Crack­ing the code

The Pak Banker - - 4EDITORIAL - Nadeem Hus­sain

WE have en­tered an era of strong tail­winds for the pay­ments in­dus­try. In­ven­tions such as ATM and credit cards launched in the 1980s and 1990s, in­ter­net bank­ing ser­vices and more re­cently mo­bile bank­ing and pay­ment ser­vices have changed the way fi­nan­cial ser­vices are be­ing de­liv­ered, and the peo­ple de­liv­er­ing them. In five years, based on five ma­jor dis­rup­tions the in­ter­face be­tween con­sumers and fi­nan­cial ser­vices will change the cash-to-dig­i­tal ra­tio from 95:5 to 65:35 in favour of dig­i­tal­i­sa­tion, and here's how:

Digi­ti­sa­tion of mer­chant pay­ments: Pak­istan sells an es­ti­mated two mil­lion smart­phones ev­ery month. This num­ber will take smart­phones to nearly 60m by the end of next year. Th­ese $50 devices are the mo­bile point of sale so­lu­tions of the fu­ture. They will re­place con­ven­tional mo­bile POS ma­chines and ATMs on elec­tronic pay­ments and non-card al­ter­na­tives. The 200,000 branch­less bank­ing touch points in just six years speak vol­umes for trans­for­ma­tional bank­ing, com­pared with the three decades it has taken to in­stal 40,000 mo­bile POS's and 10,000 ATMs in the coun­try.

The reach of fi­nan­cial dis­tri­bu­tion through branch­less bank­ing, cou­pled with low-cost mo­bile phones has thrown up the op­por­tu­nity to con­vert hun­dreds of thou­sands of middle- to low-cat­e­gory mer­chants for pay­ments. Cheaper devices al­low im­pro­vi­sa­tion on the mer­chant fee model, cur­rently at up to 2.5pc of trans­ac­tion value, to bring this down to zero on high vol­ume, low-value trans­ac­tions.

In ad­di­tion to the branch­less bank­ing net­work, a third-party sec­tor of Fin­Tech star­tups, gro­cery chains, phar­ma­ceu­ti­cals, in­sur­ance, and courier com­pa­nies is be­gin­ning to equip their net­works with low-cost tablets and smart­phones to serve con­sumers on pay­ments. We are see­ing the ad­vent of a new paradigm with dis­tinct net­works con­glom­er­at­ing to plug into the foray of pay­ment ser­vices. A wave of emer­chants is also com­ing up on the e-com­merce front, an in­dus­try an­tic­i­pated to be worth $5 bil­lion in 2020. Imag­ine the im­pact of digi­tis­ing a mere 50pc of cash on de­liv­ery for a mar­ket that size.

Big data: With the shift away from tra­di­tional data si­los at banks, the emer­gence of non­bank dig­i­tal play­ers is chang­ing the way data is sourced and utilised. Pak­istan is the first coun­try to have tested a non-col­la­terised, score­card-based credit ser­vice us­ing vari­ables of con­sumer mo­bile voice and data util­i­sa­tion. The prod­uct in­spired by the African MShi­wari was of­fered to pre-scored con­sumers free of a de­posit re­la­tion­ship with them. The ex­per­i­ment has po­ten­tially opened up a space for mil­lions of SIM hold­ers that could be of­fered small loans. This not only im­proves ac­cess to credit for the un­banked but also pro­vides the op­por­tu­nity to build and show credit his­tory for peo­ple on the outer cir­cles of fi­nan­cial ser­vices.

In the fu­ture, branch­less bank­ing will use con­sumer scores to in­tro­duce ad­vanced prod­ucts, like peer to peer lend­ing, and credit lines to mer­chants. Credit bu­reaus will in­te­grate real time with in­de­pen­dent data houses to en­rich the un­banked con­sumer pro­file, of­fer the abil­ity to red flag mul­ti­ple bor­row­ing, and man­age credit risk. Non-card pay­ments: Pay­ments are trend­ing to­wards non-card trans­ac­tions, and in-app so­cial pay­ments will hit the ground in the near fu­ture. Bio­met­ric and card-not-present trans­ac­tions are al­ready avail­able on 1Link for banks will­ing to upgrade in­fra­struc­ture, and im­pro­vise to the tune of chang­ing con­sumer be­hav­iours. Non-card pay­ments are a strong con­tender to cash, and we will see con­ver­sion out of cash given the con­ve­nience of this pay­ment method. The low-hang­ing fruit on non-card pay­ments are branch­less bank­ing agents, equipped with smart tablets and mo­bile POS so­lu­tions, able to ac­cept retail pay­ments via mo­bile-to-mo­bile trans­fers. Th­ese agents are mer­chants of the fu­ture, and will in­crease the coun­try's to­tal foot­print by hun­dreds of thou­sands.

Cross-bor­der pay­ments: The crash and burn of siloed fi­nan­cial ser­vices is ex­tend­ing be­yond na­tional bor­ders to in­clude in­ter­na­tional pay­ment ser­vices. To­day's glob­alised con­sumer wants to be able to move money at a rea­son­ably price across bor­ders. While tra­di­tional banks have done lit­tle to im­prove bank end sys­tems and pro­cesses to en­able cross-bor­der pay­ments, ren­der­ing those ex­pen­sive and op­er­a­tionally oner­ous, non-bank en­trants are util­is­ing this turf to en­able seam­less in­ter­na­tional trans­fers. The pay­ment sys­tem is go­ing dig­i­tal. Fin­tech com­pa­nies are mush­room­ing and gain­ing space where com­mer­cial banks have ei­ther not in­vested or drunk the Koolaid. The cus­tomer wants con­ve­nience, se­cu­rity and trans­parency. Gone are the days for wait­ing in line to open a bank ac­count or the re­quire­ment of an open­ing bal­ance/monthly re­quire­ment. Long-tail cus­tomer so­lu­tion is the fu­ture. As this land­scape changes reg­u­la­tors will have their hands full in man­ag­ing the change. Lastly, cus­tomer pro­tec­tion and aware­ness must go hand in hand with this change in the fi­nan­cial land­scape.

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