- Despite 83% online transactions, 64% of fund transfers still rely on cash due to cyber security concern
Pakistan has developed a robust infrastructure for online banking, which has been tested during Covid-19 and onwards. Many commercial banks are offering limited digital banking services at present as well. In January 2023, SBP awarded No-Objection Certificates (NOCs) to five entities — Easypaisa, HugoBank Limited, KT Bank Pakistan Limited, Mashreq Bank Pakistan Limited, and Raqami Islamic Digital Bank Limited. These entities received In-Principle Approval (IPA) in September 2023 to prepare for operational readiness, signaling a new era of digital banking in the country.
Pakistan is on track to roll out seamless digital banks in 2025, with at least two of the five financial entities (Mashreq Bank and Easypaisa) in the digital race have been awarded Digital Retail Bank (DRB) licenses (Mashreq Bank has been awarded restricted license). Success in the small-scale trial phase would lead to full-scale digital retail banking operations in the years to come.
The DRB license represents a leap forward in expanding access to financial tools. Although Pakistan remains a tech-savvy, young, and largely unbanked financial market, the five new entrants are well aware that it will not be easy to win customer trust for full-scale banking on smartphones. Many consumers in the country are used to queuing in long lines to ensure funds are safely transferred, especially in an environment where issues of cyber theft and data breaches are prevalent.
As per SBP’s report, 83% of financial transactions are conducted online. However, in terms of total fund transfers, some 64% are still carried out through physical banking methods like cash or cheques suggesting that large payments are still being made through conventional channels due to people’s mistrust of technology and fear of cyber theft. The issuance of licenses addresses challenges posed by rapid technological advancements in two key areas; enhancing digital literacy among customers and implementing robust cybersecurity measures to safeguard customer trust and maintain the financial system’s integrity.
The five banks—competing among themselves and with conventional banks, which have decades of experience — are ramping up their preparedness. They are forming teams, finalizing banking apps and deploying technology to enter the tech-savvy, young, and still significantly unbanked Pakistani financial market, particularly in remote areas. The other three banks are at different stages of “operational readiness” in all their functions, including governance, risk management, capital requirements, compliance and audit, consumer protection, business continuity, cybersecurity, product development, deployment of technological infrastructure, and the formulation of relevant policies, processes, and procedures. After operational commencement, digital banks will help develop a digital ecosystem, enhance customer experience, and provide affordable digital financial services, including credit access to underserved segments of society.
Pakistan is in the midst of significant change, which has accelerated exponentially over the last five years. The five digital banks are set to revolutionize the lending landscape in Pakistan. These banks are tasked with making a difference in the financial sector, doing what conventional banks have failed to do, such as SME financing and catering to banking needs in remote areas. They aim to meet the financial needs of businesses, rather than lending all their deposits to the government, and to promote financial inclusion by offering people-friendly, reliable, and trustworthy services to win the trust of customers using digital financial transactions. Their success depends on changing mindsets from manual to digital transactions, replacing decades-old habits by earning trust in the technology, and increasing the number of customers through the introduction of customer-centric products, ultimately making digital banking mainstream.
Experience suggests that it will take another 10 to 15 years to completely shift people from conventional banking to digital banking. Lending will be key to the success of digital banks. They are expected to lend more than conventional banks within five years. However, they will still have to rely on their counterparts to generate deposits.
Digital banks are also expected to reduce the time needed to open a bank account for corporate entities to around one day, compared to the current process of about one month. Similarly, they will expedite lending to industries, reducing the time from one month to just one day.