The Pakistani banking industry is underway of digital transformation serving the financial inclusion, changing the customer’s expectations and their interactions to make the fulfilment easier, faster, transparent and secured. Though, Pakistani banks have been bit stalled in prescriptive regulatory compliance in the customer relationship journey; however, in the coming years, leading banks will operate as digital financial superstores that re-designed the line between technology companies and banks. In the next decade, banks will move towards determined, integrated and more secured solutions for its customers.
Financial inclusion, alignment of the regulatory framework with technological innovation, facing cybersecurity threats, and frauds and managing multilateral collaborations could be the key features of banking vision in the coming years. It means that regardless of age, geographic location, level of financial literacy, the financial inclusion would be the purposeful milestone of this new era of banking. There should be the provision of financial products and services to all individuals and businesses, introduction of innovative products with secure payment modes, usage of deep customer insights, alternative solutions to branch banking services.
Branch services will start reducing in scope as compared to the new digital services that are now being offered. In the future, customers will demand one shop and simplified solutions ‘at the touch’ associated with their lifestyle and business needs, to achieve this objective, there is a need to focus on a push-pull strategy along with the digitalization of customer relationship journey and its connectivity with the changing trends.
Such kind of fulfilment could be achieved in banking through the conscious deployment of scalable and flexible technological solutions to reduce the gap between offering and usage. However, it will not reduce the importance of the quality of customer services as simplified and competitive solutions will ultimately produce a satisfactory response from the customer. These innovative solutions will expectedly reduce the cost of services and ultimately attract a wider range of customer segment.
McKinsey Global Institute (MGI) suggests 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 Digital Transformation
Based on the research of MGI and EFMA, the digital transformation journey of banks can be described in three characteristics but overlapping eras, in Pakistani banking scenario, along the digital curve:
This was the era of the branch-centricity and deposit banking. The sales and service delivery completely relied on their branch network. Therefore, banks invested heavily in expanding branch footprint and enhanced user-experience at branch-level. The operations were 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. Most of the banks took digital transformation on a project-by-project basis using pilots and gradual deployments.
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 taking 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.
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.
E-banking in Pakistan
Digital transformation in banking is a strategic imperative that everyone in Pakistan’s banking industry understands. According to GSMA Intelligence, 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.
In 60-years, the banking has come a long way from nationalization to privatization. The industry has expanded its branch footprint, provided baseline DFS infrastructure and enabled interoperability through interbank switches. There are a total of 46 commercial and microfinance banks in the country today. However, for every 100,000 people there are only six online branches (12,424 in total). Similarly, there are only six ATMs (total 11,381) and 26 POS terminals (total 50,769) for every 100,000 people.
In contrast, only nine branchless banking 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!
In 1987, the first automated machine (ATM) installed in Pakistan by Habib Bank Limited. Nearly a decade ago, ATMs were not familiar with the general public and developed ATM cards that grew very slowly. Now the E-banking system is not new in Pakistan. All of the progress of e-banking is due to the true efforts by State Bank of Pakistan. It provides the basis, environment, and policy for building an online banking system. Until the 1990s, the introduction and progress of automated teller machines and cards were slow in the general public. After 1999, the National Bank of Pakistan took note of the importance of e- banking projects (ATM and cards, 2002 SBP instructions through all banks to their account holders and connected to any one of the two switches (1link and MNET). As a regulatory body SBP authorized two interconnection networks in 2006, which makes it possible for any cardholder of any bank to obtain cash from any ATM in any bank in Pakistan. With the growth of the economy (Pakistan, 2017), the financial transactions increased in great numbers and it was felt to extract more benefits from the switching network, making banks easier, faster, more cost-effective and reliable. 1-LINK offers Visa and Union Pay cards to increase the availability of plastic cards outside of Pakistan. IBFT and UBPS can easily transfer funds to other accounts quickly and pay utility costs from any alternative delivery channels that were previously limited to the branch office. Mobile banking also greatly mapped Pakistan’s no account. One such example is Telenor and Tameer Microfinance Bank to launch Easy Paisa, which provides real-time remittance, local remittance through its huge agent and mobile phone network. IBFT and UBPS make it easy to transfer funds quickly to other accounts and pay utilities from any delivery channels that were previously limited to the branch office.
What should be done?
For a digital financial revolution to happen in Pakistan, millions of people will need to change their behavior. They will only do so if it’s to their benefit. The customer journey, the banks’ desire for innovation, the use-cases available for using a mobile wallet as well as the commercial banks’ dependence on income from government instruments, will all have to change.
The most profitable banks in Pakistan are heavily dependent on the interest rate arbitrage available between their cheap cost of funds and risk-free investment in government securities (Treasury Bills and Pakistan Investment Bonds). Commercial banks have little risk appetite for consumer or micro-lending. In fact, their total number of individual customers in a country of circa 220 million people is less than two million.
The notion that commercial bank branches will disappear due to digital progress flies against the realities of these branches being sources of cheap deposits. In fact, it is very possible that commercial banks will continue to grow their physical footprint in order to protect their interest arbitrage ‘gravy train’. When it still takes approximately an average of one month for a new to industry applicant to get a credit card or a personal loan, when only a few banks have board members with technology experience and when the CEOs are not meaningfully compensated for either the customer journey or increase in earnings from digital banking, why are we expecting commercial banks to change customer behaviour and lead this revolution?
What is Fintech?
