We would like to recognize the contribution of the following people without which this production would not have been possible:

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3 We would like to recognize the contribution of the following people without which this production would not have been possible: KRN Team Nabeel Malik (FinSurgents Advisory Board) Sandeep Dhar (FinSurgents Advisory Board) Muqeet Salam (FinSurgents Advisory Board) Yasir Ali (FinSurgents Advisory Board) Atiya Shah Mughees Tanvir Butt Sherazam Mazari (Sabre Group) Tahira Dosani (ACCION) William Cook ( Digital Payments Consultant) Aamir Atta (Pro-Pakistani) Obaid Saleem (GSMA Pakistan) Munib Myers (Ex-CEO Daraaz.pk) 3

4 Purpose of the Study Provide a context of the Pakistani market in which the study is conducted Predict the future of Digital Financial Services (DFS) in Pakistan Overview of the existing financial services landscape to spot opportunities for DFS Study FinTech hubs around the world to identify components of a developed FinTech ecosystem Provide overview of the salient aspects of regulatory environment in Pakistan Suggest the role of regulators in promoting FinTechs in Pakistan Analyze the startup ecosystem and identify gaps to make recommendations for creating necessary support for FinTechs Outline the model for growth of a FinTech ecosystem in Pakistan and its components Identify FinTech verticals for investment by Karandaaz and the preferred characteristics of a FinTech business Devise a mechanism for Karandaaz for investing in FinTechs Identify the risks and suggest mitigation strategies for the investments 4

5 Methodology Following four knowledge sources were referred to for this study: 1. Primary research data gathered from 57 interviews conducted with senior managers from a range of industries relevant to the FinTech ecosystem commercial and microfinance banks, mobile financial service providers, insurance companies, incubators, accelerators, FinTech technology services providers and consulting companies 2. Over 3000 surveys conducted from the above-mentioned industries 3. Insights gathered from in-depth research into global FinTech ecosystems and verticals, as well as local market reality 4. Use of FinSurgents domain expertise and knowledge base 5

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7 Introduction to FinTechs: Context & Background We are entering an age where the sociological, financial and technological changes over the last decade have led to the creation of Emergent FinTechs. Emergent FinTechs will not only unleash innovations resulting in a series of large-scale behavioral changes but also re-invent the relationship individuals have with their money. It seems that this change will be the most pronounced in emerging markets. 7

8 Introduction to FinTechs: Insights Digitizing the financial services value chain in the Emerging Markets will enable FinTechs to displace cash, digitize payments and document the economy Startups are expected to morph into FinTech hubs once they realize that incumbents are open for collaboration Digital credit revolutionizes conventional lending and emerges as one of the most compelling use cases for digital payments Large-scale behavioral transformation occurs when large segments of societal needs are unmet Banks are not capable of disruptive innovation; they only make incremental innovation What mobile apps are to smartphones, FinTechs will be to financial services providers 8

9 Market Context: A Peek Into Pakistan Only 29% of women in Pakistan have smartphones, as compared to 77% of men Insight: We expect FinTechs to empower women by architecting products and propositions uniquely suited to their needs 9

10 Market Context: A Peek Into Pakistan Pakistan s financial services sector and communication and identity infrastructure provide the necessary enablers and drivers for digitization and further growth. 10

11 What are FinTechs? Small companies and startups redefining the financial services value chain through digitization Traditional FinTechs collaborate with incumbent financial service providers as their technology providers through traditional pricing models Emergent FinTechs are a new category of FinTechs that partner with bank through new engagement models or simply displace financial institutions 11

12 Market Research Source: FinSurgents Primary Research 12

13 Global FinTech Trends Global FinTech investment is soaring Payments and lending have the highest number of FinTech Unicorns 13

14 Future of Digital Financial Services in Pakistan Pakistan is largely a cash-based economy Paper-based transactions in Pakistan 2010 PKR million 2015 PKR 127 trillion Adoption of DFS will be encouraged by the FinTechs and other service layers to achieve an inclusive economy. Collaboration between incumbents and FinTechs is the New Winning Strategy and the Way Forward! Source: FinSurgents research and analysis 14

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16 Market Readiness, Opportunities & Gaps With the world s 5th largest young population and an increasing internet and smartphone penetration, Pakistani consumers are now ready to adopt and consume digital services. The new use cases are expected to be created by the FinTechs leveraging the incumbent platforms. These FinTechs will engage not only the existing customers but also invite the unbanked to utilize these services. 16

