Financial Inclusion in Pakistan

Growth of digital mobile services has allowed the world to become more connected and has allowed
masses especially those who were previously deprived of financial services such as poor and women
have access to convenient and effective financial services. These developments have had their effect in
Pakistan as well. “The country is home to over 145 million NADRA verified cell phone connections,
with more than 48 million having 3G/4G/LTE connectivity, while cellular density remarkably stands at
71.4%, growing from 54.6% in 2008.” (Yasir) “According to Access to Finance Survey (A2FS) 2015,
access to financial services still remains low. Only 23% of the adult population has access to formal
financial services, while merely 16% of adults have a bank account. Furthermore, only 11% of adult
women have a bank account, compared to 21% of men having a bank account. Within the DFS sphere,
out of the 33 million BB counts, almost 53% are inactive, while the average deposit balance in total
accounts is around Rs. 340.” (Yasir)

ARTICLE: Mobile Money-The case for Financial Inclusion.

Mobile money systems aim to serve two main purposes; as a tool for financial inclusion and as a new
business opportunity for its providers. It has the ability to tap into a large untouched market. “Digital
finance has the potential to reach over 1.6 billion new retail customers in emerging economies and to
increase the volume of loans extended to individuals and businesses by $2.1 trillion.”
The survey conducted in this article by taking a sample of mobile money providers ranging from banks
to mobile money operators to third party providers of mobile money has produced some key insight into
mobile money opportunities.
1) Scale enables profitability but requires significant upfront cost
There is significant benefit of scale in the industry due to a greater percentage of fixed investment.
Therefore, the unit cost decreases as more value flows into the system. This however is quite expensive
for small providers as they would have to invest two times greater just to maintain a size large enough to
earn profits. The survey on the sample of milieu providers shows that the breakeven point for providers
occurred at $2billion to $3billion in annual transaction value which is quite large. The fixed cost in this
system is mainly attributable to IT costs required for transaction processing which also includes software
licensing fees. Fixed costs also includes personnel and real estate costs. However, in the long run when
the number of providers increases, due to network effect marginal costs would be lower specifically
relating to sales and marketing, agent acquisition and management, and cash distribution.
New customers will also join due to word of mouth and agents may also sign up by observing the large
opportunity it brings with itself. It is therefore important for mobile banking providers to attain benefits
of scale only by investing heavily and for a long time scale.

2) Regulation can accelerate or hinder ability to scale

Regulation has potential to influence the ability to grow and maintain a customer base, build and sustain
a high-quality agent network, develop critical capabilities and infrastructure, and offer products beyond
basic payments. Therefore regulations can impact the business of mobile money providers in a number
of ways. Firstly, introduction of Tariff caps to make the services more affordable for the poor can affect
the profitability of providers. For example the survey shows that “capping cash-out tariffs at $0.25 each
would
shift overall provider margins from 35 percent to roughly -5 percent”. Apart from that it may also reduce
the customer base as providers would be resistant to serve customers if the expense to reach them
outweighs the benefit received from them.
Secondly restriction on who can serve as an agent can hinder the growing Cash-in-Cash-out (CICO)
network. Although this kind of restriction would be aimed at reducing illicit financial activity, it
eventually curbs the providers ability to work with airtime distributors and small informal shops which
actually make most business for the providers by reaching out to far-flung areas.
Thirdly regulations such as firewalling mobile money and other business IT systems can increase the
fixed costs of providers especially those who are small scale and eventually affect the profitability.
Although such regulations are benficial for customers in providing protection against cyber breaches it is
costly for the provider.

