Shifting of the Paradigm with Ali Sarfraz, Karandaaz

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“Partnerships among industry players as well as across industries will constitute a key success factor as the digital age advances in Pakistan”, expressed Ali Sarfraz, CEO, Karandaaz during an exclusive Q&A session with Daily NewsPK while sharing his insights on the FinTech and start-up landscape in Pakistan and the impact of COVID-19 on it.

1. How do you think the financial industry will change post-COVID-19?
The global economy is witnessing a severe economic shock; governments and central banks are busy designing and rolling out fiscal and monetary stimulus packages, primarily, to provide liquidity to the financial markets, support to small and medium-sized business that are considered most vulnerable and direct cash support to household affected by the lockdown. Financial institutions (FIs) have become the medium to channel these stimulus packages to the real economy and as the situation is still evolving, a rapid delivery system is essential. FIs are experiencing a period of intense activity. Institutions that have adapted quickly, and can respond efficiently to the higher volume of requests, have an opportunity to increase their reputation, value, and market share across the industry.

Secondly, with reduced physical interaction, banks are faced with a big opportunity to digitize. The lockdown associated with COVID-19 has encouraged customers across the board to start adopting digital banking. Costumers are using contactless payments more; in Hong Kong, the use of digital tools in retail banking has increased from 40% to 80% in recent weeks. FIs that can make the transition to digital sooner rather than later, will ride this wave.

Thirdly, once the dust from the crisis begins to settle, whether, in a year or longer, I also suspect that we will see an uptick in the financial inclusion of SMEs. At present 75% of Pakistan’s GDP is estimated to be contributed by the informal sector. As support packages by the GOP are providing preferential lending rates and more robust support to registered and tax-paying entities, this will encourage more documentation. Reinforcing this effect will be initiatives such as the Secured Transactions Registry (STR), Regulatory Framework for Digital Banks, and the Micro Payments Gateway which will greatly enhance the overall ecosystem of Pakistan’s financial industry.

2. How do you see consumer behavior shifting towards digital during this crisis time and what is your approach while understanding and responding to their needs?
Customer behavior is poised to change (i.e. avoiding large crowds, person-to-person contact, waiting lines), with a preference for online channels to initiate and complete transactions. Karandaaz undertook a survey of 17 digital financial services (DFS) providers and 8 FinTechs to understand the impact of COVID-19 on the DFS ecosystem in Pakistan. 94% of the providers felt that adoption and usage of DFS, overall, will increase in the next three to four months. 69% of the respondents expected a surge in new mobile wallet accounts in the next three months; while 25% suggested that adoption might not increase, but usage by current mobile wallet subscribers will increase. Responding to the likelihood of enhanced utilization of DFS, designing innovative products, and introducing new use cases for consumers will help. Awareness campaigns to educate people on DFS usage, and creating a trust for utilizing DFS will be imperative moving forward.

3. What are the key initiatives that you have taken or planning to support society and help businesses, specifically SMEs, flourish in these turbulent times?
As an immediate response, we are providing additional financing to one of our investee companies, Excel Labs, a laboratory and diagnostic service provider in Pakistan, to initiate COVID-19 testing. With this additional funding, Excel Labs is building capacity to carry out an estimated 500 tests daily and more than 10,000 tests a month. In addition to this financing at zero percent mark-up, a grant by Karandaaz is also being provided to Excel Labs for subsidizing around 4,000 tests, which will be available to vulnerable categories, including those above 65 years of age, doctors, and nurses exposed to the Coronavirus, and poor individuals who cannot afford the test. The samples collected by Excel Labs will be tested in a WHO standard lab.

To support the women-led businesses in our portfolio, Karandaaz has deferred interest payments and is providing grants for partial salary payments and business continuity support. We designed this relief package based on an analysis of the macroeconomy, an impact assessment survey, and an analysis of the business financials of each of these investees. Our survey indicated that while these businesses were employing a total of 520 people, 380 could potentially lose their jobs as these businesses were under extreme stress following the lockdown and were unable to retain their employees.

Karandaaz has also been sharing insights on the impact of COVID-19 on the financial industry. In April we documented key measures taken by central banks across different countries (UK, US, Japan, South Africa, Malaysia, India) to minimize disruptions to the financing of MSMEs. Based on the findings, recommendations for the SBP were developed and shared in a policy note. On the digital financial services side, a note on the Impact of COVID-19 on the DFS Ecosystem in Pakistan was released earlier this month. We are hoping that all this valuable information will enable stakeholders, including the regulators to access timely information on the impact of this pandemic and the recommendations will help them come up with more effective mitigation strategies.

4. Since there are limitations in the usage of physical channels and the surge in digital channels usage is being witnessed, do you think the digital payments ecosystem will be revolutionized in Pakistani landscape post-COVID-19?
FinTechs may find themselves at the forefront of providing innovative solutions. While previously, the conventional financial sector players have somewhat resisted the adoption of new technologies current circumstances provide an opportunity for larger financial institutions to adopt new and innovative solutions. Some key opportunities are,

Development of digital lending solutions, including credit scoring models to provide fast and sufficient liquidity;
Digital KYC solutions, including in-app biometric verification modules;
Crowdfunding platforms to support small businesses;
Utilization of roaming agents, especially for cash transfers to the elderly, and people with special needs;
5. In your opinion, what significant impact can partnerships create in the nourishment of the eco-system and create a win-win situation for everyone at this point in time?
SBP and SECP, the two main regulators, have been very proactive in rolling out solutions to strengthen the domestic financial industry, however, a coherent approach is necessary to align the prevalent regulatory frameworks in order to make the regime less ambiguous and more encouraging for financial institutions, and especially FinTechs. As the digital economy matures in Pakistan, there will be a greater need for additional entities to coordinate such as the Ministry of IT, which is in the process of developing and finalizing a personal data protection bill. This bill will have a cross-sectoral impact, with implications for financial institutions (bank as well as non-bank), as well as for the e-commerce industry which falls in the purview of the Ministry of Commerce, but has close linkages with payments service providers.