17 Market Readiness, Opportunities & Gaps Insights Digital payment infrastructure and not cash distribution infrastructure, will lead the transition to the new age of financial products and services Branchless banking interoperability will provide further impetus to move from cash to digital M-wallets trump plastics (credit and debit cards) as the digital payment method which can truly enhance customer experience and give a further boost to growing m-commerce As we transition to the first level of behavior change of digital payments, the new wave will be digital credit Increased connectivity of devices has made it possible to make insurance more personalized Microfinance banks can now create virtual sales teams for the distribution of products. Sales persons can become trained via an online digital presence Pakistanis are increasingly adopting smartphones which are a source of information, communication, education and entertainment 17

18 Market Readiness 5 th largest young population offers new age financing opportunity Gen Y adopts new technologies early, and financial products built over Social, Mobile, Analytics and Cloud (SMAC) are fast and effortless to use Low financial inclusion ratio indicates a wider canvas for DFS Pakistan has a financial inclusion ratio of 15%, compared to an average of 33% for lower middle-income countries Low contribution of financial services towards GDP with a narrow focus on top of the proverbial pyramid only The banking sector represents 80% of the financial services but serves only 15% of the population 18

19 Market Readiness Talent in IT sector is growing, but quality is lacking 1500 registered IT companies in Pakistan and technology services exported to other countries equate to $1.6 billion of total sales Improving ICT accessibility through 3G/4G Pakistan has low ICT access due to low per capita bandwidth and high entry level prices for fixed broadband plans Consumer movement towards mobile and social platforms Pakistan has 32 million active internet users and 16.2 million of these users access social networking via a mobile device Ease of doing business and Investment to GDP ratio are low. Improvement in financial markets needed. Pakistan ranks at 138 among 189 countries in the ease of doing business and has an Investment to GDP ratio of 15% compared to a 32% ratio of other emerging 19

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21 Digital Financial Services Insights Opportunity to leapfrog to next generation payments for the world s third largest cashbased economy Pakistan only had 7.33 ATMs per 100,000 people in However, it can leap to the next generation of digital payments infrastructure and bypass the physical payments infrastructure Real use cases for m-wallets can accelerate m-wallet uptake and enhance online banking engagement With 132 million biometrically verified SIMs, issuing wallets is possible through the click of a button Providing an impetus to the digitization of currency through branchless banking interoperability 12 players in Pakistan have branchless banking licenses of which none has interoperability among their wallets 21

22 Digital Financial Services Insights Digital lending services can provide the missing link to formal lending Digital credit will take place at three levels of lending- individual, small merchant and supply chain Supply chain digitization can provide SME financing SMEs account for 98% of all enterprises in the country and their workforce comprises of the largest share of the rural and urban population Insurance has a chance to become relevant and affordable The insurance sector contributes to only 1% of the GDP. Pay-As-You-Go insurance can change this. Microfinance banks can be redeemed from the limitation of physical reach through physical channels Microfinance banks lack an extensive distribution system which can be overcome wallet based payments and a virtual sales team 22

23 Digital Financial Services Insights Digitizing international remittances, an opportunity for FinTech led value addition Pakistan is one of the top 10 markets for remittances, but currently, these can only be collected from bank branches Formalizing savings by introducing need based products 36% adults save in Pakistan and only 4% save with a formal financial institution Opportunity to disintermediate insurance and wealth management through digitization Insurance companies want to reach customers and make sales via online channels as well as collect premium payments digitally Online commerce is creating demand for enabling digitized payments Pakistan s e-tail is expected to grow to EUR 746 million by 2019 EUR 1.9 billion by a 2.3% penetration 23

24 Re-Defining the Lens The urban and urbanizing: Potential for FinTech adoption Pakistan is considered to be almost 73% urban or urbanizing; these areas are connected physically and electronically and promise a high rate of FinTech adoption Mobile technology facilitating digital adoption With a mobile penetration of 69%, Pakistan is quickly becoming an economy reliant on mobile phone technology Online commerce growth will lead to a rise in digital payments Pakistan s e-tail has a projected growth of up to USD 600 million by 2017 and is forecast to reach 2.3% of the market by 2024 Smartphones are capturing an increasing share of the market, aided by the growth of mobile internet services Smartphone adoption is expected to rise from 16.6% in 2016 to 51% by

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27 Ecosystems: Railroads and Infrastructure Insights This chapter looks at the global trends along with local market findings in a comparative context to arrive at the recommendations for developing a FinTech conducive environment in Pakistan. The four key elements include: Regulatory Measures, Financial Institutions, Startup Environment, and FinTechs themselves. 27