Financial technology (Fintech) is used to describe new tech that seeks to improve and automate the delivery and use of financial services. At its core, fintech is utilized to help companies, business owners and consumers better manage their financial operations, processes, and lives by utilizing specialized software and algorithms that are used on computers and, increasingly, smartphones. Fintech, the word, is a combination of “financial technology”.
The fintech will change customer behaviour. Fintech (payments, savings, lending and wealth-management and information ecosystem) has seen healthy growth. While there has been a marked uptick in the traditional person-to-person payments, and we are actually seeing innovative models for person-to-business payments — an example is school fees — and business-to-business payments, unfortunately, we have yet to see major traction in government-to-person (G2P). Benazir Income Support Program — now the Ehsaas program, which began 10 years ago, remains the only visible example.
Fintech in Pakistan
Pakistan Fintech are legal entities, which are sound in terms of innovation but light on capital. While they may touch the tip of the iceberg, they cannot by themselves succeed to alter the customer behaviour in a country where cash is king. Currently, Rs6.3 trillion is the cash in circulation outside the banking system.
For our digital banking revolution to succeed we need three major interventions:
- Use case for cash substitution has to be digital purchases at the ‘grocery stores’. It requires to build a scalable solution.
- There has to be a greater partnership between commercial banks and fintech
- The government —should take the lead in creating an environment where G2P and person-to-government payments become the norm.
For banks to adapt, thrive, and mature in the digital economy they must embrace change through digital transformation of their business. Until now, however, too much focus has been on technologies driving change and not enough on management’s need to reimagine the organization and its own role in making the most of digitally driven business opportunities. For CEO’s accustomed to leaving IT issues to a CIO or CTO and viewing IT as a support function rather than full partner in developing business strategy, digital transformation can be daunting. To leverage the power of digital technologies in financial services, C-Suite executives need to overcome their fear of change. Digital transformation is far more than an IT upgrade. It encompasses the full organization, strategy and processes, and introduction of potential new business models in ways to leverage digital technologies to create new business opportunities.
Today, banks are under pressure from all sides – from tech savvy customers who have come of age with smart-phones in hand and expect to do their banking via digital services, as well as from Fintech start-ups developing applications for customer-facing financial services that quickly become commoditized in direct competition with banks.
Surprisingly, many banks have yet to implement or even develop a digital transformation strategy. Unfortunately, 40 percent of banks still view digital transformation as an ad hoc IT project (as per, IDC MaturityScape Benchmark; Digital Transformation in Banking 2018).
Problems & Opportunities
Why have banks been be perceived as slow to move on digital transformation? It’s not a lack of awareness of the importance of the technology. After all, banks have long been big investors in IT. But that itself is part of the problem. Large banks’ operations are often run on legacy IT systems dating back to the 1990s or even 1980s. The investment in maintaining that installed hardware and updated software to support established applications and methodologies makes managers reluctant to give up the investment and long- established business processes tied to the systems. Banks are often simply too busy keeping these legacy systems alive to innovate and change.
Legacy IT systems and processes are an obstacle – and so too are “legacy attitudes”. Banks that position IT as a support service for operations with the CIO as IT manager rather than a full partner in developing business strategy will find digital transformation a challenge. Such “legacy attitudes” have led CEOs to misjudge the speed and magnitude of change underway in financial services. Relegating the bank’s CIO to a support role rather than offering a seat at the table in developing long term strategy has also played a role in some banks missing opportunities to engage a new generation of bank clients and understand their preferences for digital services.
Re-imagining the organization and long-term strategy are key to successful digital transformations. Transformation of the business is not designed for short-term solutions and immediate gain. Digital transformation to position a bank for success in the new economy must have a vision for long-term success. It’s not a quick fix for a troubled business. The transformation of the business needs to embed agility in the bank’s processes and management thinking to ensure the organization can effectively manage change and to survive. Agile fintech start-ups developing innovative ideas to successfully engage a new generation of customer are already disrupting bank business. Banks need to learn from fintech entrepreneurs and work with them when possible. The desired end-state and success criteria will be based on “Fintegration”; those banks that best leverage and partner with FinTechs will succeed.
Success for bank CEOs today is to build an organization that is agile and prepared to manage change. This requires viewing digital transformation as change management rather than project management. Change management is open ended in its goals and looks not only to transformation of defined business operations or processes, but to the people in the organization to prepare them to manage rapidly changing business conditions. Project management, on the other hand, is a process of guiding a team to accomplish a defined goal and deliverables working along a timeline with a target completion date.
The digital revolution in financial services is focused on leveraging new technologies to enhance and serve the customer experience. A recent study by the Economist Intelligence Unit for SAP showed that IT departments in banks still take a back seat in digital innovation as change is often led by business units. That leaves IT to play a support role.
Lessons from Fintech entrepreneurs show IT should play an equal role with business units in developing digitally driven customer services. In the digital economy, IT must have a seat at the management table to build its expertise into every business process. To hold onto bank clients and profits while rolling out new customer facing services means putting digital technology in place that enables new forms of innovation and creativity. It’s not simply a project to enhance or support traditional methodologies.
Digital transformation is the key to banks achieving sustainable success in a new economy. To succeed, CEOs will need to move beyond both legacy systems and “legacy attitudes”. A wave of game changing technology convergence is underway today. Big data, blockchain, biometrics, API banking, adaptive security, AI and technologies yet undreamed of will have an enormous impact on banking in future. CEOs must not only adopt new technologies, but new ways of thinking to build organizations capable of managing change.