1. Digital Financial Inclusion
PAKISTAN SCHOOL ON INTERNET GOVERNANCE (pkSIG) 2018
03 – 06 September, 2018
Regent Plaza, Karachi

2. Outline Global Perspective: setting the context
Developments in Pakistan’s DFS Market
National Financial Inclusion Strategy
Collaborative Regulations and Digital Ecosystem

3. Digital Financial Services (DFS): A global perspective

4. Financial Exclusion Challenge
Bangladesh
India
Pakistan
Kenya
Accounts (% of age 15+) *
2017
50%
80%
21%
82%
2014
31%
53%
13%
75%
Growth
61%
51%
62% 9%
Financially excluded
20%
79%
18%
Technological Literacy
2016
37%
38%
40%
Note: * The percentage of respondents who report having an account (by themselves or together with someone else) at a bank or another type of financial institution or report personally using a mobile money service in the past 12 months.
Source: Global Findex Database World Bank and Financial Inclusion Insights, Intermedia, 2016

5. Why DFS/Branchless / Mobile Banking a Priority
Financial Stability
Economic Growth
Poverty Reduction
Promoting Enabling Regulation & Consumer Protection
Financial Inclusion
Targeting the poor and low income
Increasing the economic size of Formal Financial Sector
Reducing the cost of banking for existing customers through mobile solutions
Facilitate and encourage economic activity; Promote Local Economic Development

6. Digital technologies significantly reduce the cost of providing financial services (up to 90 percent)
1: To reach full cost savings, sufficient improvements are necessary in system design, scale, and operational efficiencies
Source: McKinsey, 2015

7. The Potential Economic Impact of DFS in Emerging Economies
Two billion individuals and 200 million businesses in emerging economies today lack access to savings and credit.
“Rapidly spreading digital technologies now offer an opportunity to provide financial services at much lower cost, and therefore profitably, boosting financial inclusion and enabling large productivity gains across the economy.”
Source: McKinsey Report 2016

8. DFS Focus Group of International Telecommunication Union (ITU)
The Focus Group had four Working Groups on:
Interoperability
Ecosystem
Technology, Innovation and Competition
Consumer Experience and Protection
Detailed working of the DFS Groups involving experts from World Bank, technology firms, central banks, telecom regulators, banks and telecom operators.
The Focus Group has formulated recommendations and are available at:

9. Branchless/Mobile Financial Services in Pakistan

10. Traditional vs Mobile Banking
Traditional Banking
Cost is too high to set up bank branch and ATM network
Image of serving mostly rich people
Large amount of paperwork and requirements to be completed to open an account
Mobile Banking
150 million active cellular mobile SIMs
However, the No. of subscribers is 90 million (some subscribers get SIMs for their family members also)
Approx. 38 million m-banking accounts
Fast growth in annual m-banking transactions
Low cost as m-banking leverages the existing infrastructure
Low psychological barriers to access
Reduced KYC requirements

11. Permissible Branchless / Mobile Banking Models (as per SBP’s Branchless Banking Regulations 2008, amended in 2011 and updated in 2016)
One-to-one (1-1) Model
In this model one bank offers mobile phone banking services in collaboration with a specific Telco. As a consequence, the services may only be offered to customers using mobile connection of that specific telco.
One-to-many (1-∞) Model
In this model a bank offers mobile phone banking services to customers using mobile connection of any Telcos. This model offers the possibility to reach to any bankable customer who has a mobile phone connection.
Many-to-many (∞-∞) Model
In this model many banks and many telcos join hands to offer services to virtually all bankable customers. Under this system, a ―Third Party Service Provider‖ (TPSP) is necessitated, which must be controlled by an FI; or by a subsidiary owned and controlled by an FI or a group of FIs; or by a third party under proper agency agreement with Financial Institutions. FIs‘ such arrangement with TPSP shall be subject to the regulatory approvals.

12. Time pey (On time) (Nov 2012)
Partnerships of Mobile Operators with Banks
Telenor
Microfinance Bank
Easy Paisa
(Oct 2009)
CM Pak
Askari Bank
Time pey (On time) (Nov 2012)
Jazz
Mobilink Microfinance Bank
Jazz cash
(Dec 2012)
Ufone
U-microfinance Bank
U-Paisa
(Jul 2013)
Telenor, Jazz and Ufone have also full ownership of partner banks
Stand Alone Banks
UBL Omni HBL Express MCB Lite Meezan Bank JS Bank Alfalah Askari FINCA

13. National Financial Inclusion Strategy (NFIS)
Pakistan launched its NFIS in May 2015 which
sets out the national vision and roadmap to accelerate financial inclusion.
Over 50 countries have already set national commitments and targets for financial access through digital means (The World Bank)
Bangladesh has prepared draft NFIS in 2018

14. Financial Inclusion (FI) Strategy can accelerate progress towards Financial Inclusion
Increase in account ownership is larger in countries with strategies:
Average annual growth of 15% in countries with strategy
Average annual growth of 7.6% in countries without strategy
Note: FI Account = Percentage of Adults (age 15+) with a Bank Account
Source: World Bank