3) Opportunities for providers will increase as mobile money business models evolve
Mobile money providers offer four type of services easily decribed by the ACTA Framework: A –
accounts and activities associated with opening and maintaining he account, C - Cash-in-Cash-out
Services, T - transaction between two accounts and A - adjacent activities (financial and non-
financial) tied to mobile money wallet. Financial adjacencies include interest earned on balances held
and Nonfinancial adjacencies include strategies to help companies acquire new customers, reduce
customer attrition etc.
In today’s business model CICO represents 60% of profit for at-scale providers and accounts for largest
share of both revenues and costs. Since margins on CICO are low a reduction in small amount of cost
can reap large profits. However, this area is mainly reliant on the role of agents in acquiring and
maintaining customers. Therefore any changes in CICO structure could result in increased customer
acquisition costs.
Account-related activities mainly related to marketing are the second largest contributor to costs of
mobile money systems since it requires a lot of effort to acquire down-market customers who are more
difficult to reach and who may be less prone to switching behavior quickly. Transactions on the other
hand are second largest contributors to revenue due to large fees from customers compared to low costs
to provider attributed to automated systems and digital users interface. Of the four main services,
adjancies remains a largely untapped area, contributing no more than 10% to revenues and costs.
“Mobile money offers providers the opportunity to enhance existing business models and to develop
new ones beyond standard digital payments—including new forms of more data based financial
services, micropayments, and entirely new digital business models.”
Companies are developing innovative products and services that require digital payments. There is also
an increased market of peer-to-peer lending in China and Mexico. Not only that digital payments has
allowed small amount transactions thus promoting micropayment opportunities, frequent and on time
payment of school fees, health care and salaries by digital modes. Pay-per-service and Pay-as-you-go
models have emerged and it has enabled new “sharing economy” models, including ridesharing and
employment matching.

4) To seize current and future opportunities, providers will need to partner or acquire new skill.
While models differ, there are typically five main roles across the value chain: deposit holder, e-money
issuer, payments service provider, agent network manager, and telecommunications channel provider.
The three main entities banks, Mobile Network Operators (MNOs) and third-party providers each play
one of the roles listed above. Their roles may vary according to the country. In all value chains of which
we are aware, a bank or other depository institution plays the role of deposit holder and an MNO plays
the role of telecom provider. Banks, MNOs, or third-party providers can play each of the remaining
three roles. No single type of provider banks, MNOs or internet providers has all set of skills and to
maintain profitability in the growing mobile money system, diverse and hard-to-develop capabilities are
a requirement. Such as, broad marketing and distribution, management of an agent sales force, systems
and analytics, rapid product development, and financial intermediation. It is therefore essential for the
providers to either attain all of these skills which would be very costly and require a large amount of
time or partner with other providers.
The article therefore highlights three main modes of success for existing or aspiring mobile money
providers. Firstly, upfront large investment for a large amount of time to maintain scalability. Secondly,
either development of capabilities one does not have or partnering and acquiring firms that have those
skills.

Critical Analysis of the article:

This article does a good job at providing an introductory view of the basic economic ideas that are
driving the mobile money market and provides a healthy treatment of the subject matter. But it is not
comprehensive by any means.

Any discussion of proper treatment of a subject matter of a particular study does, and should, start with a
proper identification of the scope the study. The geographical scope of the study is quite limited,
restricting itself mainly to East Africa, also taking data for representative companies from the South East
Asia and West Africa. But limitation of scope does have some serious implications because it leaves out
the two most significant markets South Asia and China, also many other small markets like Latin
America. The scope of the study across type of companies studied is quite satisfactory. The data has
been taken from the companies that have different degrees of maturity. It is important because degree of
maturity usually also provide indication of the level of scales that company has achieved and experience
curve that it has created for itself. The study also consider players that have different points of origins,
i.e. Telcos, Banks or internet players, has providing a proper view of the heterogeneity that characterizes
this industry.

This study mostly concerns itself with the past data, but at the same the study also delves into
considering the new opportunities. Mobile Money developed in the era of brick mobile phones and came
forward as a CICO solution. But as smart technology has become, or is becoming, the new norm, the
scope of services and products that can be delivered through this platform has increased to a great extent
and has changed qualitatively. So any discussion of the economics of the mobile money industry could
have not been complete without the inclusion of this aspect. But still much of the developments that
have already taken place has not found there place in this study, this error flows directly from the fact
that this study has not given proper treatment to China and South Asia, where most of these
developments are taking place.

