PAKISTAN: Digital Financial Inclusion - A question of survival

Digital technology and #innovation as it is being embraced by the financial institutions and how consumers themselves are demanding it, is no longer considered something that’s novel or even trendy. Frankly, it is a question of survival for millions of people. We're a country with literacy rate of around 60% and financial literacy of less than 20%. Our GDP per capita is around $1,500. For context the United States is around $70,000. We are one of the poorest countries in the world with a GNI per capita of $1,280 and world’s fifth most populous country, with 230 million people, ranked 92 out of 116 nations in Global Hunger Index, unable to sufficiently provide food for nearly 40% of its population and with current food inflation running north of 40%.

This is not a question of what the next innovation is, it's a question of how these people are going to feed themselves and how this country is going to move forward.?

Pakistan is ridiculously under penetrated and pretty much any key metric that you look at, #financialinclusion ratio around 20%, household debt to GDP ratio 2.9%, the United States for reference is 78%, UK 86%, Canada 107%, but it isn't because in Pakistan people don't borrow it's because we borrow from the wrong places (informal loans), because we don't have a choice. Majority of the borrowers, nearly 100 million people, can't borrow from the banks because most of it is for small amounts, and it doesn't make sense to service a $100 loan or a $50 loan if the cost of #onboarding itself is around $20 in a traditional bank. It just doesn't work out, so the banks can't take care of the masses, so they end up going to the money lender next door. Same goes for insurance, our insurance penetration rate is a paltry 0.9% (this is ratio of premiums underwritten to GDP). Global average is 6.8% but the point being that when you start going through all these metrics, where less than 0.5% of our adult population actually has access to #equities or #mutualfunds with about 220,000 #retailinvestors on the exchanges, how are people going to protect themselves against externalities, invest in their growth and borrow to power their own business growth?

If you're not going to get technology to actually drive increased access to capital, increased access to healthcare, the human cost there is incredible.

So, when we talk about building digital infrastructure, when we talk about exchanging data these are not theoretical questions, these are not questions about another 20 bps on margin, this is the question of giving #credit to someone (100 million borrowers) who only has access to credit through informal market at an APR of around 100%, and to allow them to pull themselves out of the situation that they find themselves in and so increasing access to information, increasing #accesstocapital and doing it urgently in the most democratic way possible is the least our people, who are more privileged, is under a bounden duty to build systems that actually empower the people.

These are all critical questions, for a country of 230 million people, with 68 indigenous languages, with 50+ banking and non-banking financial institutions, it's simply not going to solve financial inclusion problem.

There are literally hundreds of different Pakistan's. Just seventy-five years ago we were 565 different princely states (before independence/partition) those brought together in the instrument of accession to the Dominion of Pakistan and India, but the point is that it is hubris on behalf of any bank, NBFI or #fintech to think that they can serve all of Pakistan, therefore, the only way to do it is to open up the banking system and the payment system and the data rails to as many companies as are qualified and certified and want to do this in a responsible manner and delivering that payment, that access to banking systems that access to the data rails.

So how do we get access to finance for the masses, the rural population, the remote villages?

We're a country with a literacy rate of around 60% (being generous here), so what about the remaining forty percent? Just because they can't read they cannot be financially included? How do you design a system for them? How do you design it when less than 30% of Pakistan actually speaks English, or where around 45% of the population uses feature phones, and like I said we have 68 languages, what is the right way to make that happen? Is it audio is it video? Possibly, and so innovating on authentication, innovating on consent, innovating on mobile interfaces which were not designed in the silicon valley in the sense the paradigms for design that makes sense here are natural and you know it just doesn't work for the larger population of Pakistan.

We have to think about a whole new design paradigm for the movement of money and maybe it works out to be something simple like in Urdu I'll say, “Yasmin ko panch saw ropay bhej do,” which as you know means “send Yasmin Rs. 200” and the fact that it's coming from my feature phone from my voice and I'm saying it in a way to a contact that's probably in my phone, maybe that does the #authentication on its own. This maybe far away but this is a journey that needs to be taken with the user in mind first, not about competition, not about who's the first to launch a #chatbot, there are people to uplift and that's something that we cannot lose sight of.

Need States

As stated earlier, there are 100's of Pakistan's, so literally there are thousands of different need states (use cases) like a farmer in Multan who's growing mangoes will have a very different #cashflow curve than a wheat farmer in Punjab from a Carpenter from a Schoolteacher, there are thousands of use cases all of them are cohorts. They all have different need states which means they require a certain type of credit, they require a certain type of insurance, they require a certain type of #savings product to make sure that their cash flow curve is smoothened over time and so that they can they can grow and create wealth over time.?

So if we're going to do that, the traditional distribution architecture of financial markets where the distributors essentially do nothing but financial distribution, be it brokers, agents, aggregators etc., are not the right people to distribute financial products to these borrowers because these distributors have to spend money to reach these people and that in itself makes a product unaffordable, particularly at a small scale. So, the right people to service these cohorts are people who already have transacting relationships with them so there's a cash flow relationship that's already been established, the collection can be integrated, data flows and trust is already built in because these people have been transacting for a while, therefore, we want to be able to, not every company but any company should be a fintech company. You want to enable any company to become fintech companies so that they can provide these digital products and insurance products and #payment products to the people who are interacting with them.

Now to do that, one can't design thousands of different financial products, that's just doesn't scale.

One of the ways to do it is by unbundling the entire banking and financial system into building blocks what we call “primitives,” (whereby each protocol offers a specific financial function), so stored value accounts, using a engineering term called “CRUD” (Create, Read, Update, Delete) which is mutually exclusive and collectively exhaustive set of operations that one can carry out on a stored value account .?

A stored value account could be any type, could be a savings account, a current account, a loan account to #mutualfund and insurance policy, anything that holds present or future value and is regulated. We want to be able to programmatically create, read and delete these accounts and the "use" of this is essentially payments because money in, money out, that's an update on the stored value account across the rails, be it bank transfers be it #cards, #visa, #mastercard, #unionpay, PayPak,?doesn't matter, to do a dressing which is creating and resolving addresses but what is referred to as issuing infrastructure. Can I issue a virtual account number, can I issue a virtual card number, can I issue a RAAST ID and route it? Addressing, authentication, authorization; these days is known only as PIN but it could be like a cross-origin authentication type login like login with #plaid in the US or login with Cross River in Nigeria, login with an institutional login and then authorization, is nothing but a rule engine to say what is the permitted credit and debit, and then the last category is what is called utilities so it could be data #APIs, it could be #KYC, it could be bank account verification APIs (which is where Plaid began) it could be any of these that facilitates a transaction.?

Now if one (actually now this is all unbundled into three categories) chooses the right set of blocks from these categories one can actually design theoretically any financial product so you take a loan account you take a fund transfer API and you take a tax challan or a tax invoice verification API you essentially have an #invoicediscounting product because you have a verified tax data you have a loan account on tap that you can open up and you have the fund transfer API to finance that invoice with a loan account.

The same goes for a liquid mutual fund and you take a debit card issuance API and you take a bank account verification API, you put them together you have nothing but UBL Liquidity Plus fund, for instance or NBP Government Securities Liquid Fund through Mawazna. So basically a money market fund on tap that you can spend from, so you could theoretically design any financial product which makes sense for a particular cohort and that's what needs to be done. Basically, enabling these different functions.

Lastly, in regard to regulatory landscape, we need regulations which support fintechs, upcoming Digital Banks and other non-bank ecosystem participants in Pakistan and not be too restrictive. We need to always keep those end consumers in mind with every part of this process.