Of Pakistan's 140mn adult population, more than 100mn are unbanked. On the other hand, there are 180mn mobile subscriptions in the country; half of these have mobile broadband connectivity. Despite this huge opportunity for fintechs, the market is largely untapped. We estimate there are only about 45 fintechs in operation in Pakistan, the bulk of which operate in the payments sector. One reason for this is that Pakistani fintech start-ups are able to attract much less funding than other comparable markets. However, we think the market is at an inflection point – activity levels seem to be picking up, with SadaPay's recent US$7.2mn funding round throwing the spotlight on the market’s huge potential.
In this report we discuss: the fintech opportunity in Pakistan; the current state of the fintech ecosystem; how the central bank is promoting digital finance; the success factors and future plans of fintechs; and the key challenges limiting fintech growth. We also highlight some interesting companies that could drive fintech growth in Pakistan.
Pakistan’s low financial penetration presents a strong opportunity for fintechs
Pakistan’s financial inclusion levels are poor relative to emerging market peers – around three-quarters of Pakistani adults do not have a bank account. In addition, most of the country’s c3.3mn SMEs (which contribute one-third to GDP) are excluded from accessing formal credit lines. Furthermore, Pakistan’s currency in circulation is equivalent to c15% of GDP, one of the highest ratios in emerging markets, signifying that it remains a heavily cash-based economy. The financial services sector therefore appears ripe for disruption.
With mobile phone penetration standing at 85%, fintechs have a clear mechanism with which to reach financially excluded individuals and businesses. Although internet penetration remains poor, it is improving rapidly (34% of the population in 2020 vs 22% in 2018) and the pandemic-related lockdowns are accelerating digital adoption in the country.
Current state of Pakistan's fintech ecosystem
The fintech ecosystem is less developed than its peers
Despite its huge potential, Pakistan’s fintech ecosystem is very underdeveloped, with only about 45 fintechs in operation, compared to double this figure in Vietnam, which has half its population. Also, the fintech landscape is payments-dominated – 40% of fintechs are focused on payment, versus c30% in Nigeria and Vietnam. Funding to Pakistan fintechs is also very limited, attracting just US$10mn in 2020 versus US$425mn in Vietnam and US$89mn in Nigeria.
The fintech product mix is dominated by payments providers
Pakistan has about 18 payments-focused fintechs, accounting for 40% of the total universe, higher than the 32% average for EM peers. A higher concentration of payments indicates a relatively young fintech ecosystem, in our view, as payments are generally the first target of digital disruption, followed by lending and insurance.
Telenor and Ant Group-owned EasyPaisa was the first, and remains the largest, digital payments provider in Pakistan; it was founded almost 12 years ago. The firm led the development of peer-to-peer payments in the country, initially via agent-based transactions, though most transactions have now shifted to its mobile wallet.
The payments sector is growing at a strong pace
In the last five years, the number of mobile wallet accounts in Pakistan has almost tripled to 60mn, within striking distance of the 62mn bank accounts in the country. The proportion of active mobile wallet accounts has also improved, to 60% at end-2020 compared with 50% at end-2016.
Another noticeable trend has been a shift in the preference of branchless banking customers from agent-based (ie over-the-counter) transactions to those using mobile wallets. Digital financial services, like mobile wallets, can provide individuals with convenient, affordable and secure payments, and savings opportunities. The value of mobile wallet transactions has increased almost 9-fold over the last five years, and now account for over 90% of transactions on digital payments platforms, compared to 40% in 2016.
Fintechs’ access to funding is poor
Fintechs received just 13% of total start-up funding in Pakistan in 2020. This is a low proportion compared to other emerging markets; African fintechs for example, attracted 23% of total start-up funding in 2020.
There were only five fintech funding deals in Pakistan in 2020 amounting to US$10mn. This is significantly below the experience in other countries like Vietnam (US$435mn) and Nigeria (US$89mn). Also, 90% of the funding flows (ie, US$9mn) went to one company, Finja. Nonetheless, the funding situation appears to be improving, with some large-scale fintech funding rounds in 2021 so far; in March, SadaPay raised US$7.2mn, while CreditBook mobilised US$1.5mn in May.
