Breaking the legacy mindset of large commercial banks

KARACHI: Is the legacy mindset of large commercial banks that sit atop assets of trillions of rupees stopping them from jumping on the digital bandwagon?

While up-and-coming players tap into new segments like mobile wallets, big players seem content with their decades-old business model that revolves around taking deposits and investing in risk-free securities.

“There is definitely a legacy mindset of how to do business when it comes to the banking industry,” said Karandaaz Pakistan Director Digital (Financial Services) Rehan Akhtar, a non-profit focused on promoting access to finance for small and medium-size businesses.

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The level of financial inclusion in Pakistan is significantly lower than regional peers. Only 21 percent of adults had a bank account in 2017 compared to India and Bangladesh with a banked population of 80 per cent and 50 per cent, respectively.

Despite their brick-and-mortar networks in most urban centres of the country, the reach of traditional banking is still very low, said Akhtar, whose organization enjoys financial and institutional support from the UK’s Department for International Development (DFID) and the Bill & Melinda Gates Foundation to promote digital financial services.

In order to stay relevant in the fast-changing financial services landscape, he says banks need to realize the difference between vendors and partners. “While vendors are part of a company’s cost side, partners such as fin-techs are part of revenue,” he said.

Fintechs are niche-focused financial services companies that leverage technology and trigger innovation for their clients, such as banks, which are too big and bureaucratic to innovate on their own. Karandaaz has conducted two challenge rounds for fin-techs and given seed money to startups to take their ideas further.

Partnering with fin-techs requires a “very different mindset” and openness to share customers on part of commercial banks, he said. But reaching out to new customer segments requires banks to rethink their business models in terms of both distribution and products, he said. “Quite a few banks have started digital initiatives. I believe banks should give more resources to such initiatives.”

Karandaaz is undertaking a project called Digital Payment System (DPS) with the help of the State Bank of Pakistan (SBP). It is aimed at creating a modern payment system involving a hub platform to leapfrog its payments landscape and reduce the cost of digital transactions to a very minimum.

The hub will be owned and governed by all participating banks and will create a level playing field for innovation for existing players. The project is designed to be delivered within two years, he said.

Tech-enabled solutions

Karandaaz is focusing on enhancing mobile-enabled solutions, i.e. accessing financial services using mobile phones. These are virtual wallets that store payment card information on a mobile device, allowing users to make payments to merchants listed with the relevant service providers. Currently, there are more than 10 banks and fin-techs that have introduced mobile wallets.

Another payment solution, QR code, is gaining popularity of late. Instead of punching a merchant code on a phone, it requires the user to only scan the QR code and initiate the payment. One reason for its popularity is that it saves a lot of money on merchant acquisition. A traditional point-of-sale machine is quite expensive, but the QR code can just be printed and pasted over the counter, he said.

There are only 52,500 Point of Sales (POS) machines, less than the total 10 years ago, as per the SBP data. According to Akhtar, the country has by and large missed the plastic card market for which POS machines are relevant. The industry should instead focus on mobile-initiated financial transactions, he said.

Karandaaz Pakistan is undertaking a study to find factors that are hindering the growth of digital solutions for retail payments in Pakistan. “There is a varying degree of understanding among different stakeholders about the value proposition for merchants to start accepting payments digitally rather than cash,” he said.

The study will answer the requirements of each merchant segment from the financial and payments perspective. It will also evaluate modern technologies, like smartphone applications, QR code and near field communication (NFC), contactless communication between electronic devices, that may bring cutting-edge solutions to disrupt the digital retail payments in Pakistan.

“It is important to consider the combination of deep user insights, technology capabilities, and micro-merchant focused that can assist in increasing uptake and usage of digital retail payments in Pakistan,” Akhtar said.

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Kazim Alam
Is a senior financial and economic correspondent at Pakistan Today
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