Determinants of Fintech and Bigtech lending:the role of financial inclusion and financial development In PAKISTAN


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This study investigates the determinants of Fintech and Bigtech lending.

Financial Inclusion is considered a key enabler of economic development and is featured as a target in 8 of the 17 sustainable development goals (SDGs) of the United Nations (UN). Increasing evidence suggests that inclusion of small and medium enterprises (SMEs) and individuals can help increase economic growth, support job creation, aid the effectiveness of fiscal and monetary policy and contribute to financial stability6 . Research also suggests that the impact of digital financial inclusion of individuals alone can increase Pakistan’s GDP by $36 billion by 20257 . To accelerate financial inclusion, Fintechs (or Financial Technology firms) are playing a key role. Through utilizing the power of digital innovation, Fintechs have been at the forefront of serving customers in disruptive methods, leading to increasing ease and convenience in accessing financial services for individuals and businesses alike. For the Fintech ecosystem to thrive in Pakistan, aspects related to regulations, infrastructure, investments, amongst others, are required to come together to develop a conducive environment. In the recent past, we have seen some growth in the Fintech ecosystem, as more start-ups and investors enter into this space, and supportive regulations are promulgated by the regulators. However, given the prevailing gap and the resultant potential in the financial ecosystem of Pakistan (with only 21 percent of the population financially included as per the World Bank8 ), Fintechs are at the forefront of enabling adoption and usage of digital financial services. The next section presents the literature review and hypothesis. Section 3 presents the research methodology. Section 4 reports the empirical results. Section 5 presents the conclusion of the study.
This report provides a descriptive assessment of the Fintech ecosystem through studying opportunities and challenges, investment landscape and regulations. The concentration on these focus areas is a result of our analysis of key factors that are collectively binding for the ecosystem to flourish.
The financial and banking sector is now paying special attention to FinTech regulators as it has become an extensive trend caused by innovators and closely followed by researchers (Mention, 2019). Currently, the FinTech sector makes use of Information Technology (IT), primarily focused on smartphones to increase the effectiveness of the financial scheme. The technology associated with the Internet, like mobile internet or cloud computing, will support enterprises in the sector of financial services that are already established, like banking activities (Gomber et al., 2017). In Pakistan, a mobile payment (mpayment) product is often referred to as FinTech. Major E-Commerce platforms and platforms for online shopping have a customised payment method integrated into them for the Fintech invention (Teja, 2017). Additionally, FinTech has evolved as a technology banking sector innovation (Prawirasasra, 2018; Thakor, 2019). In fact, by integrating FinTech digital platforms into the banking sector, the general people might receive costeffective financial services (Jakšič & Marinč, 2019). The financial and banking services industry’s adoption of infrastructure technology (FinTech) is influenced by business factors (Rabhi, 2016). Technology innovation in banking and financial services is influenced by fintech (Gomber et al.,2018). One opinion that develops is that Fintech may put traditional monetary institutions in danger of dying out. The financial services industry is being disrupted by fintech, according to several practitioners’ and scholars’ perspectives (Prawirasasra, 2018; Dermine, 2017). The financial services authorities in Pakistan created a number of banking regulations in response to the practice of FinTech. The banking services sector in Pakistan is now concerned about the trouble of the Fintech business. As a result, there will be much thought given to how FinTech may affect Pakistani banks in the future.

⦁ Literature review and hypothesis

⦁ Literature review


Digitalization in the banking industry nowadays shows the growth of FinTech (Prawirasasra, 2018). Zavolokina et al. (2016) claimed that a business model’s creation, modification, or improvement provides insight into a FinTech’s workings. FinTech also has a tool for collaboration or disruption (Prawirasasra, 2018). The use of IT in the finance industry is a true indicator of fintech (Wulan, 2017). The World Economic Forum (WEF) also noted that Fintech firms can alter and innovate the financial services industry’s business model (WEF, 2015). But according to this study’s findings based on bank preferences for FinTech, FinTech identifies a new technology advancement that seeks to enhance the Bank’s financial service automation. FinTech has evolved in the financial and banking sectors in line with its development, in fact (Thakor, 2019).
Banks are unique financial institutions in that they combine the production of liquid claims—that is, demand deposits—with loans. Though banks can replicate most of what FinTech firms can do, FinTech firms benefit from an uneven playing field in that they are less regulated than banks. The uneven playing field enables nonbank FinTech firms to challenge banks in specific product areas where success is not tied to what makes banks unique—namely, their deposit‐gathering abilities and the potential for synergies with borrowers provided by deposits. And although banks’ responses to FinTech have also been hampered by their legacy IT systems and by internal frictions inherent in large diversified firms, FinTech’s narrow product offerings and lack of established “franchises” appear to put clear limits on Fintech’s ability to displace banks. Unlike Fintech, however, BigTech firms have some advantages that banks will find it harder to replicate, and so they present a much stronger challenge to established banks in two main areas: consumer finance and loans to small firms. And FinTech as well as BigTech are contributing to a trend in which banks are losing a comparative advantage that has derived from having more immediate access to information about parties seeking credit. The extent to which banks succeed in warding off such threats will depend on (1) their ability to make effective—and possibly even better—use of the same information technology now being used by its new competitors, and (2) their success in realizing economies of scale and scope that their nonbank competitors will find hard to match.

