A CONFESSION

Let me start with a painful admission: I was wrong.

My obtuse stance on developing a Pakistani equivalent of PayPal is now coming back to haunt me. For years I have been advocating that PayPal should come to Pakistan. For 11 straight years I wrote my annual letter, aptly titled: An Open Letter to the President of PayPal. The result? No cigars.

Every time I posted my letter, many people would say, why can’t we develop our own PayPal?

I was vehemently opposed to the idea of developing a localized version of PayPal. I literally fought tooth and nail on this issue, instead stressing that it was PayPal where our efforts should be focusing at, and not some silly domesticated payment solution.

Well, as I cited, I could not have been more wrong. I could have just said zeitgeist demands that now we have our own payment system, but best not to hide behind that excuse.

PREQUEL TO THE CHALLENGE

Over the past couple of years, a lot many financial institutions are trying to win the battle of financial inclusion. In Pakistan, financial inclusion somehow is limited to converting the unbanked to the banked. I have no qualms on this approach. However, I feel there is a parallel opportunity, that needs to be addressed.

A localized, agnostic payment system.

Last year (2014), I attended, the Mobile Money & Digital Payments Global in Istanbul. The takeaway points can be read here: Take away thoughts from Mobile Money & Digital Payments Conference. To summarize:

That one line is so powerful in its delivery, that for those who get it, will understand where we have been lagging behind.

It is no secret, that most products & solutions that banks unveil are a direct result of the lobbying effort by the vendor supplying the solution. One can argue that this is bullshit, but it is not. Vendors align with their contacts at bank and come up with a product. The contact within the bank then takes ownership of this idea and then sponsors it via an internal document.

In the end, usually a worthless product is launched, vendor makes a lot of money, quotas are met, and the end result is limited success. This is the bitter truth no one like to talk about.

From CIOs/CTOs to Head of X Department within banks, it is all about the constant churn, whether or not it truly solves a problem or not, is lost in the noise. They cannot afford to be complacent.

THE INDUSTRY OUTLOOK

It you look at State Bank of Pakistan, Payment Systems Department (PSD) Report for 1st Quarter, Fiscal Year 2014-2015, the numbers are mixed. Two particular areas I want to highlight:

The number for POS terminals, had hardly improved (from 34,428 to 34,471), showing a very shallow growth rate for the acquiring business in Pakistan (even if measured on a quarterly basis). Pakistan, with a population of now nearly 190 Million (we cannot be stuck 180 Million for the past 20 years nearly), has roughly 35,000 POS machines. Turkey with a population of 75 Million has a 2.3 Million POS* machines deployed, and nearly all of them CHIP+PIN.

Think about that for a moment: Pakistan: 35,000 — Turkey 2.3 Million.

This clearly shows that the net growth in the retail sector for POS is dismal, which would probably point in the direction of a cash-based market.

Another interesting statistics from the same SBP PSD report is:

What was disturbing about the above-cited figures is the declining trend in the two quarters that are matched. PRISM transactions have declined, Payment Through Internet – declining numbers. 3rd Party Account to Account Funds Transfer – declining numbers, Payment Through Mobile – declining numbers. Though I must confess, one cannot infer the whole economic trend of a country from a single snapshot of statistics (bear in mind, it was year end, Ramadan also happens in this period, etc.), but it was something that did stand out.

Along the same lines, State Bank of Pakistan’s Branchless Banking Quarterly Newsletter (July-September 2014) has some interesting numbers worthy of mentioning.

The Branchless Banking (BB) which to the rest of the world is known as mobile money, part of MFS (Mobile Financial Services), or even as Stored Value has some pretty solid growth numbers. Why the numbers for PSD are down and BB are up? – one word: Mobility!

Transaction value showing a growth of 15% and the Average Size of the Transaction showing 23% growth are impressive numbers no doubt. I am pretty confident as and when the October-December 2014 figures would be released, the growth trends would remain intact.

On marketshare, EasyPaisa remains king. The question to be asked is, what is the profile of these users? The regular, white-collared, banked worker would very rarely be using these services.

On a personal survey that I conducted, out of 200 friends and family that I reached out to, only two people had a branchless banking account and both were EasyPaisa users. Again, this is not indicative of the pulse of the industry, but for me, this is important. Why? Because the answer is, none of my friends are using it (we will come to this later on).

