Tuesday June 25, 2024

Financial inclusion

By Dr Imran Batada
February 06, 2022

The most recent update in the digital banking sector shows that Pakistan is growing digitally at a fast pace. The State Bank of Pakistan (SBP) has issued the licencing and regulatory framework for setting up digital banks. Over time, there has been the growth of digital insurance, digital economy, paperless payments, cryptocurrency, and other digital forms.

This licencing and regulatory framework will play a major role in the growth of the digital economy and help set up digital banks as separate entities in Pakistan. Financial inclusion has always been a major issue in the country, and this framework is likely to lead to affordable digital financial services.

Under the framework, the SBP is set to grant two types of digital banking licences according to certain terms. The first one is digital retail banks that will focus on retail customers and the other is digital full banks that will focus on retail customers, businesses and corporate entities. Through the licences, up to five digital bank licences will be issued to attract different financial players who should have a strong value proposition, powerful technological infrastructure, financial strength, skills, technical expertise, and effective risk management strategies.

Digital banks will offer financial products and services through remarkable digital platforms and electronic channels. The major objective of the framework will be to promote financial inclusion, provide easy credit access and affordable digital financial services to people, encourage applications for financial technology, foster a better customer experience, and develop the digital ecosystem.

Globally, people are switching to different digital forms of making payments, making the world a ‘global village’. With the emergence of e-commerce stores, drop-shipping, and print-on-demand businesses, people are using different forms to make payments. The digital banking system will play a major role in making the exchange of money and cash flow easier.

Various technological advancements have helped revolutionise the banking industry by a huge level. Digital banking will ultimately help ensure better customer service to their target customers. Mobile banking has greatly been embraced in different parts of the world due to high mobile ownership. Asia is one of the regions that has adopted switching to digital banking, especially in countries such as China and Singapore.

Seventy percent of global customers use digital payment methods. For example, China has popularly implemented QR payments on a large scale. The evolution of digital banks will lead to strong technological capabilities with lower operating costs and expenditure. Digital architecture is being created to improve the banking sector. Some regions, such as Hong Kong, and Malaysia, use this digital banking approach.

Most digital bank regulations have restrictions on banks’ physical presence, to encourage innovation in the financial sector. Ideally, digital banks must still comply with the basic requirements to ensure that all the rules are adhered to. The regulations also expect new innovators/start-ups to have financial inclusion for all. The regulators are also based on ownership and control.

There are certain instances like in Korea where a non-financial institution/organisation needs to afford up to a maximum of 34 percent of digital banks. When this requirement is met, it ensures their inclusion. On the other hand, in Taiwan, non-financial companies that have great financial tech or communication capabilities are allowed to form a digital bank. However, they will need to own at least 10 percent of the capital.

In addition, countries such as Brazil, Germany, and South Africa have licensed digital banks under their licencing regimes. However, to boost the growth of digital banks, the regulators need to be more accommodative. For this, they need to be innovative, more open to risk, flexible, and adaptive to new solutions, and accommodate open communication channels. According to global statistics, more people prefer doing mobile transactions without necessarily having to go to the bank to do small transactions. This shows how people are embracing digital currency and digital banks.

Digital banking also leads to security in mobile and online banking. This is because some mobile banking apps require the use of biometric authentication to log in. This may include fingerprint, voiceprint or facial recognition. Digital payment and e-wallets tend to offer more security than a physical card. Through digital and mobile banking, people have more control over their cash.

The digital banking licence will be a magic wand for financial inclusion because digital banks will help fill the gap as there are many unbanked people. Hence, they will have easy access to financial services. According to the World Bank, over 32 percent of adults globally are unbanked, hence digital banks will help cater to them. Digital banks will also assist to serve the unbanked and underbanked by delivering quality financial services at their comfort. They will lead to cheaper transactions, personalised financial services, and security. For instance, those who don’t have access to traditional banks can create a digital asset wallet and start transferring funds at a lower fee.

The digital bank licence will be a bit different from the existing commercial bank licence. This is because there will be ‘electronic know your customer’ which will allow full digital onboarding by checking customers’ identities and anti-money laundering checks. Ideally, the e-signature will allow customers to validate most transactions remotely. Open banking will ease data sharing and provide better ecosystem opportunities. The cloud hosting in digital banks will help resolve the infrastructure scaling and more. This means that digital banking will be essential for not only the customers but also the owners.

According to the World Bank, digital financial services have been launched in more than 80 countries. More underserved customers are moving from cash-based transactions to formal financial services. This is through payments, transfers, savings credit, insurance and security. This has led to the introduction of non-financial firms that deploy new tech, new contractual relationships, different regulatory treatment, and the use of a new kind of data. Also, for the State Bank of Pakistan, it needs to have great, secure policies that will be inclusive of all stakeholders. There is also the importance of sensitisation of Pakistan residents so that they can embrace digital banks.

The writer is CTO & director, Centre of Information Technology at IoBM.

He tweets @imranbatada and can be reached at: Web: