13 mins read

Fintech in frontier markets and the Goldilocks equation

As tech industry founders and mentors we have always been curious about the absence of Fintech pitches from competitions we judge in the region. Let’s restate that – absence of Fintech pitches with teeth, plans with a bite that would make us believe that team and the idea being presented had the potential to change communities around them. Products that would turn us into instant evangelists and believers. Perhaps it is not so much the absence of pitches, it’s the quantum, the volume that comes out in the open compared to the decks we see from other spheres as part of our work.

For the longest time, we felt the issue lay with deep pockets required to make a Fintech play work in Pakistan. But we weren’t sure if our read on the industry was right. We were also curious about why we were only seeing plays that focused on payments (Simsim, FINJA, Foree, Phonepay, Keenu to name a few) but not much on the more advanced concepts and themes visible in the same field.

Was it because the financial services playground was by definition hostile to new ideas, to innovation, to change? We were quite sure demand side was not the problem. We would all love to pay using a tap and pay application at the corner grocery store, buy automobile insurance on the phone, send and receive funds across borders with an app, book movie tickets for any show across the city, refinance our home loans, check the status of our financial health and our credit scores before we drop off to sleep and more. We were also quite sure the despite our geekiness, we weren’t the only one with this wish list. That there were other users who given the convenience and impact offered by such tools would be happy to sign up and pay for them. What were we missing?

CFA Society of Pakistan and Nestio to rescue

Yesterday at a CFA Society of Pakistan event supported by The Nestio technology incubator in Karachi we found our answers. If you are not in the mood for a long discourse, the short answer is Goldilocks conditions or the Goldilocks principle. It refers to a scenario across multiple fields of science where things are just right for something to happen (thank you Faisal Khan). Life to emerge, Microsoft to take off as a global business, a medicinal compound to have a desired effect, a contagion to spread or be contained and payments systems to reshape themselves as a self-evolving organism in frontier markets.

The answers to our questions came in small packages of insights powered by two refreshingly honest panels comprised of bankers, analysts, investors, regulators and technologists.

A word of fore warning. While our theme was Fintech, the discussion in the panels focused on payments systems, specifically mobile payment platforms. Surely there is more to Fintech, we asked. You have to start with payments, we were told.

At first look mobile payment numbers in Pakistan look quite attractive, user activation and engagement have been a challenge. Over ten million mobile wallet accounts were opened in the last decade. Only two million are active. Here active is defined as one executed transaction in the last 90 days. Stricter boundaries around number of transactions over a smaller time period yield even lower figures.

Given the number of accounts, the total number of transactions in the system conducted by or with mobile wallets are not indicative of wide spread acceptance, usage or adoption. Number of transactions conducted with smart phones, credit or debits using QR codes, account to account transfers, metrics of retail or individual use cases, are all on the low side.

What would it take for fintech to take off in frontier markets?

Payments is where it starts. Get payments right before climbing higher on the ladder

There are a number of necessary conditions for mobile payments to take off. The first is smart phone penetration. The second is mobile payment products and availability of m-wallets. The third is a supportive regulatory framework. The fourth is large pool of on boarded merchants where mobile payments are accepted. The fifth is effective use cases for consumers and businesses. The sixth is scalability of technology infrastructure. The seventh is tech savvy customers who appreciate convenience and are willing to work through the initial kinks in the system.

These requirements are not just necessary for payments. They are also necessary for most Fintech plays. They represent the so called Goldilocks conditions or equation. Not too hot, not too cold, just right. Once the seven elements are in alignment conditions are right for a payment play to hit critical mass and clear the path for others to follow. Mobile payments take off, become a viable business, barriers for higher complexity products fall in natural order. Because payments provide validity and proof of concept for a given market and the foundation required for other products to succeed. Without an active and widely used mobile payments network (or two) in place the doorway to new products in the Fintech space will remain closed.

Softer yet safer regulations. Tiered capital slabs for market entry

There are three reasons why banks in general are not committed to a payments play. They take away budgeted resources from core businesses that are operationally less complex and more profitable. Payments require the ability to be nimble, agile and flexible which is difficult for a regulated entity to do. Beyond the environment, banks are a process oriented beast and changing processes to support a new payments play requires levels of commitment that most boards and management committees are unable to support.