On the break down of the type of transactions it is interesting that P2P (funds transfer) via CNIC represents the largest segment, followed by Utility Bill Payment (both which can be termed as low-hanging fruit).

In the pie-chart above, if you exclude G2P (Government to Person) payment, because the bulk of them are for BISP (Benazir Income Support Program) Cash-In/Cash-Out are the top two transactions sets. This would most likely again imply that P2P transfer sets are being completed, i.e. Party A loading money in one town, and Party B off-loading money in another town, confirms that the P2P sector will remain strong in the months to come.

THE MOBILE WALLET COMETH

Qasif Shahid who is a good friend/colleague in this space once sat down and and said something that is worth mentioning. I’m paraphrase here, because I cannot recall the original quote, but it goes something like this (with a little added mix):

A lot of changes have happened. A 100 years ago, someone made the best buggy whips, then came the ICE (Internal Combustion Engine) which led to the death of the buggy-whip industry. Many years ago, a facsimile machine was common with everyone. Today, it is very hard to find one. The email attachment killed the fax machine.

Mobile phones killed the landline business, because now I can take my phone with me, where ever I go. In the same manner, the traditional bank account is being killed by the mobile wallet. We are in that very transitionary stage right now.

By varying account (depending whom you ask), the mobile wallets in Pakistan are poised to grow to 45 Million to 80 Million in the next 5-10 years. That is a huge number any which way you look at it. If every debit card represents a bank account, then we have something like 18-19 Million bank accounts at best (BISP card numbers extracted).

The mobile wallet space will be double that of all the bank accounts in Pakistan.

Double!

There is one point that everyone sort of overlooks. One need not get a mobile wallet from your mobile carrier. There ought to be the freedom to choose a wallet of your liking, and herein lies the problem. Do we have an agnostic wallet?

In the past couple of years, no one has attempted to bring an agnostic mobile wallet into the market. One can argue that MCB Lite is one such wallet, but it was still being driven by MCB Bank and hence had operational and offering limitations.

I love the MCB Lite wallet, but it hasn’t improved much in any manner and I suspect, the old school management of MCB has a lot to do with this.

THE TRANSACTION SET

One of the most important element in the agnostic wallet (of which I am a huge fan) is that we don’t have to go with a full-blown menu of services. The transaction set can be small, but one that gets the most bang for your buck.

The most essential transaction set is listed below.

Person to Person (P2P) – for sending money between two individuals

– for sending money between two individuals Person to Merchant (P2M) – for paying offline merchants at shops or at their physical retail locations

– for paying offline merchants at shops or at their physical retail locations Online (E-Commerce) – for making payments online on websites or via mobile apps.

The solution would have to be agnostic.

Bank Agnostic – doesn’t matter with whom I bank with, I should be able to use the wallet solution effortlessly. Be able to load funds, withdraw funds and most importantly, associate my bank account with my wallet.

– doesn’t matter with whom I bank with, I should be able to use the wallet solution effortlessly. Be able to load funds, withdraw funds and most importantly, associate my bank account with my wallet. Phone / OS Agnostic – the wallet doesn’t have to be on my phone only. I should be able to access it via the web, tablet, etc. It should not be OS specific, i.e. it should be able to run on an iPhone, Android phone, feature phone, Blackberry (?), Mac, Windows, Linux, etc.

– the wallet doesn’t have to be on my phone only. I should be able to access it via the web, tablet, etc. It should not be OS specific, i.e. it should be able to run on an iPhone, Android phone, feature phone, Blackberry (?), Mac, Windows, Linux, etc. Cellphone Carrier Agnostic – there should be no compulsion to use a specific cellphone carrier. The solution should be carrier agnostic (neutral) and should be able to run on WiFi where available.

These are the essentials that are needed for today’s agnostic wallet solution in Pakistan. At present, no one has a working solution in the market.

On a personal market survey done (albeit with a very small sample size of about 300 people), over 92% of the people agreed with the transaction set above and wanted a solution that would allow them to do the above-mentioned transactions.

THE SBP PROBLEM

Last year, State Bank of Pakistan, released the much anticipated Rules for Payment System Operators and Payment Service Providers. Boy were they a disappointment.

I wrote two articles pertaining to SBP releasing these rules:

The gist of it is, one need US$ 2.0 Million as paid up capital in order to start any decent sized fintech company. Not only do the rules require a huge setup costs, they also do not offer any authorized delegate program nor does the licensing cover stored-value, or E-money, better known in Pakistan as branchless banking.