FinTech and Banks in contemporary era FinTech in contemporary era:

In this timeframe, Traditional Banks began to develop Digital Financial Services. This shift from analogue to digital is being driven by conventional financial institutions. Online banking became quite popular in the 1990s as a result of the development of the Internet and e-commerce business models. Online banking has significantly altered people’s views on money and their interactions with financial organisations (Thakor, 2019). By the beginning of the twenty-first century, all aspects of banks’ internal operations, interactions with other parties, and relationships with retail consumers had been totally digitalized. This time period came to an end in 2008 with the Global Financial Crisis. As more individuals became aware of the reasons behind the Global Financial Disaster, which swiftly expanded into a larger economic catastrophe, they began to distrust the old financial system. Another important factor that has changed the face of fintech is the growing use of smartphones, which has enabled internet access for millions of individuals globally. Bank in the contemporary era: Commercial banks are currently transitioning quickly to simulated banking. Simulated banks are branchless financial institutions that offer financial services via electronic devices like personal computers, telephones, ATMs, and cyber space (Mishra, 2012). Additionally, numerous individuals today refer to the existence of modern banks as covering a variety of technological applications, including ATMs, and mobile banking (Hamzaee & Hughs, 2011).

Contemporary Regulatory Framework of Fintech in Pakistan

PSO’s and PSPs to act as platforms for FinTech in Pakistan

The State Bank of Pakistan (S) published the rules governing Payment System Operators (PSOs) and Payment Service Providers (PSPs) in 2014, and they are applicable to any businesses seeking to get a licence to operate Payment Systems in Pakistan.

Licenses to create an electronic platform for the clearing, processing, routing, and switching of electronic transactions have been issued to PSPs and PSOs. A PSP/PSO may enter into agreements with banks and other financial institutions, other PSOs and PSPs, ecommerce service providers, retailers, and other businesses for the purpose of providing the services required of them by these laws. PSOs and PSPs are therefore anticipated to serve as platforms for FinTech.

Additionally, going forward, the SBP can support healthy competition by lowering entry barriers, which will boost innovation in the payments sector, by lowering the capital requirements for PSP/PSO licences.

Focus of the State Bank of Pakistan (SBP)

Through a number of initiatives, SBP is actively contributing to greater financial inclusion. The regulation that permitted the provision of financial services without first establishing a vast branch network was known as ‘Branchless Banking’. It took advantage of telecom operators’ broad distribution networks. There are currently nine players with branchless banking licences using various business models in commercial operations or in pilot stages. The adaptability of this rule has made it possible to implement several variations.

SBP recently published a new policy to expand prospects for financial inclusion through the introduction of the Asaan Account, a new banking product. This rule enables banks to add lesser value accounts with streamlined due diligence to their portfolios. It encourages opening bank accounts at financial institutions because it is convenient and accessible. To open a bank account, people simply need their CNICs (Computerized National Identity Cards) and a PKR 100 opening deposit.

It is anticipated that the lowered account opening requirements will promote financial inclusion and encourage those in the lowest social strata to seek out banking services. If they see the necessity, banks can potentially offer extra services to these accounts. Paper-based account opening requirements will be reduced thanks to Asaan Accounts. To enable them to retain bigger deposit balances than are currently possible under the branchless banking framework, this category should be expanded to include merchant and branchless banking customers.

⦁ Research methodology

The methodology for this study primarily comprises of qualitative data collection from key stakeholders of the financial services ecosystem of Pakistan. While we do not claim for this study to be nationally representative, we have ensured that the data collection instruments and stakeholders interviewed together construct complete and detailed perspectives of key elements of the ecosystem, its opportunities and challenges. While the report utilises primary data for analysis, secondary literature is also incorporated at various parts of the report9 .

⦁ Data and sample

Interviews were held with relevant stakeholders’ part of the Fintech ecosystem in Pakistan. These included regulators [State Bank of Pakistan (SBP), the Securities and Exchange Commission of Pakistan (SECP) and others], sampled financial institutions, Fintechs (SBP licensees and non-licensees) and Fintech sector experts. Almost all interviews were conducted remotely. The data collection took 5 weeks during which 41 interviews were completed. (Please see Annex 1 for details).
The larger financial services landscape including insurance, wealth management, leasing, low-income housing, mortgage refinance, commodity and capital markets and other domains that are not under the regulatory regime of SBP were not covered.
Globally, Fintechs are earning increasing prominence in financial sectors. The ability of Fintechs to provide innovative solutions and to disrupt the financial services ecosystem has culminated in significant interest from investors, regulators and individuals. Since the launch and the subsequent success of M-PESA in Kenya, developing countries have followed suit to utilize technology for accelerating financial inclusion. Although infrastructural and other challenges prevail that impede exponential growth, countries seek the right formula’ that can result in widespread adoption and usage of DFS. The role of Fintechs has become more important during the pandemic that resulted in lockdowns and social distancing. Fintechs have supported governments in delivering relief measures, specifically tax relief schemes, delivering government-based stimulus funding to Micro, Small and Medium Enterprises (MSMEs) and households amongst other aspects. While this importance has been exacerbated after the emergence of COVID 19, initiatives for the promotion and support for Fintechs are not recent. The Bali Fintech Agenda Paper10, released in 2018 by the World Bank and the International Monetary Fund (IMF) discusses 12 key points to support Fintech ecosystems. In addition to suggesting that countries should Embrace the Promise of Fintech’s, the paper identified the key role countries have to play in accelerating financial inclusion. The 12 elements are below:

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