15. Strategic Framework for NFIS - 2015
Target: 50% adults should have digital transaction accounts including mobile wallet accounts by 2020.
(Total No. of adults as on June 2015 were million).
Promote access to financial services in rural and underserved areas.
ICT and broadband is identified among the main pillars which will enable such proliferation.
ENABLER 4: Public & Private Sector Commitment and Coordination
ENABLER 1: Financial/Payments/ICT Infrastructure
ENABLER 3: Enabling Legal and Regulatory Environment
DRIVER 3: FINANCIAL SERVICE PROVIDERS
Providers develop systems, knowledge, products to serve new market segments profitably and safely
DRIVER 2: ACCESS POINTS
Expand and Diversify Access Points
DRIVER 1: DIGITAL TRANSACTION ACCOUNTS
Expand Access to Digital Transaction Accounts (DTAs)
Drive Scale and Viability - digitize payments
ENABLER 2: Supervisory & Judicial Capacity
DRIVER 4: FINANCIAL CAPABILITY
Raise Financial Awareness & Capability (Consumers, SMEs)

16. NFIS Coordination Structure
National Financial Inclusion Council
National Financial Inclusion Steering Committee
Technical Committees / Consultative Working Groups
(Technical level representatives from both public and private sector, led by NFIS main stakeholders as mentioned above)
Finance Secretary, Governor, SBP
Chairman, SECP, Chairman, PTA, Chairman, FBR, Secretaries, Provincial Finance Departments, Chief Commissioner Islamabad Capital Territory (ICT)
Ministry of Finance (Chair)
Finance Minister
Senior technical level representatives from MoF, SBP, SECP, PTA, FBR, SMEDA, and other private and public sector institutions
SBP (Chair)
Governor
PBA: Pakistan Banking Association; SMEDA: Small and Medium Enterprise Development Authority

17. Telecom Regulator is facilitating the Implementation of NFIS
Chairman PTA is member of the Council and Member (Finance), PTA is member of the Steering Committee
PTA is also member of various Technical Committees:
Sub Committee 1 – Payment System Infrastructure
(PTA, Pakistan Post, 1 Link, SBP, NADRA, Mobilink Microfinance Bank, Karandaz)
Sub Committee 2 – Digital Financial Services (Instruments, Products & Distribution Channels)
(PTA, SBP, UBL, U-Bank, Habib Bank, Meezan Bank, Finsurgents)
Sub Committee 3 – Digitizing of G2P & P2G Payments
SBP, NADRA, BISP, NBP, Pakistan Post, Provincial Finance Departments

18. NFIS Implementation in Pakistan
Promote Digital Transactional Accounts – digitization; more access points to achieve scale / viability
Lower verification & revalidation cost of Digital Accounts – to facilitate account acquisition on massive scale
Foster innovation to develop client centric products and services – to facilitate account usage through need based products and services
Expand ATM network and connect Pakistan Post to National Payment System – to enhance access points
Adoption of automated land record – for speedy disbursement of agri- loans: provision of online access of land record to banks
Digitizing microfinance – linking microfinance industry with digital platform
Creation of electronic collateral registry – facilitate financing to un-incorporated SMEs especially small enterprises
Develop Credit scoring model for micro and small enterprises – enhance usage through instant credit decision
Develop Shariah framework for banking and non-banking microfinance institutions– providing Islamic financial services to low income segment population
Develop programs for women entrepreneurship– enhance

19. Strategic Initiatives: Pakistan Post Digital Financial Services
3.5 M Customers
touch points
2M annual Trx
1.3 M Pension Customers
Pro-poor pricing model , providing lowest cost financial services in the country
Largest network of customer touch points - institution owned
Legacy Brand with high trust value among the masses

20. EOBI – Pension Payment Digitization
Strategic Initiatives: National Bank of Pakistan – Payments digitization
PKR 5 Trillion Govt Trx /Yr
20 M Walk-in Customers
Rationale
Support largest Government Payment handler in the country
NBP has already formulated a department with well staffed team to digitize its government payments
Opportunity to bank 20 million unbanked walk-in customers
EOBI – Pension Payment Digitization
500,000 + Registered Pensioners
PKR 1.9 Billion Disbursement

21. Enabling Regulatory Environment for Mobile Financial Services

22. Coordination / MoUs/ Joint working groups , regulations and goals
Coordination among the regulators and industry players is the key
Coordination / MoUs/ Joint working groups , regulations and goals
Financial Regulator
Telecom Regulator
Securities and Exchange Commissions
National registration / Database Authority
Financial Institutions
Telecom operators
Micro-insurance providers
Technical Service Providers
Applications / solution providers