28 Components of a FinTech Ecosystem 28

29 FinTech Ecosystems: Mature Hubs and Emerging/Nascent Environments A Mature Hub is differentiated by: Higher level of startup and investment activity Large volume of bets (number of deals) in almost every vertical Late stage funding deals for established verticals. Emerging or Nascent FinTech environments: Do not have enough concentration of FinTech activity in one city to qualify it as a hub. Activity is thinly spread across multiple cities. Key elements are either absent or underdeveloped. 29

30 A Comparison of the Mature and Emerging/Nascent FinTech Ecosystems 30

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32 Global trends aiding FinTechs Regulation s: Balancing innovation with oversight Progressive regulator examples: FCA-UK, MAS Singapore, ASIC Australia. Balancing innovation and regulation: Promoting FinTech collaboration and increasing customer confidence Industry input: An inclusive approach to determining obstacles to innovation The two types of mindsets: Progressive and Restrictive Regulatory Sandbox: Flexible experimentation while minimizing risks Flexible policies: Promoting FinTech businesses RegTech: Using technology to reduce the cost, complexity and time in regulatory reporting International cooperation: Diminishing geographical boundaries in the digital world 32

33 Key Regulatory Initiatives in Developed and Emerging Countries Developed countries are focused towards facilitating innovation and consumer protection + risk reduction while emerging market countries are focused on financial inclusion 33

34 Pakistan s Current Regulatory Environment PSO s and PSP s to act as platforms for FinTechs Focus of the State Bank of Pakistan on financial inclusion Regulations facilitate financial institutions but restrict small companies Payment regulations are the most evolved 34

35 A closer look into the Regulatory Initiatives in Pakistan Source: FinSurgents research and analysis 35

36 Recommendations Banks acting as platforms take the regulatory burden while FinTechs innovate Clear directives for the two types of FinTech models Creating a dedicated FinTech Regulatory wing 36

37 Financial Institutions (FIs) Insights De-hinging banking innovation from legacy structures FinTechs have shifted partnership dynamics from licensing to profit sharing Banks and FinTechs have an independent relationship Small banks - FinTech Partnerships to lead the process of reducing transaction charges Eliminating connection between incumbent acceptance and small companies survival Creating winning examples FinTech collaboration is inevitable for large players, but small players have a different perception 37

38 Market Research Findings on FIs Large players are keen on owning FinTech incubators, but internal challenges can hinder execution Views on FinTech collaboration challenges vary with FinTech readiness Banks face talent shortage to capitalize on FinTech related opportunities and consider FinTechs as a talent source Insurance companies see themselves as technology driven, but they have a limited outlook on FinTech collaboration areas FinTech companies are more open to cross-industry collaborations Telecoms are more inclined towards FinTech collaboration 38

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40 Recommendations FinTech coaching for all players Building FinTech awareness programs and collaboration platforms Eliminating the regulatory ambiguity Need for a FinTech consortium 40

41 Startup Environment Overview of Investments in Pakistan Startup funding is mostly local and at an early stage, but there appear to be early signs of international VC funding coming to Pakistan Source: FinSurgents Secondary Research 41

42 Findings 1. The startup ecosystem in Pakistan is currently emergent, but it is gaining pace 2. Accelerators and incubators are scattered across four cities Karachi, Lahore, Islamabad, and Peshawar 3. According to startups and banks, there is a lack of collaboration platforms in Pakistan where FinTechs and incumbents can come together 4. Startup incubators see very few entrepreneurs interested in financial services products because of the perceived regulatory uncertainty around this space and recommend the same to incubated startups 5. Startup activity is thriving in the software and services sector of Pakistan 42

43 Recommendations Need for neutral FinTech incubators Betting on the right FinTech leader profile So far FinTechs are geographically concentrated in the cities of Karachi and Lahore 43

44 FinTechs Finding Unreceptive attitudes of large players, complicated regulations and deficient early stage funding cited as the top challenges faced by FinTechs 44

45 Areas believed to be impacted the most by FinTechs 45

46 Emerging Market Innovation Stack The Emerging Markets Innovation Stack FinTechs enable the creation of payment rails within emerging markets by enabling retail and online payment acquisition and the aggregation of available payment options, they create the foundational layers of yet another ecosystem the startups. Emerging market FinTechs must be less capital intensive and serve multiple segments A lower CAPEX allows FinTechs to break-even faster; the non-linear growth of FinTechs enabled through technology, makes them an attractive investment. 46

47 Thank You! Qasif Shahid +(92) Lubna Razaq +(92)