The Licensing and Regulatory Framework for Digital Banks unveiled by the State Bank of Pakistan (SBP) in January 2022 not only heralds a firm resolution by the central bank to shake up Pakistan’s banking industry, it does so while reinforcing its commitment to several objectives already being pursued, including the promotion of digital financial services, financial inclusion, and increased competitiveness in and innovation by the financial industry.
The first of the salient features supporting these objectives include the distinction between the two types of licenses — the Digital Retail Bank (DRB) license and the Digital Full Bank (DFB) license, without the compulsion to transition from the former to the latter license.
While the DRB license may be viewed as a limiting option as it allows the incumbent to only service retail customer segments excluding corporate and commercial, with less than half the minimum capital requirement (MCR of Rs4 billion) compared with what is required for commercial banks and the DFB license (MCR Rs10 billion), it is a significant opportunity for license takers to focus on segments previously not catered to successfully by the financial and banking industry.
Much like the MFI Ordinance which ringfenced service provision to a particular client segment, this focus on niche segments, it is hoped, will propel license takers to break new ground in terms of customer segments, models and products and services.
Experience in other countries demonstrates the ability of digital banks to penetrate certain segments more successfully than the incumbent banks—in the UK 18–21-year-olds constitute 26% of the customer age mix, compared to 12% for traditional banks; in India it is 31% compared to 7%. Similarly, Hello Bank by BNP Paribas, Ila Bank in Bahrain and TNEX in Vietnam have penetrated non-core client segments of banks including the youth, low-income individuals and Micro Small and Medium Enterprises (MSMEs).
This is a vital consideration in Pakistan given that agri lending is 3-4%, SME financing is 6-7% and consumer loans 5-6%of overall private sector lending.
A second feature is the varied pool of sponsors eligible to apply independently and/or in collaboration for the license—local and international commercial banks, international digital financial services entities, microfinance banks (MFBs), and EMIs. This pool has been significantly expanded from what was envisioned when the draft framework was unveiled in February 2021, signaling the SBP’s openness to exploring a healthy variety of models and approachesto meet the objectives of the regulation.
In Singapore, Malaysia and Hong Kong, where digital bank licenses were recently awarded, the applicant mixwas extensive including banks, platform service providers, fintechs, telecom service providers, and even an airline company and a media house.
Reportedly, the interest Pakistan’s framework has generated, globally, could result in north of 20 applications in this first round, and it can be expected that traditional banks will not be the only recipients of the license.
A third feature is the emphasis on a digital-only entity, with a requirement to phase out any smart branches within seven years of starting operations. This requirement will not only reduce the brick-and-mortar footprint of the financial services industry reducing the end price for consumers, but also push incumbents to use artificial intelligence and big data analysis, and give much-needed attention to the client experience and product offerings.
According to research by Price Waterhouse Coopers, Pakistan, the average cost of customer acquisition and servicing for digital banks is 5-15% that of traditional banks. In China, Mybank is estimated to have a per transaction cost of 0.15% of traditional banks, while WeBank’soperating cost per account is estimated at 3 RNB compared to 20-100 RNB for traditional banks. Birthing digital-only entities in Pakistan’s banking industry, which will operate purely on digital platforms, are expected to yield benefits such as real-time updates, quicker account approval times, quick investing services and personalisation.
Moreover, as the digital bank cadre grows, traditional banks in Pakistan will have to catch up with the competition. This was witnessed on a significant scale in China after the entry of digital banks in 2013.
And finally, by carving out digital banks as a separate cadre, these entities will have no choice but to live, breathe and sleep digital banking, rather than running boutique units patching into legacy technology infrastructure built fora brick-and-mortar model of outreach. While SBP issued the Branchless Banking Regulations in 2008, which have also undergone several iterations, and are now supported with additional regulations, guidelines and large infrastructure undertakings such as regulations for the digital onboarding of clients and merchants, cloud policy, and the instant retail payment system infrastructure, RAAST, digital transformation of the banking industry has fallen short of expectations.
Even the microfinance industry continues to rely primarily on a physical model of outreach. In short, theseentities will receive the focused attention and governance steer required to grow into Pakistan’s large market offering.
The SBP has announced that five digital bank licenses will be issued. While this is broadly in line with the number of licenses issued in countries with a bespoke digital bank licensing regime—Singapore has issued four licenses out of 14 applications, Malaysia six against 29 applications, and Hong Kong eight—the SBP may consider expanding this number to eight for the following reasons:i). During the pilot and transition phases there could be exits; ii). Given the larger mix of sponsors that are allowed to seek this license, the SBP may want to expand the pool of incumbents that will be granted licenses in order to have a larger number of test cases to learn from; and iii). The timeline for re-opening applications is longer than three years.
In the run up to the March 2022 deadline for applications, it is not yet certain what the split between DRB and DFB license awards will be. However, to ensure adherence to and maximize achievement of the underlying objectives stated in the framework, it is hoped the balance will be in favor of the DRB license.
Visa, Mastercard and American Express suspend operations in Russia
Move by payment networks worsens country’s financial isolation over Ukraine invasion
Payment networks Visa, Mastercard and American Express have said they would suspend operations in Russia, dealing a new blow to the country’s financial system after its invasion of Ukraine. The decision followed a request by Ukraine’s President Volodymyr Zelensky on Saturday and threatens to further isolate a Russian economy facing crippling financial sanctions and a string of corporate boycotts.
San Francisco-based Visa said in a statement that it would immediately begin working with clients and partners in Russia to stop all transactions over the coming days. Once the process is completed, transactions by Visa cards issued in Russia will no longer work outside the country, and cards issued elsewhere in the world will not work within Russia.