However, this study does provide a good discussion of the value chain of the industry, of different
players involved in the industry, of different skills and functional competitive advantages that are
required for the success, of need for scaling and customer acquisition. It is one of the very first studies
that tries to take on this particular subject matter, so a comparative analysis is not really possible. But
this fact also tells the pioneering role that this study is playing in this area of study.

Mobile Money Market In Pakistan:

According to the report of the state bank of Pakistan, Pakistan’s Financial Inclusion is improving.
Pakistan witnessed a 13 percent increase in financial inclusion since 2008. Much of this improvement is
associated with the increased use of mobile money. Although the overall financial inclusion of Pakistan
is low as compared to other regions of the world. According to the World Bank Report (2014), Pakistan
is the largest mobile money user in South Asia. 9 percent of the males and 2 percent of the females in
Pakistan use mobile phones for monetary transactions (Express Tribune, 2016). In recent 5 years,
mobile money market has contributed to 3.5 percent GDP of Pakistan. There are two main mobile
money models in Pakistan- OTC and mobile wallets. In over the counter model, transactions are
performed through an agent while in a mobile money wallet model; the people themselves perform
financial transactions directly, through the use of mobile phones.

About 79 percent of the Pakistani adults have access to mobile phones and 59 percent of the adults
actually own a mobile phone (Adults > 15 years). Currently, 7 percent of the adults have digital finance
accounts. Digital finance accounts can be operated through ATMs, debit cards, online and mobile
phones. The policy Branchless Banking by State Bank of Pakistan has a major contribution in these
figures. The policy followed a long path as mentioned below:

2008: State Bank of Pakistan and PTA issued the policy.

CGAP invested in Easy Paisa

2010: CGAP coordinated an exchange between State Bank of Pakistan and Mexican Regulators on
Level 0 account.

2011: Know your customer requirements were lifted and level o accounts were introduced. This means
that accounts can be opened through a simple SMS string.

2012: State Bank of Pakistan and PTA assured no introduction to anti-market regulations.

2014: The limit on level 0 account’s daily transaction was increased from 15000 to 50000.
2015: State bank of Pakistan allowed the opening of remote wallet.

NFIS was launched.

The mobile market is competitive in Pakistan. There is one primary-State Bank of Pakistan and one
secondary-PTA. The market deals in 7 types of products: Bill Payments, P2P Transfers, Airtime Top
Ups, Bulk Payments, Loan Repayments, Merchant Payments, International Remittances. New products
in include health insurance, life insurance and alternate energy financing. Easy paisa holds the largest
share in mobile market i.e. 54 percent. OMNI has 20 percent of the market share, while Mobi has 14
percent, time pay has 3 percent, u Paisa 4 percent, Mobile Paisa has 5 percent and HBL holds 1 percent.

OTC market is prominent in mobile money market with almost 80 percent of the share. Although OTC
is cheap and convenient but the real player that can help Pakistan improve its financial inclusion is
mobile wallet. OTC has slowed the speed by limiting the access to facilitated transactions only. Mobile
wallet offers much cheaper and faster transaction then OTC. Around 5500,000 people have m-wallet
accounts but only 40 percent accounts are active.

Following reasons were found for the lack of mobile wallet usage in Pakistan:

SBP has implemented new regulations such as biometric verification for level 0 accounts. Also, it has
increased the limit on the level of transactions on the three tiers of accounts to promote mobile wallet.
Following steps need to be taken to promote mobile market:

 There is a need to enhance customer’s awareness and knowledge about the money market and its
products. Communication is required at each level. For instance, they need to know what mobile
wallet is and how to conduct transactions through them. A trail period should be provided to
them before they become a regular user and communication should not stop even at the last
level.
 There is a need to find a way to deal with the customer skill deficits, which is related to
ownership and capability of mobile users, and illiteracy. A major proportion of the female
population in Pakistan shares mobile phones with family and they have to justify any calls and
messages that they make. Many of them cannot understand any text message received and also
cannot send one. This problem can be handled through new user interface designs such as use of
icons; images and receipts could be redesigned such as the amount paid becomes prominent.
 More products need to be added in mobile wallet to encourage customers to increase its use.
 Interoperate ability needs to be promoted as mobile accounts in Pakistan are only limited to the
users of certain mobile operators. Interoperability is defined as the “the possibility to transfer
money between customer accounts at different mobile money schemes and between accounts at
mobile money schemes and accounts at banks.”
Other Methods to promote Financial Inclusion:

Apart from inculcating mobile money in the system, a country can follow the following steps to promote
financial inclusion in the country.