23. Regulatory Framework in Pakistan
SBP’s Branchless Banking Regulations, 2008 (updated 2011; revised Jul 2016)
MoIT Policy Directive, May 2008
SBP’s Rules for PSO and PSPs issued in Oct 2014 for e-payment gateways and payment system providers and operators.
PTA’s Regulations for Technical Implementation of Mobile Banking, 2016
SBP’s Regulations for Mobile Banking Interoperability, 2016
PSP= Payment Service Provider; PSO=Payment System Providers

24. PTA & SBP Joint Regulations for the Technical Implementation and Interoperability of Mobile Banking
Close Cooperation of SBP and PTA to promote mobile / branchless banking in Pakistan
MoU signed between SBP and PTA in January, 2012 (renewed in 2016)
Extensive consultation process with stakeholders on the draft regulations

25. Salient Features of PTA & SBP Joint Regulations
Applicable on mobile operators, Third Party Service Providers (TPSPs) and financial institutions that offer m-banking services
Provides detailed mechanism for technical implementation of one-to-one and any-to-any model of m-banking
Existing models (one to one) will continue with their arrangements without the requirement of separate license
All TPSPs are required to acquire a license from PTA and authorization by SBP
All TPSPs and operators to enter into Service Level Agreements (SLAs) with SBP authorized Fis.

26. Salient Features of PTA & SBP Joint Regulations
A joint PTA and SBP committee to resolve the disputes between the parties, and to protect consumers’ interest.
Operators and TPSPs shall put in place an effective and comprehensive consumer protection mechanism against risks of fraud, loss of privacy, delays in service provisioning etc. to the consumers.
Quarterly Review of market dynamics, regulations and SOPs

27. Key benefits of PTA & SBP Joint Regulations
Opportunity for the technical service providers and operators / banks to come forward with their advanced interoperability solutions
Availability of interoperability on payments and across platforms
Serve the current demand in the industry for another switch with enhanced and innovative interoperability solutions
Ensure quality of service / regulatory oversight
Security of transactions and systems
Consumer protection
Dispute resolution

28. Asaan Mobile Account (AMA) Scheme through TPSP
AMA scheme aims to facilitate 2 minute account opening process and allow transactions with a basic/feature mobile phone from anywhere, at any time.
The scheme will improve the accessibility of new customers for account opening, drive usage of digital financial services through increased number of account-to-account transactions across various networks and provide digital access to a range of quality financial services.
SBP and PTA have jointly worked for the success of AMA scheme and technical platform for this scheme is being provided by the joint TPSP license.
AMA scheme is currently in the pilot phase to test the solution in a live environment to validate the system connectivity, integrations and user acceptance.
After the pilot test, the scheme will be launched on commercial scale and its scope will be extended to all BB providers.

29. Impact of Financial Inclusion Strategy
Access Points
Source: SBP

30. Impact of Financial Inclusion Strategy
2010
2015
NFIS Launched
2018
Internet Banking
Internet Banking Users
0.8 million
1.8 million
2.9 million
No. of Internet Banking Transactions
0.9 million
16 million
22.3 million
Value of Internet Banking Transactions
Rs billion
Rs. 798 billion
Rs. 886 billion
Branchless / Mobile Banking
BB Accounts
0.3 million
15 million
38.5 million
No. of BB Transactions
36 million
375 million
646 million
Volume of BB Transactions
Rs. 138 billion
Rs. 1,872 billion
Rs. 2,803 billion
No. of transactions through mobile applications
6.6 million
Source: SBP (2018 figures are provisional)

31. The Potential for Digital Financial Services in Pakistan
150 million biometrically verified SIMs (provides uniquely authenticated database for m-services)
58 million mobile broadband subscribers
Less costly smartphones
30 million daily hits on the websites of olx, rozee and pakwheels
50,000 Points of Sale
Nearly 38 million m-wallet accounts
Network of 100,000 unique m-banking agents’ locations
400,000 m-banking agents
13,835 ATMs
Over 70 thousand SECP registered companies
Nearly 2 million merchants / shops
Switches (1-LINK, MNET),
(only 1-Link is linked to mobile payments)
Progressive Telecom and Financial Regulators
Well established NADRA database

32. Development of DFS Ecosystem to the next level
To reap the potential, our DFS ecosystem need to evolve to a state where consumers and businesses feel comfortable to leave their funds in digital form rather cash.
Delivery of bulk payments including G2P and B2P through mobile wallet accounts.
Payments through these wallet accounts must be acceptable and as easy as paying cash at the merchants outlets.
Payments across different channels should be ubiquitous and interoperable for the consumers, wherein, anyone can transfer to anyone through any channel.
Delivery of additional services including savings, insurance, investment and loaning through digital wallets
For the overall success, development of consumers’ trust in digital technologies is crucial.

33. National Payment Gateway National Fraud & Risk Management
Way Forward: Development of Complete Digital Ecosystem
Shared Infrastructure
Real Time payments
National Payment Gateway
Instant Credit
Social Payments
G2P
Digital Credit
Bureau
Text
Real Time monitoring
National Fraud & Risk Management
Shared
Touch Points
Increased Outreach
Build Use Cases
P2G
New Use Cases

34. Thanks