The first iteration of mobile payments regulation is designed and focused to enable bankers to enter the payments market. This is the reason why capital requirements tend to be higher in the first few rounds of mobile payments regulation. Not as high as a bank but also not as low to be in reach of every technology entrepreneur.

Central banks set the entry threshold keeping bankers in view because banks are a known well understood commodity. While banks may launch or initiate payments plays to explore the opportunity most bank sponsored plays become part of the living dead. Higher capital requirements lead to a natural selection mechanism that favors capital providers more than entrepreneurs and founders. Rather than agile and nimble footwork required to make things work in early days, we end up with behemoths stomping the grazing ground and seedlings with equal fervor. Local capital providers are notoriously difficult to partner within frontier markets when they become sole gatekeepers. More so when the relationship requires access to keys to the kingdom.

Pakistan is a rare market (one of two in the world) where a trio of bankers acquired by a telco operator reshaped the market using the initial versions of the payments enabling regulation. The revised versions of payments regulatory framework tend to focus on the non-banking community and introduce tiered capital requirement for market entry. It is important for the non-banking community to be heard when the regulatory framework is reviewed and when entry capital requirements are being finalized.

The challenge faced by the central bank, the ask is high. Reshape the payment landscape, support innovation and change, while protecting consumers and the current system. Ensure that the right pedigree of entrepreneurs, the ones with right motivation, the right incentives enter the market. While failures in the tech sphere are common and tend to have isolated impact, a payment system failure would not go down unnoticed. It would take its customers and their households with it. Depending on how well connected and integrated the network was, it may generate a crisis of confidence within the industry and create a contagion that may spread across other segments within financial services.

Capital is taken as a signal of comfort by the regulator. It doesn’t just provide a cushion to ride over bumps in the road, it is also valid and well tested indicator of market confidence in a founding team and its pedigree.

Education of the ecosystem. Exploring the edge of innovation

Travel is a great teacher and enabler. It allows us to witness firsthand how other markets tackle the same problems we are facing. Participants in the ecosystem as well as the regulator need to devote resources to explore markets that share our profile. Beyond the conference circuit, there are relationships in place at the central bank level with active participants in the payments and technology space across the region. Activating these relationships to ensure there is a regular transfer of ideas, models, and frameworks across markets is one benefit. A secondary benefit is collating opinions and requirements from external investor and presenting progress made in our domestic markets. In addition to educating oneself it is just as important to be seen. Starting conversations and dialogues paves the way for future collaboration. It also facilitates cross pollination across borders and markets.

Onboarding merchants and retailers first, not consumers

If no merchant or retailer will accept payments through your wallet or tap and pay application, mobile payment networks are not going anywhere. Widespread merchant acceptance leads to consumer acceptance and activation. Not the other way round.

Merchant acceptance is not possible without a concerted onboarding effort. Smaller retailer and merchants typically lean towards cash and need strong incentives to switch to more documented modes that lead to higher tax and reporting burdens. In Pakistan, that challenge has been addressed by using distributors to push wallets to smaller retailers. Distributors manage a large amount of cash and have suffered problems with cash leakage, collection, theft, security services, insurance premiums, and embezzlement for decades. Mobile wallets solve all of these problems. It is easier for them to push mobile wallets down their supply chain than for a bank or digital payment provider to sell them to individual retailers.

A frontier market like Pakistan may have as many as 600,000 merchants. While we don’t need to get all of them onboard the critical figure is close to 200,000 – 250,000 mark. Think about this for a second. Even if you have the will and capacity to knock on all these doors and the infrastructure to process their transactions, how long will it take for contracting teams to parse, generate and process 250,000 onboarding contracts. The same challenges apply to bio-metric verification, physical account opening forms and technology infrastructure. There are internal scalability challenges not necessarily related to will or technology, that need to be addressed to retool industry back ends. To first scale up, then successfully ingest a onetime influx of merchants and then scale down.

The good news is that the on-boarding effort originally started by Tameer Bank is now being supplemented by HBL, Jazz, UBL, Alfalah and other wallet providers. This additional allocation of capital to getting merchants onboard is going to help everyone in the field. Even if some of these teams fail to get traction, their conversion dollars will go a long way in moving the needle in our market.

2020 or 2021 is where we will be able to tap and pay faster than cash

Two interesting questions were posed to the panelists.

