The emerging ecosystem of digital financial services coupled with the supportive regulatory environment has provided opportunities for Fintech companies in Pakistan, which has gradually surged to over 40 with different ideas, products, and services.

The promise of Fintechs is also becoming increasingly recognized by financial institutions, and the need for providing user-centric and inventive products and services to a large unbanked population of the country is being progressively acknowledged.

According to the report ‘Fintech Ecosystem in Pakistan’ released by Karandaaz Pakistan, there are more than 40 prominent Fintechs operating in Pakistan in the following seven mainstream specialized fields.

Payment Service Providers
Digital Credit/Savings
Payment Independent Software Vendors (ISVs)
Merchant Aggregators
Wallet Services
Insurance Tech
Identity Services

Payments are the most prominent in addition to the opportunities in infrastructure, investments, and insurance. This trend also mirrors the global priorities of the Fintechs that have had a surge in the payments space, especially after the onset of the pandemic.

The report also found that the regulatory support for Fintechs has improved considerably in recent years, with increased interest from the State Bank of Pakistan (SBP) and the Securities and Exchange Commission of Pakistan (SECP).

A significant shift in the adoption of digital financial technologies has also been observed on the demand side as a result of the pandemic. The volume of both mobile banking transactions and internet banking transactions has exponentially risen by 102 percent and 42 percent respectively.

Similarly, the adoption of smartphones doubled over the last two years, reaching 81 million by the end of 2019 (49 percent of mobile connections). It is anticipated to reach 70 percent by 2025. This shows a dramatic shift in consumer preference and a ripe market opportunity for Fintechs to capture.

Investors of Fintechs in Pakistan
While there is little data available for Fintech investments in Pakistan, the report highlighted that that typical angel and venture capital investors have been cautious with Fintech investments.

Resultantly, in line with global trends, corporate houses are increasingly realizing this opportunity. Large corporate houses are making direct investments in Fintech start-ups or using their venture capital arms to fund the same. Some of these corporations are Zong, NayaPay, Avanza Payment System, Keenue, VRG, etc.

According to an analysis of 24 Fintechs, 54.2 percent were undertaken by corporate entities, followed by Venture Capitalists (VCs) at 21 percent and by angel investors at 12.5 percent.

Investments by corporate entities will continue to rise, followed by a surge in investments by VCs and angel investors. Investments by the latter are most likely to increase due to favorable adjustments established by the SBP (such as modernizing foreign exchange regulations).

Aligned with global trends in investments, the payments segment will absorb a majority of these investments in the near future.

Prevailing Challenges in Fintech Innovation
Currently, even with regulatory support, the availability of innovation capital, relatively good infrastructure, and a youthful population, these start-ups are not geared towards solving the financial inclusion challenge.

Of hundreds of start-ups founded over the past five years, only a few are targeting innovation in financial services, i.e. Fintechs. Of these limited Fintechs, a minimum is targeting the under-served population. This may be due to the reason that innovation efforts to date have been directed towards improving the ‘delivery’ of the existing financial products instead of new product development that caters to the underserved segments of the population.

However, despite the focus on the delivery of existing financial products, the user experience is not usually at the heart of product development. Consequently, many low-tech savvy individuals are unable to benefit fully from the services provided.

Future Outlook
The future for the Fintech ecosystem in Pakistan holds abundant potential. The launch of the RAAST program, in particular, will potentially create a considerable market opportunity for Fintechs to capitalize on.

Despite several challenges, there is the chance of a surge in the supply of Fintech experts in Pakistan. This primarily emanates from the rising interest in entrepreneurship, more successful start-ups, and wider investment activity.

It is difficult to predict if financial literacy and inclusion levels will rise in the near future, but the trend in the adoption of smartphones paints an encouraging picture.

The payments segment is most likely to have enhanced activity in the near future, followed by the infrastructure segment. The lending segment may also have a growth in interest by Fintechs.

Given the recent focus of the regulator on gender mainstreaming in financial inclusion, financial institutions will tend to respond with adequate rigor. However, the considerable gap in the financial inclusion of women remains an opportunity for Fintechs to capitalize on.

Institutional donors and other government agencies are expected to continue supporting the economic empowerment of women through financial inclusion and independence, and this will result in more grants and technical support in bridging this gap.