 Foster diversity in financial institutions. This kind of diversity can be promoted by introducing
financial institutions such as postal banks, microfinance institutions, credit cooperatives. The
main idea is to cater the needs of the customers who aren’t or cannot be properly served by the
commercial banks.
 Promote the use of innovative technologies and inculcating technology-driven, non-traditional
institutions. In different countries, innovative technology providers are using technology,
existing customer networks and infrastructure to lower transaction costs and deliver financial
products and services well-suited to the needs of low-income consumers thus expanding the
customer base and in-turn promoting financial inclusion.
 Expand agent-based banking and other cost-effective delivery channels. This technique helps in
reaching the customer base that is difficult or expensive to reach by traditional means. By
 promoting agent-based banking and building lite branches of financial institutions, financial
inclusion is increased to a great extent.
 Invest in supervision and leverage technology to optimize limited resources. Optimization of
limited resources leads to an effective functioning of financial institutions that in the long run
promote financial inclusion.
 Encourage the development of low-cost, innovative financial products. Since different customer
bases face different financial needs, innovation in the financial products and services promote
financial inclusion of the underserved segment of the consumer base.
 Promoting financial education among the clients and keeping them updated of the changes in the
financial infrastructure. Lack of education is a key issue that results in resistance by the users in
trusting the financial infrastructure. Hence educating those customers promote financial
inclusion in the country.
 Strengthen financial infrastructure. Strengthening the infrastructure in the most important step
towards financial inclusion. While there are many ways to strengthen the financial infrastructure,
automation is typically the first and foremost step taken by every country in promoting financial
inclusion.
 Automation provides an easy and speedy mode for these companies in order to comply with
these regulations. This directly helps promote financial inclusion as the relation between
regulatory bodies and financial institutions is strengthened resulting in an extremely coherent and
efficient financial system.

Financial Inclusion Strategy in Pakistan:

The State Bank of Pakistan (SBP) launched the National Financial Inclusion Strategy (NFIS) for the
country in May 2015, which aimed to increase the access of financial services to adults from 10% of
adults to at least 50% of adults by 2020. The NFIS focused on four areas to focus on to improve
financial inclusion statistics in Pakistan:

 Promoting digital transaction accounts and reaching scale through bulk payments
 Expanding and diversifying access points
 Improving capacity of financial service providers
 Increasing levels of financial awareness and capability
 Design products and services that better reflect Pakistanis’ needs and daily lives.
  To improve digital financial services (DFS) use, support the development of phone skills and
access to phone ownership.
 Invest in developing women’s mobile phone skills, their access to phones, and programs that
address social norms.

Government policies and initiatives in support of financial inclusion are key for advancing access and
usage of financial services. Progress can be slow when contending with historical barriers to inclusion
and competing against informal services. Additionally, formal products must be tailored to better meet
the needs of Pakistanis who are currently using cash and relying on friends and family to save, borrow
and protect them against risk.
 Work cited
1) https://propakistani.pk/2018/05/29/digital-financial-services-to-be-a-36-billion-industry-by-2025-sbp/

2) https://karandaaz.com.pk/blog/unrealised-potential-mobile-wallets-pakistan/

3) https://www.psigen.com/6-ways-financial-services-companies-can-improve

4) http://blogs.worldbank.org/psd/water/8-key-approaches-accelerate-financial-inclusion

5) https://karandaaz.com.pk/wp-content/uploads/2017/02/Using-Mobile-Money-to-Promote-Financial-
Inclusion-in-Pakistan.pdf

6) https://tribune.com.pk/story/1043192/pakistan-leads-south-asia-in-mobile-money/