The first was an estimate for the year when it would be faster to pay through tap and pay compared to physical cash from your wallet in Pakistan. You show up at a restaurant, at your corner grocery store, at the popcorn counter at the cinema, place your order, wave your phone and walk away. Technologically speaking you can do that today. There are vendors that accept payments using tap and pay or working through QR codes in larger cities. Careem, Uber and Bykea have also brought ordinary rickshaw drivers (tuk tuk for our Far Eastern friends) into the payment loop. Yet the option and behavior is neither common place nor pervasive as yet.

The panel’s answer for that year when mobile wallet become the norm rather than an exception ranged between 2020 and 2021. With a caveat that if the regulator decided that this was a key strategic initiative required to energize the economy, it could even be sooner, given Goldilocks conditions are met.

The second question led to an interesting side bar. What if in 2021 we are a cashless economy and your phone dies, gets lost or runs out of power? Also how will people without phones fare because there will always be a segment of society that would not be comfortable with technology due to reasons of preference, access or affordability. The answer addressed a primary concern. Most cash less societies are not truly cash less and the same would hold true for us. We would transition from a “cash only” economy to a “less cash” economy.

Innovation is not going to flow from banking or telcos

Perhaps the most surprising yet honest confession from the bankers on the panel was the above statement. When we set up the panel discussion we set it up as a conflict between evangelists and cynics. The evangelists came from banking. The cynics came from the technology industry. It was a surprise to see both groups debating the same point of view from one side of the table.

Banks are not geared to be innovative. They are geared to be safe. Safety is in following the well traversed, the well understood path, not the road less traveled. This is by design given the role banking systems play in the flow of commercial transactions through a system. A technological business failure may not necessarily sink a society. A single bank failure can trigger a global recession under the right conditions. Two generations over the last one hundred years have witnessed the pain global recessions bring with them first hand.

Once the path becomes well-trodden and well trafficked banks will follow. Not before.

The same is not true for telco players but their burden is somewhat similar. Telco operators are large monolithic organizations not designed to be nimble or agile. There are two factors that feed that mindset.

First, as a regulated licensed entity, the cost of the license and the infrastructure investment (just like banks) acts as a natural barrier to entry. When the price for a seat on the table starts at a few hundred million dollars and ends at a few billion dollars, competition for seats and tickets is limited. It also doesn’t help that telco operators are headquartered in the federal capital territory which is essentially a different planet compared to the rest of the country. It doesn’t matter which part of the world you are in, federal capitals thrive on a gate keeping, rent seeking mindset. It is embedded in the psyche, seeped in the water. It doesn’t matter how innovative you were when you landed, spend enough time in the territory and you will make yourself fit the mold.

Our hopes, therefore, need to be pinned on an external instigator. Someone from outside the banking and telco space needs to take the lead. With the patience and persistent to hew the path first so that the two industries can follow safely in their footsteps.

Given the amount of capital required to enter the payments space our likely candidate will be an external foreign player. Ant Financials acquisition of Telenor Bank and Tencent’s search for a target to acquire in Pakistan feeds the trend. To be followed by announcements from other bigger players in 2019.

Local investors despite the talk have difficulty committing large amounts of long term capital. There is an issue with expertise and belief in the underlying opportunity. Family offices and industrial conglomerates are driven by their need to diversify Pakistan exposure and are often too jaded by their high contact experience with local markets, players and regulators.

The problem lies with outsourcing innovation to external providers of capital and ideas. From a national interest perspective that is a double edged sword. If we outsource innovation to others, we will never learn to innovate ourselves. External driven innovation models will always favor an alien worldview. It may be beneficial but it will always remain an acquired taste. While society at large would benefit from resulting innovation, real payoff will flow to external owners who saw the opportunity, allocated capital for it and innovated in the first place.

Pakistan’s regulatory burden

Pakistan is held to different compliance standards given its unique geopolitical context. This one fact leads to a significantly higher burden of regulation for market participants. We often see comparisons with other markets as well as our cross border neighbors. The challenge is the burden laid on our regulators to go the extra mile when it comes to the movement of cash, currency and other liquid assets across payment channels.

For years the undocumented economy was viewed as Pakistan strength by armchair economists. The official numbers didn’t matter because cash driven parallel channels thrived on undocumented flows. The documented economy finally began to grow in early 2000. So did the undocumented economy but the proportions began to change in favor of the documented sector. A 4th generation national identification platform (NADRA) linked to the banking and taxation administration has made it difficult if not awkward to hide wealth in the documented financial system.

While we have moved forward, there is work that needs to be done in terms of incentives, mindset, education, ease of doing business and reducing frictional cost when it comes to interacting with taxation machinery. These are all drivers that have been used to argue against documented mobile wallet payment platforms. Powerful, practical, commercial incentives need to be created to offset these challenges. The goods distribution push to get retailers on board is one such example. Where the offset offered by mobile wallet by big enough to overcome the frictional cost of additional taxation.

State Bank of Pakistan has been privy to these debates. We have said this before and continue to remind audiences that the ask expected from the central bank is high. Grow and transform the financial ecosystem yet retain a balance between safety and security. Manage expectations and perception with external stakeholders who continue to ask us to do more. Encourage innovation yet create filters that would ensure that only teams with the right credentials and value system step onto the dance floor. Reduce the chances of abuse and disappointment. And side by side with all of this keep a central focus on their core mandate. Regulation, supervision, and review of the banking system and all its associated moving parts.

Yet despite the above ask State Bank has always been responsive, open to feedback and accessible to both consumers and entrepreneurs. As long as conversations and dialogue continue between the two we are hopeful that we will be able to find a middle path that will allow us to sufficiently de-risk payments for technology entrepreneurs, banks and the “do no harm” mandate of the central bank.

The Goldilocks conditions.

Two decades of association with financial services and technology has gifted us with many friends who operate at the intersection of the two fields. When we sit down for a cup of coffee, get on the phone with each other or sit across on panels like the one hosted by the CFA society we all feel the common vibe. There is something in the air. Buzz, anticipation, electricity. The time is finally right for Fintech platforms to take off in Pakistan. In a discovery phase, different recipes are tried out to test traction and effectiveness. We would say a discovery phase would define us just right as a market.

It is a question of when, not if before some combination of talent, capital and resource stumbles upon the correct mix of ingredients we have been looking for. The mix that will make the payment ecosystem go critical.

If you can make it to the table before that happens, you will be in for a ride of a lifetime. If you don’t, you will miss the bus on one hundred million consumers starting afresh on their payments journey with their brand new mobile wallet applications.


The Fintech smackdown was organized on 18th December 2018 by the CFA Society of Pakistan in collaboration with The Nestio, PASHA technology incubator in Karachi.

The first panel included Shahid Mustafa from Telenor Bank, Faisal Khan from Faisal Khan and Co (Istanbul, Turkey) and Faizan Siddiqi from Interlink Multi Media.

Shahid was one of the three co-founders behind Tameer bank and recently returned to the rebranded Telenor bank to roll out his grand plan to get his mobile wallet in your pocket. Faizan is a well-regarded and respected technology industry investor and growth expert who is also a big believer in the transformative power of payments done right. Faisal Khan has been the man with numbers and insights when it comes to understanding financial services field research and making payments work in frontier markets. Faisal flew in specially for this event from Istanbul, where he is based these days.

The second panel was moderated by Ali Farid Khawaja, a Fintech industry analyst who also runs a corporate investment fund out of London and has rebooted one of the oldest brokerage brands in Pakistan. Ali asked and posed tough questions and repeated went after the jugular of the two bankers on his panel. Atyab Tahir who runs the digital transformation team at HBL, the largest privately owned bank in Pakistan, and arguably the most forward looking. Omer Salimullah, who is in the process of setting up Pakistan’s first digital bank working within JS Group and also the key resource behind the Open api initiative at JS Bank. Omer and Atyab were accompanied by Zeeshan Nawaz from Securities and Exchange Commission Pakistan who is the Secretary of the commission task force on FinTech related initiatives.

After the two panels Dr. Inayyat Hussain, Executive Director from the State Bank of Pakistan took the stage, presented the perspective of the banking and payment systems regulator and answered a number of questions posed by the panelists and members of the audience.

We thank the CFA Society of Pakistan, The Nestio team, SBP and SECP for their patronage of the event. We are also indebted to the panelists who took time out of their schedule and shared their insights with the Fintech community of Pakistan. The views expressed here are their personal opinions and not a reflection or representation of their employers or their partners.