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We would like to recognize the contribution of the following people without

which this production would not have been possible:

KRN Team

Nabeel Malik (FinSurgents Advisory Board)

Sandeep Dhar (FinSurgents Advisory Board)

Muqeet Salam (FinSurgents Advisory Board)

Yasir Ali (FinSurgents Advisory Board)

Atiya Shah

Mughees Tanvir Butt

Sherazam Mazari (Sabre Group)

Tahira Dosani (ACCION)

William Cook ( Digital Payments Consultant)

Aamir Atta (Pro-Pakistani)

Obaid Saleem (GSMA Pakistan)

Munib Myers (Ex-CEO Daraaz.pk)

Purpose of the Study

• Provide a context of the Pakistani market in which the study is conducted

• Predict the future of Digital Financial Services (DFS) in Pakistan

• Overview of the existing financial services landscape to spot opportunities for DFS

• Study FinTech hubs around the world to identify components of a developed FinTech

ecosystem

• Provide overview of the salient aspects of regulatory environment in Pakistan

• Suggest the role of regulators in promoting FinTechs in Pakistan

• Analyze the startup ecosystem and identify gaps to make recommendations for

creating necessary support for FinTechs

• Outline the model for growth of a FinTech ecosystem in Pakistan and its components

• Identify FinTech verticals for investment by Karandaaz and the preferred characteristics

of a FinTech business

• Devise a mechanism for Karandaaz for investing in FinTechs

• Identify the risks and suggest mitigation strategies for the investments

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Following four knowledge sources were referred to for this study:

1. Primary research data gathered from 57 interviews conducted with senior managers

from a range of industries relevant to the FinTech ecosystem – commercial and

microfinance banks, mobile financial service providers, insurance companies,

incubators, accelerators, FinTech technology services providers and consulting

companies

2. Over 3000 surveys conducted from the above-mentioned industries

3. Insights gathered from in-depth research into global FinTech ecosystems and verticals,

as well as local market reality

4. Use of FinSurgents domain expertise and knowledge base

Methodology

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Introduction to FinTechs: Context & Background

We are entering an age where the sociological, financial and technological changes over the last decade have led to the creation of Emergent FinTechs. Emergent FinTechs will not only unleash innovations resulting in a series of large-scale behavioral changes but also re-invent the relationship individuals have with their money. It seems that this change will be the most pronounced in emerging markets.

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• Digitizing the financial services value chain in the Emerging Markets will enable FinTechs to displace cash, digitize payments and document the economy

• Startups are expected to morph into FinTech hubs once they realize that incumbents are open for collaboration

• Digital credit revolutionizes conventional lending and emerges as one of the most compelling use cases for digital payments

• Large-scale behavioral transformation occurs when large segments of societal needs are unmet

• Banks are not capable of disruptive innovation; they only make incremental innovation

• What mobile apps are to smartphones, FinTechs will be to financial services providers

Introduction to FinTechs: Insights

Only 29% of women in Pakistan have smartphones, as compared to 77% of

men

Insight: We expect FinTechs to empower women by architecting products and

propositions uniquely suited to their needs

Market Context: A Peek Into Pakistan

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Market Context: A Peek Into Pakistan

Pakistan’s

financial

services sector

and

communication

and identity

infrastructure

provide the

necessary

enablers and

drivers for

digitization and

further growth.

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Small companies and startups redefining the financial services value

chain through digitization

Traditional FinTechs collaborate with incumbent financial service

providers as their technology providers through traditional pricing

models

Emergent FinTechs are a new category of FinTechs that partner with

bank through new engagement models or simply displace financial

institutions

What are FinTechs?

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Market Research

Source:

FinSurgents

Primary Research

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Global FinTech Trends

Payments and lending have

the highest number of FinTech

Unicorns

Global FinTech investment is

soaring

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Source: FinSurgents research and

analysis

Future of Digital Financial Services in Pakistan

Pakistan is largely a cash-based

economy

Paper-based transactions in

Pakistan

Adoption of DFS will be encouraged

by the FinTechs and other service

layers to achieve an inclusive

economy.

2010 PKR 80.68 million

2015 PKR 127 trillion

Collaboration between

incumbents and FinTechs is the

New Winning Strategy and the

Way Forward!

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Market Readiness, Opportunities & Gaps

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With the world’s 5th largest young population and an increasing

internet and smartphone penetration, Pakistani consumers are now

ready to adopt and consume digital services. The new use cases

are expected to be created by the FinTechs leveraging the

incumbent platforms. These FinTechs will engage not only the

existing customers but also invite the unbanked to utilize these

services.