The license is also for operators &/or providers you still need a bank to work with (which is okay), but you also need a branchless banking license holder if you will offer any type of mobile money solution. Bummer!

A BANK IN NEED IS A FRIEND INDEED

The solution to SBP’s requirement is to work as an ISO (Independent Sales Organization) with a bank that has the relevant licenses. As an ISO you (the startup) will be guaranteed of the income for the life of the client, and the bank can take the product and launch it.

Lets face it, very few organization will have the money and capacity to meet SBP’s stringent requirement for obtaining a license. Even if you do obtain a license, you still need to work with a bank. So why not hack the system, by trying to convince the bank that you have a solid product that would make money for them.

Banks love making money. Period.

A solid, well-thought of business model should allow a couple of banks to court you for your idea and implement it.

Needless to say there are caveats but there is nothing that cannot be sorted out. To summarize here is what needs to be done:

Find a bank that has a branchless banking license and is willing to work with you.

The brand-name would be yours.

Sign an ISO (revenue-sharing) agreement with the bank

The product would say something like: “ABC powered by XYZ Bank“

Grow your user and revenue base.

If need be apply for your license (you will get better valuation if you seek partners, etc.)

Once you have your own license, you can then use multiple bank

Licensing would allow you to own your brand directly and position it.

Contrary to popular belief, the banks are willing to work with fintech startups, provided the fintech startups themselves are willing to work with the banks, which in plain speak means that the tussle of having to retain ownership of the product and company must be let go of. The fintech can work on an ISO model with the bank, and still retain full ownership of the code and intellectual property.

This suggested model is not something new. This is the way most of the deals are structured elsewhere in the world, with the exception being on the branchless banking license which seems to be the norm hurdle in this part of the world.

THE FINTECH CHALLENGE IN PAKISTAN

One is hard-pressed to find fintech startups in Pakistan. I firmly believe there are a lot many future CEOs who have an idea about a fintech startup, but because of the legal, monetary and licensing hurdles, don’t know where to start and hence are shying away from coming forward.

If the proverbial diamonds in the rough can be identified, then they can be polished.

On a recent visit to Plan9 and PlanX (as operated by PITB) in Lahore, and talking to the various startups, it was abundantly clear, we needed a payment solution.

Over the past couple of months, many organizations have called me up, asking for names of startups to whom they should give money (because they have funding available). I was short-stumped on providing such a list.

If all these organizations can gather together on a single platform and then implement a challenge, I see no reason why Pakistan cannot see a rock-solid payments solution in the days to come.

To find a solution to Pakistan’s electronic payments, is to have a fintech challenge.

We can learn a lot from the various fintech incubators and accelerators around the world and also from the fintech challenges themselves.

The goal is simple. To fund a few fintech startups and accelerate their offering into the practical world. One need not necessarily code a solution from scratch but there should be an option to simply go buy an off-the-shelf product and build a solution offering around it. There is no rule or law that prevents a startup from doing that.

The end goal is to solve the problem.

Innotribe Challenge, has some really clear rules framework defined. We can certainly use this and modify it for our socio-economic environment and proceed forward.

One of the most important themes that the challenge should promote is open-architecture.

First and foremost, we should promote a culture of APIs (Application Programming Interface) within the financial and banking services industry. Specifically, we should be architecting and deploying RESTful APIs. Currently, we do not have an API environment.

Today, if someone developed an app and wanted to do account title fetch for a bank account, there is no provider in Pakistan that would allow you to do that via a paid API. None.

The same can be said of say CNIC verification via an API, or biometric verification. A startup would face Herculean tasks of trying to connect with someone in NADRA and then perhaps convince them to open their API to them.

When fintech intermediaries, specially banks and allied service providers develop an Open API stack, it allows the third party developer community to take full advantage of this and innovate further. Further than what the banks and allied service providers could perhaps themselves do.

Take a simple example of something called an IBFT (Inter Bank Funds Transfer) that is allowed in Pakistan. There is no API for this. None.

Had an API been available, a lot many startups sitting in Plan9/PlanX in Lahore would be able to implement this and use it as some form of a payment mechanism.

I believe the time is ripe for such a challenge to take place. Various incubators / accelerators like Plan9, PlanX, Nest I/O, LUMS Center for Entrepreneurship and others can work collectively and contribute towards the promotion of the challenge.

We’ve been wanting a solution for a long long time now. Let’s make it happen in 2015.