Pakistan’s central bank is aggressively promoting digital finance
The State Bank of Pakistan (SBP), under the leadership of Governor Reza Baqir, has been actively promoting the digital transformation of the financial services sector. Over the past year it has introduced several initiatives, highlighted below:
Introduction of the Electronic Money Institution licence: Previously, digital payments platforms in Pakistan had to acquire a banking licence, which was both difficult and costly to obtain. The new EMI licence is less restrictive, easing some barriers to entry.
Raast – an instant payment system. Raast is a secure, efficient, and low-cost digital infrastructure backbone onto which private companies can attach their front-end platforms. It should significantly reduce transaction costs and improve the user experience by allowing multiple payments providers to interconnect. It should also promote innovation by providing a level playing field for all financial services providers. Raast was launched earlier this year, and will be fully rolled out in 3 phases by 2022.
Framework for digital-only banks. The SBP has introduced a draft regulatory framework for digital-only banks, with lower capital and compliance requirements. This should help to attract local entrepreneurs and international sponsors to launch fully digital competitors to the established banks.
Launch of Roshan Digital Accounts (RDA). These are digital accounts for overseas Pakistanis, which can be opened remotely with minimal KYC requirements compared to a standard bank account. Various facilities can be accessed through RDAs such as listed equity investment, lucrative rates on government investment instruments (Naya Pakistan Certificates) and subsidised car loans.
Fee waivers on online banking transaction: Since the start of the Covid pandemic, the SBP has waived online banking transaction fees, which has resulted in a significant boost to online transactions. In 2020, internet and mobile banking transaction value rose by 105% yoy.
Minimum requirement of services via internet banking. The SBP has made it mandatory for banks to provide a minimum set of services through their web and mobile banking platforms. This includes bill payments, funds transfer, beneficiary management, limit management, credit and debit card management, stop cheque payment etc.
Major success factors for Pakistan fintechs
Strategic partnerships help fintechs to diversify their product mix, improve their service quality, and expand their client base. Telenor Microfinance Bank (TMB), the operator of EasyPaisa, has partnered with Ant Group to set new technology benchmarks. Upaisa has partnered with Abacus (a leading technology and consulting firm) to improve its mobile application. Insurance comparison platforms, like SmartChoice, EasyInsurance, Mawazna, work together with traditional insurance companies to offer insurance products online to consumers.
Secure and seamless execution. Security is one of fintech customers’ major concerns. The rise in the number of cybercrime complaints, from 56,000 in 2019 to 100,000 in 2020, illustrates the challenges companies face in this area. The government has also stepped up with the launch of its National Response Centre and the Prevention of Electronic Crimes Act (PECA) in 2016. The execution of transactions should also be reliable. Local fintechs attributing their success to the reliability and security of their platforms include payments operators Keenu, Konnect and Nayapay.
Innovative services. Innovation allows fintechs to boost productivity and generate a superior user experience. Firms crediting innovation for their success include Finpocket (investech), Foree (payments) and TPS (payments).
Targetting the unbanked segment. Meeting the needs of financially unserved or underserved populations creates a major growth opportunity for fintechs. Around three-fourth of Pakistan’s adult population is unbanked. Some fintechs successfully serving unbanked clients include EasyPaisa (payments), Finca (lending), JazzCash (payments), and Tez Financial Services (lending).
Considering their plans for the next three years, Pakistani fintechs are focused on diversifying their product suites, expanding their operations (both domestically and internationally) and expanding the use cases of existing products.
Introducing new products. Pakistan’s fintech landscape is very focused on payments, and within payments most activity is centred on a few mainstream products like P2P transfers and bill payments. Therefore, fintechs are actively looking to diversify their product mix by introducing new products, both within their sector and in new sectors, for example payments firms offering lending products.
Geographical expansion allows fintechs to broaden their customer base, both domestically (eg in rural areas) as well as internationally. For Pakistan fintechs, we think their primary focus would remain on the domestic operation due to the size of the opportunity, but also due to funding constraints limiting the ability to compete abroad. Some fintechs planning to expand geographically are 1Link (payments) and Hysabkytab (financial management).
