Cracking the code
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.
Four disruptions are changing the nature of payments in Pakistan.
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 e-merchants 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.
The writer is chairman, Pakistan Microfinance Network.
Published in Dawn, March 18th, 2016
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