FinTechs are technology-focused start-ups, innovating products and services currently provided by the financial services industry.^[1] The importance of FinTechs for emerging markets such as Pakistan, is promising as they play a vital role digitizing payments. With this focus, Karandaaz Pakistan commissioned a research to conduct an in-depth assessment of the ecosystem for FinTechs in Pakistan. The report titled ‘Seeding Innovation; A framework for rooting FinTechs in Pakistan’, developed by FinSurgents Pte. Ltd analyzes the current FinTech Ecosystem prevalent in the country, assessing the awareness of FinTechs, their integration into the market and challenges in developing the ecosystem.

To determine the state of FinTechs in Pakistan, the research collected opinions from 3000 professionals and 57 industry leaders on investment, regulations, attitude of financial institutions and the challenges faced by FinTechs amongst other topics.

The FinTech Ecosystem

The key elements for developing a FinTech ecosystem in Pakistan include Regulatory Measures, Financial Institutions, Startup Environment, and the FinTech’s themselves.

Pakistan’s FinTech ecosystem is currently at a nascent stage, with only a few FinTechs operating mainly in developed cities such as Lahore and Karachi. This slow growth of the ecosystem, and the dearth of FinTechs in Pakistan is a result of only local, and thus limited, investment in the sector. Another reason for the slow activity within this space is the lack of entrepreneurs venturing into the FinTech space, primarily because of regulatory ambiguity, which is considered the most vital impetus for FinTech growth. Similarly, the lack of mutual growth platforms, allowing thought leaders and industry stakeholders to come together, hinders the maturity of the FinTech ecosystem in the country.

Support from the Regulator and Financial Institutions

Regulations are a critical element in financial services and their favorability directly determines the success of FinTechs. Mature hubs have created dedicated FinTech wings, regulatory sandboxes ^[2]and tailored regulatory approaches aimed at creating an enabling environment for FinTechs. Similarly, global examples indicate that government support in monetary, investment and policy areas has helped to develop the FinTech sector in mature hubs around the world. Regulations for Branchless Banking were released by the State Bank of Pakistan (SBP) in 2008 and amended in 2011. These regulations, along with the Payment Service Operators/Payment Service Provider regulations, although considered favorable by a considerable proportion of the FinTech arena, lack specificity for FinTechs. As a result, one third of the respondents of the survey found these regulations to be ambiguous for the FinTech space, creating uncertainty for new entrants. ^[3] This perceived uncertainty is believed to be one of the reasons for incubators to see very few entrepreneurs interested in financial services.

Other Challenges

Although global investments in FinTechs amounted to $12.2 billion in 2015 ^[4], in Pakistan, a lack of early stage funding and resources to support product development cycles limits expansion of FinTechs in the country. Similarly, given the difficulty in modifying consumer behavior, uptake of digital financial services remains low.

Conclusion

In Pakistan, conventional banking services are geographically limited and their cost of deployment hinders growth to unserved areas. With high mobile penetration and the introduction of new products and services, FinTechs can serve previously unserved markets in an efficient and cost effective manner. However, like the development of any new sector, the development of the ecosystem goes hand in hand with the development of the businesses that comprise it. Just as it is not possible to develop the businesses further without an enabling ecosystem, it is not possible to have an ecosystem develop before the businesses actually have enough traction and acceptance in the market as service providers. The good news is that this correlational process has begun and now the right kind of interest and investment is required to help it grow beyond a nascent stage.

• [1] http://www.pwc.com/gx/en/advisory-services/FinTech/pwc-fintech-global-report.pdf
• [2] Regulatory sandbox – A type of software testing environment that enables the isolated execution of software or programs for independent evaluation, monitoring and testing.
• [3] http://www.pwc.com/gx/en/advisory-services/FinTech/pwc-fintech-global-report.pdf
• [4] http://www.pwc.com/gx/en/advisory-services/FinTech/pwc-fintech-global-report.pdf