Currently, the new word FinTech is buzzing in the international and local financial industry. This terminology is a combination of finance and technology. This means any financial activity done via using technology is FinTech. But now this word represents a financial company that provides financial services via technology.
A few years ago, we saw a rise in the number of technology-based startups in Pakistan. Many dynamic entrepreneurs with their talent made it to the top and many were not able to survive in the shark tank and packed up. But they could bring the terminology of FinTech to the Pakistan market where we saw many online banks, microfinance institutions, and even telecom giants jumping into the sector.
The financial crash of 2008 started to change the minds of policymakers and financial industry experts and with the use of technology, they tried to reduce the operating cost, and financial worthiness of customers and provide financial services without leaving the office or home, mobile money was introduced and this revolutionized the financial industry.
However, due to different directions and high operating costs, conventional financial institutions are slow to adopt the new horizon opened by technology. This created a gap between common men’s financial requirements and financial institutions’ responses. To fill this gap technology-based start-ups started coming into the market to not only fulfill the financial requirements of common men but also they are operating at very low operational costs. These startups are called fintech.
Fintechs are not like brick-and-mortar commercial banks. They have no branches, they have no physical contact points, no physical account opening, cheques, and no physical application they provide all services online. As fintech are not banks they use more innovative ways to provide financial services. Different types of Fintechs operate with different licenses like EMI and NBFI. Some provide Nano lending, Payments, International Money Transfers, Personal Finance Management, Equity Financing, Earned Wage Access, etc.
To see growth potential and to achieve financial inclusion regulators in Pakistan, the Security and Exchange Commission of Pakistan (SECP) also took interest in Fintech and provided approvals, regulations, and laws to create an environment for setting up and operating fintech in Pakistan which also attracted foreign funding.
In Pakistan, people’s knowledge about the financial sector is very low and miscreants are always ready to take advantage and loot the people. In the recent past, we have seen incidents of the Double Shah, and Mudaraba scandal, and the list goes on and on. In the current economic crunch faced by Pakistan where inflation affects the purchasing power of every individual, in an environment where expenses are increasing and income is decreasing, 90% of the population is under financial stress.
More than 120 Shark lending companies were launched in Pakistan illegally without being registered in SECP during this time targeting Pakistanis under stress, giving small loans without any criteria and with no creditworthiness verification by the Credit Information Bureau. These apps invest heavily to advertise their product with very attractive terms and conditions but real loan terms are not informed to the borrower, those apps were available on Apple and Google app stores making them look authentic so people start using them without any fear.
The situation created uproar against digital lending apps when people were not able to pay the loans with pathetic interest rates and started to commit suicide, and the whole situation took a very tragic turn. With this regulators started intervening and contacting the mobile app stores to shut down non-registered apps. SECP also contacted PTA and FIA and with all this activity more than 120 Ponzi apps were shut down.
With this SECP, not only strengthened its regulatory framework for licensed Non-Banking Finance Companies (NBFCs) but also took effective measures in coordination with relevant authorities to shut down unauthorized and illegal loan apps. PTA has also raised the issue with app store management about the misuse of data, privacy violations, and coercive recovery practices.
Through SECP’s efforts and ongoing engagement, Google has introduced Pakistan’s Personal Loan App Policy, according to which Google only allows SECP-approved Personal Loan Apps to be listed on its Google Play Store. This is a big achievement for Pakistani regulators. SECP also introduced basic requirements for NBFCs, engaged in digital lending, to protect the interests of borrowers. NBFIs provide disclosure of fees, loan tenure, number of installments, early and late payment charges, etc. Access to consumers’ data (contact list, photo gallery, etc.) is strictly forbidden.
But all these episodes create hurdles for those NBFCs that are working according to the guidelines other than Nano-Lending models, such as fintechAbhi, an Earned Wage Access provider in Pakistan. EWA platforms offer a debt-free means for employees to access earned but unpaid wages before payday, fostering financial wellness. On the other hand, nano-lending apps provide short-term loans with high interest rates, which, if not managed responsibly, can lead to debt accumulation.
Chief Commercial Officer of Abhi, Mohammad Zaidi said in a meetup that they are not providing loans but access to hard-earned salaries people make at their jobs. They work with Businesses to provide their employees with financial well-being. Only in one year due to the unique business model and low-cost services, many local and multinationals were onboarded with the concept. Instead of providing unsecured loans ABHI provides EWA (Earned Wage Access) through which employees can access the portion of their earned salary via the app. They can withdraw through the ABHI app to their account in just a few clicks. The repayment happens on the payroll date by the company themselves. This model only comes into play when the employers get into a contract with ABHI, and then this service is provided to the employees.
For the employer, they also provide payroll financing, where salary is deposited on time in the employee’s bank account on the suggested date. Companies will pay ABHI salary amount as they get their receivables. This saves the companies from hurting employee morale by delaying salaries during these times.
In conclusion, fintech has rapidly evolved in Pakistan, reshaping how financial services are accessed and delivered. While the growth of fintech has been promising, it has also highlighted the need for robust regulations to protect consumers from predatory practices. The regulatory efforts of the SECP signify a commitment to fostering a fintech ecosystem that promotes responsible innovation and ensures the financial well-being of all stakeholders. As fintech grows, Pakistan’s financial landscape stands on the brink of a transformative future.
— The writer is a
journalist with more than
17 years of experience.