Below are edited excerpts of BR Research's recent interview with the banking veteran on SimSim, which is a mobile digital wallet jointly, developed by FINCA and FINJA (a Fintech) on the former's branchless banking platform, as well as on the prevailing regulatory environment for Fintechs in Pakistan.
BR Research: Starting off, in your opinion what are the main regulatory barriers to promoting Fintech as a sector in Pakistan?
Mudassar Aqil: FINCA Microfinance Bank is the most progressive bank in establishing a new kind of relationship with a Fintech. The traditional way Fintechs are treated in Pakistan underscores that there is a lot of room for improvement. In Pakistan right now, the banks and other financial service providers still view Fintechs as vendors for doing technology development for them.
That paradigm needs to be changed because today's genre is about creating alliances and collaboration through a new engagement model. FINCA Microfinance Bank's digital wallet, SimSim, is one such example. Under this collaboration, FINCA has created a partnership with FINJA on revenue-sharing basis and both the companies co-own the SimSim brand. This is a new model of innovation and partnership.
Now coming back to your question, let me first say that the SBP's recent decision to issue e-money licenses is a long-awaited and critical step towards bringing Fintechs under regulatory oversight without constricting their ability to execute. The banks without agent networks and Fintechs find it difficult to execute pure-digital strategies due to various reasons.
Primary reason is that a Fintech player has limited play without a banking partner. Banks are by default risk-averse and built around mature, stable and regulated business models. Second reason is that the regulatory oversight is being tightened on customer interactions with cash on the premise of Anti Money Laundering (AML)/Combating the Financing of Terrorism (CFT). That increases cost of operations and limits ability of smaller players without agent network to remain competitive.
BRR: We have heard rumblings that large banks treat Fintech players as passive vendors instead of active partners. Why is that so?
MA: Fintech specialises in disaggregating the banking business. They operate by picking one use case at a time, simplifying it, converting it into digital process, making it user-friendly and removing all the friction from that process for consumers. Now conventional banking models are being challenged by very smart and technically savvy individuals who may represent very small Fintechs, but it is really the weight of their ideas and their ability to execute that needs to be valued by the banks. This is the new world order in the banking world today.
So the technology stack and most of the executive leadership in IT departments and the executive suites of the banks are based on the analogue business model, which is quickly becoming obsolete. There is a need for new-age business partnerships between the banks and the Fintechs based on equality and win-win model.
BRR: Have the recent SBP guidelines on Digital Payment Security made it easy or difficult for Fintech players to engage the commercial banks?
MA: It's getting better. The State Bank is actively engaged and empathising with modern thoughts and initiatives built around customers. A number of bold decisions have been taken by banks like FINCA with the partnership of FINJA, which would not have been possible if SBP was not interested in taking financial services to the next level in terms inclusion, accessibility, usability and innovation.
We feel that the SBP sees its guidelines as guiding or binding principles in many cases for governance. But an innovative idea, no matter how disruptive, is absolutely welcomed by a regulator that is focused on achieving well-defined targets set for financial inclusion.
BRR: You mentioned financial inclusion. Digital payments are being promoted as a financial entry point for unbanked individuals. Beyond an enabling regulatory environment, what specific "fiscal measures" can the federal government offer to Fintechs to encourage innovation in this space?
MA: A regulatory and taxation sandbox framework can be built for Fintechs where they can do rapid testing of various ideas without the bureaucratic bottlenecks of various natures. Government should encourage the local venture-capital ecosystem to develop public-private partnership and support them with a clear mandate.
Besides, the government should actively incentivise the digitisation of consumer-facing operations and back-end financial processes by the traditional banks. That would consequently encourage Fintechs to assist banks in rapid digitisation. Banks in this way will build internal capability to work with external partners for tangible benefits.
BRR: Are there any non-fiscal incentives that the government can offer this space?
MA: Yes, absolutely. Such incentives may include the government offering its vast digital and physical infrastructure and assets to Fintechs to build use cases around it. For example, our national highways continue to lag in terms of accessibility to all and any Fintech. However, allowing Fintech to write or use open APIs to build payment and other use cases such as transport services using national highways information systems can change the way people travel on highways.
BRR: Let's turn to SimSim. What percentage of registered users on this platform can be classified as "active" users? Also, what is the definition of active users at Sim-Sim?
MA: SimSim follows regulatory directives for active customers. For performance tracking, SimSim strives to maintain engagement on a 30-day basis in its prioritized segments. We have over 70 percentage of customers active in our digital payroll wallet, which we are focusing currently. Around 14 percent of registered accounts are operated by females.
BRR: Can you share transaction volume and value data of the most recent period, along with the breakup in terms of transaction types?
MA: In terms of transaction mix, last year in 2018, a total of 1.4 million transactions were carried out through the SimSim platform, amounting to a total of Rs14 billion. On a quarterly basis during 2018, the number of transactions grew by 14 percent (CAGR), while the cumulative amount of transactions conducted grew by a dominant 37 percent (CAGR).
Among the transaction types, 'funds transfer' took the majority share - 54 percent in terms of number and 73 percent in terms of value of transactions in 2018. In terms of the value of transactions, the next most-used transaction type was "depositing money" into SimSim wallet - amounting to 17 percent. Cash withdrawals, bill payments, mobile top up(s) etc. are less than 10 percent of the overall amount of transactions. These transaction types are generally higher in number, as exemplified by the percentage of mobile top transactions (15% of volume). Deposits, cash withdrawal and bill payment types of transactions hovered between 5 to 10 percent of the overall number of transactions.
FINCA Microfinance Bank, which is the SimSim partner, has recently debuted loan disbursements and repayment through SimSim. Currently in a pilot phase, the bank intends to roll this out across the network in the near future.
BRR: Talking of credit disbursement, does SimSim use any digital credit assessment tools to review loan applications?
MA: We are in the process of piloting a digital nano-loan based on artificial intelligence (AI) and other statistical models and the initial results are quite positive.
BRR: Coming back to the transaction mix, what is the geographic spread of the transaction volumes and value? How has it changed in 2018 compared to previous year?
MA: At this point, the transactional traffic through SimSim is greater in major urban centres than less-developed cities. This is naturally due to a nascent ecosystem of digital financial services that presents more use cases for the urban dwellers.
Despite that, over 75 percent of SimSim wallet owners are based outside of the mega metropolis of Lahore and Karachi. Between 15 to 20 percent of SimSim users are from Lahore, while around 10 percent of the users belong to Karachi. The rest of the users are scattered relatively evenly across a plethora of cities in the country.
Comparing the half-yearly growth in 2018, SimSim's user base grew by over 20 percent in Gujranwala, Karachi, Okara, Rawalpindi and Sialkot. Users from Rahim Yar Khan were most attracted to the platform over the year, growing by 40 percent more in the 2nd half of the year as compared to the first six months of 2018. Overall, SimSim's user base grew by nearly 10 percent in 2HCY18 compared to 1HCY18.
BRR: Earlier you mentioned the issue of inter-operability. Currently what degree of inter-operability does SimSim have with ADRs of commercial banks and m-wallets of branchless banking operators?
MA: Currently, SimSim has inter-operability on interbank/wallets funds transfer on the IBFT network that is operated by 1-Link. This allows us real-time funds transfer capability. Additionally, agent networks like UBL Omni are integrated with us for cash-in and cash out transactions.
BRR: Lastly, how does SimSim make money?
MA: There are a number of areas to make money. Of course there is the "float". Then we have high-volume transactions like utility bill payments and mobile top ups. We also have plastic cards. There is the lending segment now coming up as well. Business generated through e-commerce segment also contributes.