Market Readiness, Opportunities & Gaps Insights

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• Digital payment infrastructure and not cash distribution infrastructure, will lead the transition to the new age of financial products and services

• Branchless banking interoperability will provide further impetus to move from cash to digital

• M-wallets trump plastics (credit and debit cards) as the digital payment method which can truly enhance customer experience and give a further boost to growing m-commerce

• As we transition to the first level of behavior change of digital payments, the new wave will be digital credit

• Increased connectivity of devices has made it possible to make insurance more personalized

• Microfinance banks can now create virtual sales teams for the distribution of products. Sales persons can become trained via an online digital presence

• Pakistanis are increasingly adopting smartphones which are a source of information, communication, education and entertainment

5th largest young population offers new age financing opportunity

Gen Y adopts new technologies early, and financial products built over Social, Mobile,

Analytics and Cloud (SMAC) are fast and effortless to use

Low financial inclusion ratio indicates a wider canvas for DFS

Pakistan has a financial inclusion ratio of 15%, compared to an average of 33% for

lower middle-income countries

Low contribution of financial services towards GDP with a narrow focus on top

of the proverbial pyramid only

The banking sector represents 80% of the financial services but serves only 15% of

the population

Market Readiness

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Talent in IT sector is growing, but quality is lacking

1500 registered IT companies in Pakistan and technology services exported to other

countries equate to $1.6 billion of total sales

Improving ICT accessibility through 3G/4G

Pakistan has low ICT access due to low per capita bandwidth and high entry level

prices for fixed broadband plans

Consumer movement towards mobile and social platforms

Pakistan has 32 million active internet users and 16.2 million of these users

access social networking via a mobile device

Ease of doing business and Investment to GDP ratio are low. Improvement in

financial markets needed.

Pakistan ranks at 138 among 189 countries in the ease of doing business and has

an Investment to GDP ratio of 15% compared to a 32% ratio of other emerging

countries

Market Readiness

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Opportunity to leapfrog to next generation payments for the world’s third largest cash-

based economy

Pakistan only had 7.33 ATMs per 100,000 people in 2014. However, it can leap to the next

generation of digital payments infrastructure and bypass the physical payments infrastructure

Real use cases for m-wallets can accelerate m-wallet uptake and enhance online

banking engagement

With 132 million biometrically verified SIMs, issuing wallets is possible through the click of a

button

Providing an impetus to the digitization of currency through branchless banking

interoperability

12 players in Pakistan have branchless banking licenses of which none has interoperability

among their wallets

Digital Financial Services Insights

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Digital lending services can provide the missing link to formal lending

‘Digital credit’ will take place at three levels of lending- individual, small merchant and supply

chain

Supply chain digitization can provide SME financing

SMEs account for 98% of all enterprises in the country and their workforce comprises of the

largest share of the rural and urban population

Insurance has a chance to become relevant and affordable

The insurance sector contributes to only 1% of the GDP. Pay-As-You-Go insurance can change

this.

Microfinance banks can be redeemed from the limitation of physical reach through

physical channels

Microfinance banks lack an extensive distribution system which can be overcome wallet based

payments and a virtual sales team

Digital Financial Services Insights

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Digitizing international remittances, an opportunity for FinTech led value addition

Pakistan is one of the top 10 markets for remittances, but currently, these can only be collected

from bank branches

Formalizing savings by introducing need based products

36% adults save in Pakistan and only 4% save with a formal financial institution

Opportunity to disintermediate insurance and wealth management through digitization

Insurance companies want to reach customers and make sales via online channels as well as

collect premium payments digitally

Online commerce is creating demand for enabling digitized payments

Pakistan’s e-tail is expected to grow to EUR 746 million by 2019 EUR 1.9 billion by 2024 - a

2.3% penetration

Digital Financial Services Insights

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The urban and urbanizing: Potential for FinTech adoption

Pakistan is considered to be almost 73% urban or urbanizing; these areas are connected

physically and electronically and promise a high rate of FinTech adoption

Mobile technology facilitating digital adoption

With a mobile penetration of 69%, Pakistan is quickly becoming an economy reliant on mobile

phone technology

Online commerce growth will lead to a rise in digital payments

Pakistan’s e-tail has a projected growth of up to USD 600 million by 2017 and is forecast to

reach 2.3% of the market by 2024

Smartphones are capturing an increasing share of the market, aided by the growth of

mobile internet services

Smartphone adoption is expected to rise from 16.6% in 2016 to 51% by 2020

Re-Defining the Lens

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Re-Defining the Lens

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Ecosystems: Railroads and Infrastructure Insights

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This chapter looks at the global trends along with local market findings in a comparative context to arrive at the recommendations for developing a FinTech conducive environment in Pakistan.

The four key elements include: Regulatory Measures, Financial Institutions, Startup Environment,

and FinTechs themselves.

Components of a FinTech Ecosystem

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FinTech Ecosystems: Mature Hubs and Emerging/Nascent

Environments

A Mature Hub is differentiated by:

• Higher level of startup and investment activity

• Large volume of bets (number of deals) in almost every vertical

• Late stage funding deals for established verticals.

Emerging or Nascent FinTech environments:

• Do not have enough concentration of FinTech activity in one city to

qualify it as a hub.

• Activity is thinly spread across multiple cities.

• Key elements are either absent or underdeveloped.

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A Comparison of the Mature and Emerging/Nascent FinTech

Ecosystems

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Global trends aiding FinTechs

Regulation

s:

Balancing

innovation

with

oversight

• Balancing innovation and regulation: Promoting

FinTech collaboration and increasing customer

confidence

• Regulatory Sandbox: Flexible experimentation

while minimizing risks

• Industry input: An inclusive approach to

determining obstacles to innovation

• The two types of mindsets: Progressive and

Restrictive

• Flexible policies: Promoting FinTech businesses

• RegTech: Using technology to reduce the cost,

complexity and time in regulatory reporting

• International cooperation: Diminishing

geographical boundaries in the digital world

Progressive regulator

examples: FCA-UK,

MAS Singapore, ASIC

Australia.

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Key Regulatory Initiatives in Developed and Emerging Countries

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Developed countries are

focused towards facilitating

innovation and consumer

protection + risk reduction

while emerging market

countries are focused on

financial inclusion

• PSO’s and PSP’s to act as platforms for

FinTechs

• Focus of the State Bank of Pakistan on

financial inclusion

• Regulations facilitate financial institutions

but restrict small companies

• Payment regulations are the most evolved

Pakistan’s Current Regulatory Environment

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Source:

FinSurgents

research and

analysis

A closer look into the Regulatory Initiatives in Pakistan

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Recommendations

• Banks acting as platforms take the

regulatory burden while FinTechs

innovate

• Clear directives for the two types of

FinTech models

• Creating a dedicated FinTech

Regulatory wing

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Insights

• De-hinging banking innovation from legacy

structures

• FinTechs have shifted partnership dynamics from

licensing to profit sharing

• Banks and FinTechs have an independent

relationship

• Small banks - FinTech Partnerships to lead the

process of reducing transaction charges

• Eliminating connection between incumbent

acceptance and small companies’ survival

• Creating winning examples

• ‘FinTech collaboration is inevitable’ for large

players, but small players have a different

perception

Financial

Institutions

(FIs)

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• Large players are keen on owning FinTech incubators, but internal

challenges can hinder execution

• Views on FinTech collaboration challenges vary with FinTech readiness

• Banks face talent shortage to capitalize on FinTech related opportunities and

consider FinTechs as a talent source

• Insurance companies see themselves as technology driven, but they have a

limited outlook on FinTech collaboration areas

• FinTech companies are more open to cross-industry collaborations

• Telecoms are more inclined towards FinTech collaboration

Market Research Findings on FIs

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• FinTech coaching for all players

• Building FinTech awareness

programs and collaboration

platforms

• Eliminating the regulatory ambiguity

• Need for a FinTech consortium

Recommendations

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Startup funding is mostly local and

at an early stage, but there appear

to be early signs of international VC

funding coming to Pakistan

Overview of

Investments in

Pakistan

Startup

Environment

Source: FinSurgents Secondary Research 41

1. The startup ecosystem in Pakistan is currently emergent, but it is gaining pace

2. Accelerators and incubators are scattered across four cities – Karachi, Lahore, Islamabad,

and Peshawar

3. According to startups and banks, there is a lack of collaboration platforms in Pakistan where

FinTechs and incumbents can come together

4. Startup incubators see very few entrepreneurs interested in financial services products

because of the perceived regulatory uncertainty around this space and recommend the same

to incubated startups

5. Startup activity is thriving in the software and services sector of Pakistan

Findings

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• Need for neutral FinTech incubators

• Betting on the right FinTech leader profile

• So far FinTechs are geographically concentrated in the cities of

Karachi and Lahore

Recommendations

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FinTechs

Unreceptive attitudes of large players, complicated

regulations and deficient early stage funding cited as the top

challenges faced by FinTechs

Finding

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Areas believed to be impacted the most by FinTechs

The Emerging Markets Innovation Stack

Emerging Market Innovation Stack

Emerging market FinTechs must be

less capital intensive and serve

multiple segments

FinTechs enable the creation of payment rails within

emerging markets by enabling retail and online

payment acquisition and the aggregation of available

payment options, they create the foundational layers of yet another ecosystem – the startups.

A lower CAPEX allows FinTechs to break-even faster;

the non-linear growth of FinTechs enabled through

technology, makes them an attractive investment.

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Thank You!

Qasif Shahid

+(92) 300 200 9669

qasif@finsurgents.com

Lubna Razaq

+(92) 337 047 3874

lubna@finsurgents.com

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