, many low-tech savvy individuals are unable to benefit fully from the services provided.
The Fintech ecosystem in Pakistan has a bright future ahead of it. The RAAST program’s introduction, in particular, could generate a significant market opportunity for Fintechs to take advantage of.
Despite a number of obstacles, Pakistan may see a spike in the supply of Fintech expertise. This is mostly due to an increase in entrepreneurship enthusiasm, more successful start-ups, and increased investor activity.
Although it is difficult to forecast if financial literacy and inclusion will improve in the near future, the trend in smartphone adoption portrays a positive picture.
The payments section, followed by the infrastructure segment, is most likely to see increased activity in the near future. Fintechs may become more interested in the lending industry.
Financial institutions will tend to respond with enough rigour, given the regulator’s recent focus on gender mainstreaming in financial inclusion. The significant gap in women’s financial inclusion, on the other hand, remains a potential for Fintechs to capitalise on.
Institutional donors and other government agencies are likely to continue to support women’s economic empowerment through financial inclusion and independence, resulting in increased funding and technical assistance to close the gender gap.