“We are compelled to act following Russia’s unprovoked invasion of Ukraine, and the unacceptable events that we have witnessed,” said Al Kelly, chief executive of Visa. Mastercard said it was suspending its operations in Russia shortly afterwards on Saturday. American Express followed on Sunday, adding that it would also terminate all business operations in Belarus.
The payment networks blocked multiple financial institutions in Russia from using their networks last week following the imposition of sanctions. But the move to block all transactions will worsen the nation’s financial isolation. Russia’s central bank said on Sunday that credit cards using the Visa and Mastercard payments systems would stop functioning overseas after March 9.
But it has downplayed the impact of the suspension, suggesting all Visa and Mastercard cards issued by Russian banks would continue to work inside Russia as transactions could be handled by a domestic operator, according to Russia’s state news agency Tass. Some Russian banks, including Sberbank and Alfa-Bank, have said they might issue co-badged cards linked to Russia’s Mir and China’s UnionPay international payment systems. Some Russian banks already operate the UnionPay payment system, including Gazprombank and Rosselkhozbank, said Tass.
The sanctions announced last week had already caused Russians in Moscow and other cities to rush to withdraw cash from the nation’s banks on concerns that payment card services offered by Visa and Mastercard would stop working. Long queues have formed at ATMs waiting for fresh deliveries of cash and some western experts have warned about the liquidity of Russia’s banking system.
Earlier on Saturday, Zelensky called for the suspension of all commercial transactions, including by Visa and Mastercard, during a video call with US lawmakers. During the hour-long zoom call with Senators, Zelensky thanked the US for its support but called for more military aid and sanctions to isolate Russia. In a Twitter post following the call, senator Lindsey Graham said: “Anything that could hurt the Russian economy will help the Ukrainian people and may make this war more difficult for Putin.”
Mastercard, which has operated in Russia for more than 25 years, said that following its suspension of operations, cards issued by Russian banks will no longer be supported by its network, and any card issued outside of the country will not work at Russian merchants or ATMs. “We don’t take this decision lightly,” the company said in a statement, adding that it reflected “the unprecedented nature of the current conflict and the uncertain economic environment”. The company said it would restore operations “when it is appropriate, and if it is permissible under the law”.
Last week, Mastercard and Visa disclosed that about 4 per cent of their net revenues in 2021 came from business conducted within, into and out of Russia. Amid concerns the companies could face retaliatory action from Russian hackers following their action, Mastercard said it would remain vigilant to ensure the safety and security of the global payments ecosystem and its network.
“Our cyber and intelligence teams will continue to work with governments and partners around the world to ensure that stability, integrity and resiliency of our systems continue to guide our operations and response to potential cyber attacks,” said the company. Earlier on Saturday, PayPal announced it would shut down all its services in Russia. “Under the current circumstances, we are suspending PayPal services in Russia,” said chief executive Dan Schulman. “PayPal supports the Ukrainian people and stands with the international community in condemning Russia’s violent military aggression in Ukraine.”
Pakistan Consumer Confidence Index increased by 8.8% in Q4 2021
Pakistan’s Consumer Confidence Index has increased to 77.0 points in Q4 2021 (Oct-Dec), compared to 70.8 points in Q3 2021 (Jul-Sept), translating into 8.8% quarter on quarter increase, according to a report ‘Pakistan Consumer Confidence Index (CCI)’ for Q4 2021 jointly issued by the Dun & Bradstreet Pakistan and Gallup Pakistan on Thursday.
This improvement in sentiment is driven primarily by improvement in future expectations as respondents reported a greater increase in Future Expectations (up 13.6%) compared to Current Situation (up 2.3%) in this quarter.
During the current quarter, all CCI parameters witnessed a slight improvement while still indicating pessimism, driven primarily by increase in future expectations (up 13.6%) Q-o-Q. Overall increase primarily stemmed from improved perceptions regarding Household Savings (up 16.3%), the report added.
Unemployment continues to drag consumers’ enthusiasm and remained the most pessimistic parameter (NI = 55.3). Across all parameters, consumers were only optimistic regarding Future Financial Situation (NI = 109.3). During Q4 2021 survey, 91% consumers believed that daily essentials have continued to become expensive/very expensive in the last 6 months compared to 94% in Q3 2021.
Nauman Lakhani, Country Lead of Dun & Bradstreet in Pakistan stated, “The eighth issue of Pakistan Consumer Confidence marks the end of the calendar year 2021 and completion of two cycles of CCI.
Current Consumer Confidence growth of almost 9% as compared to the sharp decline last quarter is healthy, but consumers remain in the ‘pessimistic’ zone. The slight improvement is a likely indication of normalizing demand, amidst people adapting to the ‘new normal’.”
Bilal Ijaz Gilani, Executive Director Gallup Pakistan, added, “The current quarter results show improvement in overall consumer sentiment, driven largely by improved expectation for future.
Having said this, the overall sentiment remains in the negative with majority rating current and future situation of their finances to be in dire straits.
“Given the continued pressure of inflation, slow economic growth and disparity between small vs large and those selling to domestic vs international markets growing, the chances of sentiments improving drastically in the short term are low as well. Businesses therefore need to keep this current and short-term forecast in mind while planning for expansion,” he added.
The CCI report has been developed by assessing Consumers’ Confidence about the economy as well as their personal financial situation. The Index covers four key parameters i.e., Household Financial Situation, Country’s Economic Condition, Unemployment, and Household Savings. The Index reflects ‘Current Situation’ (economic changes witnessed in the last six months), as well as ‘Future Expectations’ (changes expected for next six months) of consumers across the country.
The CCI ranges from 0 to 200, with 100 as the neutral value. A score of less than 100 indicates pessimism while a score of more than 100 indicates optimism.
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