The majority (55%) of Pakistan’s 193 m population is less than 25-years of age with even gender split and mostly (61%) living in rural areas. The country has around 45 m bank accounts and 90 m unique subscribers out of 135 m SIMs. This implies that the mobile subscribers have outnumbered the bank account holders by the ratio of 2:1.
Looking back over the 70-years of our history, the banking has come a long way from nationalization to privatization, expanded its branch footprint, provided baseline DFS infrastructure and enabled interoperability through interbank switches. However, today, the 46 commercial and microfinance banks in the country are serving every 100,000 people with just six online branches (12,424 in total), six ATMs (11,381 in total) and twenty-six POS (50,769 in total) terminals.
In contrast, since the launch of first branchless banking service, the nine service providers have created around 210,536 active agents, in only eight years. This number is around three times the size of online branches, ATM and POS terminals–all combined!
The “Digital” in Banking
McKinsey Global Institute (MGI) says that the word “digital” signifies the usage of digital infrastructure, including mobile and Internet, as the primary means of service delivery and seamless transaction processing, with minimum to no use of cash and traditional bank branches.
In its true sense, digital banking is much more than this. The widespread technology adoption regarding access ubiquity, greater bandwidth, transparency, and data-security is offering new business propositions for the banks. The opportunity to develop innovative products and services with new business models, digitally equipped sales force and end-to-end digitized processes, all resulting in greater cost-savings and unlocking of new revenue streams and, therefore, increased profitability for the banks.
The Evolution of Digital Banking
If we look at our industry to understand the digital journey of banks in particular, we will notice that because of prevailing market conditions, changing global landscape and vulnerability of their businesses to competitive forces; especially, the advent of mobile money services by Telecoms is pushing them for an accelerated digital transformation at their end.
Based on the research of MGI and EFMA, the digital transformation journey of banks can be described in three characteristic but overlapping eras along the digital curve. Let’s understand each of them in Pakistan’s context.
- Digital Banking 1.0: This was the era of the branch-centricity and deposit banking. The sales and service delivery completely relied on their branch network and, therefore, banks invested heavily in expanding branch footprint and enhanced user-experience at branch-level. The operations have been mostly product centric and direct channels like Internet banking and ATM were used to complement the branch-centric operations. The success depended on the broader customer base, size of deposits and higher price premium for the value they delivered. The banks took digital transformation on a project-by-project basis using pilots and gradual deployments.
- Digital Banking 2.0: This is the era of customer-centricity and transaction banking. The branches still play a crucial role, but the emphasis is shifting toward Omni-channel experience leveraging the access ubiquity through widespread mobile footprint and use of sophisticated technologies. The API platform is the new buzzword and so is, customer analytics. The sales and service have started to rely more on direct channels for customer acquisition and service delivery. This model relies more on a greater share of tech-savvy customers at a reduced cost, and significant cross-selling opportunities but without price change. The banks are starting to take digital transformation as a business with a clear long-term vision, cross-functional team formation with test and learn approach supported by flexible and agile development methods.
- Digital Banking 3.0: This will be an era of “digital” as a core, bringing pure digital banks to life. The branch might still exist to fulfill complex service needs of customers and for “showcasing” their physical presence; however, the banks will rely on highly innovated, and technology enabled, self-directed service models to serve their customers. These models will provide least cost opportunity for the banks to acquire new customers and extend their market reach. The banks will take digital transformation as a pure business model using subsidiaries to accelerate digital transformation, and by dissemination of digital in their culture and innovation, leading to fully digital, paperless products.
The Challenger Bank
The central bank has already started work on the concept paper for the creation of pure digital banks in Pakistan and would soon be inviting comments from domestic and international experts on various aspects including entry criteria, capital requirements, customer onboarding aspects etc.
Though this opportunity will enable incumbents to realign themselves with the evolving consumer preferences and changing market dynamics, and to come up with their own versions of the digital banks, it is entirely possible that a foreign player, like Alibaba, might surface as the challenger bank by launching yet another “Easypaisa” of the digital banking in Pakistan.
I believe a big revolution is on its way that will change the entire banking and payments industry of Pakistan!
This article is partly an excerpt from the original version, “Digital Transformation Journey of Banking in Pakistan”, published in the Special Report on 10th Mobile Commerce Conference in Pakistan, by Business Recorder Karachi on 30th March 2017. Unfortunately, initial draft instead of the final version got published due to some miscommunication.
Above image is adapted from Digital Transformation Bottom Lines by Gerd Leonhard that is available from Flickr under CC BY-SA 2.0 license.