Globally, financial institutions are rapidly evolving as consumers increasingly use fintech applications to conduct daily financial transactions from the comfort of their own homes. As a result, market capitalisations of nascent fintech companies such as Paypal are approaching those of traditional banks such as Goldman Sachs. Consumers are rapidly turning to digital finance apps due to the ease of access to technology, such as laptops and smartphones, as well as an increase in the use of e-commerce to meet their daily needs. Given this shift, traditional banks must act quickly to integrate digital finance applications into their business models or risk being outpaced by tech titans like Ant Financials and Apple shortly.

One of the key reasons for the rapid adoption of digital payment applications is the rapid rise of e-commerce, which is expected to surge from $3.3 trillion in 2022 to $5.4 trillion in 2026, as per a report published by Morgan Stanley. During the coronavirus pandemic, national lockdowns forced consumers to turn to eCommerce companies to fulfil their daily needs, from purchasing daily groceries to having food and luxury items delivered to their doorsteps.

Furthermore, eCommerce companies have been able to provide high-quality services to their customers as a result of improvements in supply chain capabilities and access to better internet connectivity, particularly in emerging markets where younger people make up a larger proportion of the total population. These young folks are more tech-savvy and thus spend much more of their time online, creating a massive opportunity for online businesses.

In addition to the rise of eCommerce, access to technology products has never been easier. Smartphones and laptops are available at reasonable prices and with a variety of specifications to suit individual preferences. Furthermore, smartphones have made the integration of new software with hardware very simple, allowing consumers to enjoy the latest applications without having to constantly replace their phones. With each passing year, consumers are flooded with a slew of new fintech applications and use cases. Moreover, the growing popularity of the “buy now, pay later” concept is attracting a growing number of consumers to these applications. This is because the idea of purchasing products at lower mark-ups with the option of paying in instalments is very appealing.

Given the rapid advancement of technology and the younger generation’s preference for digital products, now is the time for banks around the world, including those in Pakistan, to chart their next steps and pave the way for a digital future. These institutions can accomplish this in two ways: for starters, they can acquire, merge, partner, or invest in other fintech firms; or they can build their digital platforms in-house. The first approach is being undertaken by banks across the globe. For example, JPMorgan acquired a fintech company called OpenInvest in 2021. The business model of OpenInvest revolves around providing investment solutions to consumers while taking a variety of environmental, social, and family values into account. Likewise, Citigroup and Goldman Sachs participated in an unbelievable 120 deals, combined, between 2018 and 2020.

Many banks are also partnering up with technology companies to put their strengths on the table and create innovative products catering to consumers’ financial needs. A good example of such a model is the two giants, Goldman Sachs and Apple, which have joined hands to bring new credit cards to the market. Under this partnership, Goldman Sachs will bring its financial and regulatory expertise to the battleground, while Apple will help the project with its technological prowess. On the other hand, banks can take the opposite strategy and build their digital platforms in-house as well. The most important factor to consider for this strategy to work is understanding consumer behaviour to the point where a bank can forecast what a consumer wants even before the consumer recognises what he or she wants. This phenomenon is mind-boggling, but with the advancement in technology, the availability of big data, and the development of complex algorithms anything is possible. For example, when a customer applies for a car loan from a bank, the bank should begin marketing personalised insurance plans to the customer. This is entirely possible for a bank to do, even if the consumer is new to the bank because data can be obtained and analysed from third-party sources.

Having said that, the second approach is relatively more difficult, in my opinion. This is because banks generally think in terms of income and expenses, whereas technology companies are inclined more towards innovative ideas and achieving the next big thing. Hence, the second approach is better suited for technology companies because, before success is achieved, an institution must be relatively more willing to bleed cash into these projects for some time. This characteristic is less common in traditional banks, which are more risk-averse and have risk management ingrained into their DNA.

Banks in Pakistan should also begin working on integrating digital financial applications into their traditional brick-and-mortar products because market dynamics are rapidly changing and one thing is certain: time does not wait for anyone. Looking back over the last few years, mobile subscribers in Pakistan increased from nearly 140 million in 2017 to nearly 184 million in 2021, while mobile broadband subscribers nearly doubled, from nearly 42 million in 2017 to nearly 99 million in 2021.

These figures clearly show that a majority of Pakistanis are technologically savvy and are rapidly gaining access to the internet. This rising adoption makes it almost inevitable for Pakistanis to at least try products and services online shortly, if they haven’t already, and eventually need innovative digital financial products and services tailored to their specific needs. If Pakistani banks do not act now, they will be running an already lopsided race and effectively digging their graves while reaping short-term rewards in the form of momentary profits.

Furthermore, the State Bank of Pakistan (SBP) also has a very supportive stance toward digital finance in Pakistan. In recent years, the central bank has also initiated various projects, such as the Roast initiative, which is a free instant payment platform that will eventually enable end-to-end digital payments between individuals, businesses, and government bodies. Furthermore, the SBP has also decided to issue five digital banking licenses. Hopefully, SBP has more projects in the works, and private banks also start planning for the future, which is fintech.

All in all, it is up to banks to decide which path they want to take, whether it is to acquire or partner with already established fintech companies, build their financial platforms in-house, or a combination of the two. However, the rapid growth and adoption of fintech have made it a phenomenon too disruptive to ignore. As a result, traditional banks must decide whether to stick to their guns or adapt to change. Whatever they decide, it is important to remember that history has not been kind to companies that have been resistant to change.