Expanding use cases of existing products. Another way fintechs can grow their customer base and increase transaction volume is to expand use cases for existing products. For example, Pakistan payments fintechs are developing new use cases by partnering with various merchants and institutions. Some firms planning to increase use cases include Easypaisa (payments) and Nayapay (payments).
Key challenges limiting fintech growth
We think there are a few key reasons why the Pakistan fintech landscape is not vibrant, despite the huge opportunity:
Lack of awareness and trust. Digital payments and other fintech products have a huge opportunity in the underbanked segments of the society that often reside in rural areas and have low literacy rates. Though most underbanked adults have mobile phones, they currently lack knowledge of fintech applications and how to use them. Even for those that are aware, there is a significant lack of trust concerning digital channels; for example, much of the population still prefer to pay their utility bills through bank counters as they desire a physical, bank-stamped payments receipt, rather than a digital receipt.
Undocumented economy. The primary backbone for any strong digital payments ecosystem is an extensive merchants network onboarded to accept digital payments. In Pakistan, it is a challenge to onboard merchants, especially those with small scale. These entities prefer to deal in cash, as otherwise their sales get documented, resulting in higher tax liabilities.
High transaction costs. Transaction costs on digital payments channels are very high compared to traditional banking channels; for example a PKR10,000 cash withdrawal through an ATM costs cPKR140 on JazzCash/Easypaisa (leading mobile wallets) while it cost Just cPKR20 from a normal bank account. However, we think the launch of Raast could help lower some of these transactional costs and facilitate pick-up in digital payments adoption.
Limited funding. Pakistan fintechs have significantly lagged their international peers in attracting funding flows. Fintech funding deals in 2020 attracted just US$10mn. However, 2021 already appears to be better in terms of funding flows, with Sadapay and CreditBook attracting cUS$7mn and US$1mn, respectively. However, much higher levels of investment will be required to fully bridge the financial access gap and build a strong, internationally competitive, fintech ecosystem.
Pakistan fintechs to watch
This subsidiary of Telenor Microfinance Bank was launched in 2009 to provide branchless banking services, and was the first mobile payments platform in the country. It is the only Pakistani fintech to be certified as a mobile money service provider by the Global System for Mobile Communications (GSMA). At end-2020, EasyPaisa had around 8.1mn active mobile wallet accounts and processed transactions worth PKR1.5tn (US$9.5bn) in 2020.
JazzCash (formerly known as MobiCash) is a branchless banking service provider launched in 2012 by mobile network service company, Mobilink, which is backed by international telecom giant Veon. JazzCash is now a leading mobile payments platform in Pakistan, competing closely with EasyPasia. In 2019, JazzCash had 6.5mn active digital wallets and processed transactions worth PKR2.0tn (US$13bn).
Finja aims to to fulfill the needs of financially-excluded individuals and SMEs on its digital platform. It is primarily a lending platform, but is also in the process of acquiring an e-money licence from SBP, which would enable it to launch full-fledged digital payments platform for consumers, businesses and merchants. Finja attracted the highest volume of fintech funding in 2020, at US$9mn, taking its total funding to US$15mn. To date, Finja claims to have disbursed over 50,000 loans.
Tez Financial Services (Lending)
Tez is the first fully digital non-bank microfinance company in Pakistan that aims to play a primary role in financial inclusion. Tez uses technologies such as Artificial Intelligence to monitor customer preferences and tailor their offerings accordingly on their one-stop mobile phone application. Tez has also recently expanded to offer insurance products to its customers in partnership with EFU, a leading domestic insurance company.
SadaPay's mission is to replace complexities and high costs in traditional financial services with simple and free digital financial services. The firm is collaborating with MasterCard and has secured the largest fintech funding round so far in 2021, at US$7.2mn, taking its total funding raised to US$9.3mn. SadaPay is still in its pilot phase and already has 200,000 customers on its waiting list. As a fully digital operator, the firm enjoys low marginal costs.
Acknowledgements: We would like to thank Rabail Adwani for his assistance with this report.