Pakistan is a resilient nation. It has faced many challenges throughout its history, from numerous sociocultural conflicts to political instability and economic hardship. However, the country has always managed to overcome these challenges and emerge stronger.
And then came COVID-19; a natural disaster of sorts that effectively shook the world and left literally no corner untouched. Millions lost their lives, and much was learnt during this time. It is now known as one of the planet’s greatest pandemics that has completely redefined the way people live their lives, how organizations view productivity and how corporations approach profitability.
The pandemic’s aftermath caused innumerable macroeconomic challenges – it led to the failure of many organizations, companies and startups globally. And as it is with every business, Pakistan was not immune to its effects. Ironically, like a phoenix rising from the ashes, digital payment acceptance accelerated in the country during this time, in the most promising way. While financial inclusion in Pakistan has traditionally hovered in single digits for a great many years, there was an optimistic surge that fueled consumerism, or what was left of it. With the current rate at over 21%, catapulted by a number of factors such as the country’s young and growing population, the increasing use of smartphones, and the government’s supportive policies – it does seem like Pakistan’s fintech space is possibly blooming.
Here is some evidence: according to a recent report by McKinsey, the fintech sector in Pakistan is expected to generate revenues between $3.5 and $4.5 billion by 2025. Fintech startups in Pakistan are providing innovative solutions commercially to a wide range of financial problems. For example, digital wallets, microfinance solutions, and even insurance products to a population that previously had no access to such services. These startups are also increasingly exerting the use of technology to make it easier for people to pay bills, transfer money, and consequently invest money.
A more significant development in the Pakistani fintech sector has been the rise of Buy-Now-Pay-Later (BNPL) platforms. Why is BNPL so popular in Pakistan now? Because the said technology allows consumers to purchase goods or services “now” and pay for them “later”, sometimes without interest and offers Shariah-compliant solutions. BNPL platforms are set to become the next go-to technology in Pakistan, as they offer a convenient and affordable way to finance purchases, especially with the rising inflation and local currency depreciation.
Additionally, another upcoming trend in the Pakistani fintech sector is the growth and improved usage of digital wallets. Digital wallets are becoming increasingly popular, as they offer a number of advantages over traditional payment methods. For example, digital wallets are more convenient, as users do not need to carry physical cards with them. They are also more secure, as the payment information is stored in a secure format. According to a recent report by the State Bank of Pakistan, the number of digital wallet users in Pakistan increased by 40% in 2022. And what does this tell us? It is now easier for people to bank, pay bills, and transfer money, even in remote areas.
The benefits of this disruption are innumerable with spoils for many industries. The growth of fintech in Pakistan will increase financial inclusion, improve access to credit, boost economic growth, create jobs, and attract foreign investment. As reported by the State Bank, the fintech sector currently employs over 100,000 people. This is a significant number, and fingers crossed, it is expected to grow in the coming years.
In the first quarter of 2022, half of all funding deals in Pakistan were under the ambit of fintech, with respective ventures bringing in nearly $4 million in financing. This trend has continued into the first quarter of 2023, with fintech startups raising $9 million across two deals. One notable instance in the first quarter of 2023 was the $7.5 million funding round for Adalfi, a BNPL (buy-now-pay-later) platform. And this is the largest funding round for a fintech startup in Pakistan.
But with every high, there are lows – and so here are some imminent challenges that the fintech sector in Pakistan shall face. The global economic downturn has forced fintech startups in Pakistan to pivot from hypergrowth to sustainability and profitability. A large portion of foreign investment that came into the country two years ago has dried up, forcing organizations to make difficult decisions. Moreover, startups are still relatively new in Pakistan, and many consumers are not just hesitant to use new technology, but actively avoid them. Unfamiliarity with the technology is not just the reason here – these risk-averse users are concerned about their data security, and rightfully so! Fintech startups need to build and nurture trust amongst consumers by being transparent about their operations and by taking crucial steps to protect their data. In addition to this, as the government is still developing a framework for the fintech sector, the volatile landscape requires companies to stay on their toes when it comes to the latest regulations and as such, they need to be prepared to make changes to their operations if needed.
Lastly, this sector is wholly vulnerable to cyberattacks. In fact, I think there is a whole new set of cybercrimes sneakily creeping up on us. They will look to one single thing: sensitive and digitally stored financial data, an immensely valuable target. Fintech startups need to proactively take steps now to start educating users and ensuring they have the appropriate measures in place such as firewalls and encryption.
Despite these challenges, the fintech sector in Pakistan is poised for growth. I believe the sector has the potential to transform the way people in Pakistan access and manage their finances. It has all the necessary ammunition to make a significant contribution to the country’s economic development.
The next few years are and will be critical for Pakistan. We need to continue to grow and innovate in order to meet the needs of consumers and businesses. The government needs to ensure a supportive regulatory infrastructure for further investment and stability. With the right ingredients in place, fintech in Pakistan is set to boom.
By Fawad Abdul Kader
The writer is the Country Manager at Paymob Pakistan
