In October 2017, the giants of Pakistan’s financial and policy scene met at the most expensive hotel in the federal capital for a conference on how best to help the country’s poor. Representatives from the State Bank of Pakistan (SBP), including the then governor, World Bank officials, CEOs and presidents of leading commercial banks and telecom companies were all in attendance to talk about the progress towards achieving the United Nations Sustainable Development Goals in Pakistan.
At one of the discussions, a casual but telling tiff emerged between the CEO of one of the largest banks in Pakistan and the CEO of a telco. What need do banks and telecom companies have to throw shade at each other? Well, the one point where the two find themselves in entanglement is achieving financial inclusion through branchless banking.
So when one of the participants asked why the commercial banks were not playing a greater role in financial inclusion and pursuing the lower end of the market, the bank CEO was quick to dish out their talking points, saying that the only way they could financially justify servicing the currently unbanked was if they were able to do it outside of the banks branches and leverage the agent networks and technology infrastructure (read USSD, more on that later) of the mobile telecom companies. Not missing a beat, the CEO of the telecom company, to the delight and sniggering of the crowd, responded by saying that telecom companies would allow banks to use their agent network the day the banks would allow them to set up kiosks in their branches to sell SIMs to bank customers.
This one, small, seemingly wry moment holds within it the crux of why Pakistan’s banks and telecom companies do not cooperate with each other to try to expand the country’s abysmally small banked population: they are too busy seeing each other as competition, and see the race to build out a branchless banking network as a zero-sum game where only one player can emerge as dominant.
That mentality plays out in the way branchless banking networks are set up, and shows up in the extraordinarily high, near-monopolistic levels of transaction pricing for these services. If a neighbourhood shop has an agreement to serve as the agent for Telenor’s branchless banking services, for instance, a customer who uses JazzCash usually cannot seek cash at that same outlet. And the transaction fees can be astronomically high, ranging from a low of 3.5% (usually for larger transactions) to as high as 13% of the amount a customer is seeking to transfer or withdraw.
Here is what that ends up looking like in practice: if a customer has a normal bank account with, let’s say Habib Bank (HBL) and wants to withdraw Rs5,000 in cash using an ATM card, their cost is zero if it is an HBL ATM and a flat Rs15 if it is a non-HBL ATM. But if a Telenor EasyPaisa customer wants to withdraw that same amount from an EasyPaisa agent, it will cost them Rs 100.
It gets even worse if it is a funds transfer to another account. Transferring Rs5,000 from one bank account to another costs around Rs108, but transferring the same amount of money from a mobile wallet will cost Rs270 per transaction.
In other words, if you are too poor to have a bank account, your transaction costs are several times higher for the same kind of transactions as someone who is well off enough to have their own bank account. No wonder Pakistan’s financial inclusion statistics remain terrible: the poor may not always have the best education, but they are generally smart enough to recognise their own self-interest and realise when they are being taken advantage of.
Millions of people have started using the mobile banking and wallets offered by the telecom companies, but transaction levels and activity rates remain low. People use them mostly to undertake one-off transactions rather than making them their default mode of payment.
The financial inclusion problem
This, of course, is a problem for the State Bank and its goal of getting as many Pakistanis into the financial system, with access to all sorts of transaction capabilities, as possible.
In an ideal world, the banks and telecom companies would find ways to create joint ventures that would allow them to initiate products and services that would help serve the goal of financial inclusion. In practice, however, almost every mobile company has set up their own microfinance bank that they now see as a direct competitor to the mainstream banks.
Telenor has Telenor Microfinance Bank, Jazz has Mobilink Microfinance Bank, and Ufone has U Microfinance Bank. All of these institutions have the licence to offer almost the same kind of services as the mainstream banks.
And each of the mobile companies has spent decades building out partnerships with tens of thousands of retailers across the country, ranging from the local paan kiosk to large-scale formal sector supermarkets, and does not feel like sharing that infrastructure with anyone else, least of all companies they see as competitors. It used to be that the mobile companies saw each other as their main competitors. Now, as mobile banking and wallets become a larger business, they see even the banks as competition.
This ultra-competitive attitude, however, is not constructive and is causing the market as a whole to grow a lot slower than it otherwise would, a story that bears out in the numbers.
During the first quarter of 2020, the latest period for which data is available from the SBP, there were over 193,000 active branchless banking agents in Pakistan serving a total of 48.3 million accounts. Of those accounts, however, only about 27.7 million (57% of the total) were active accounts and had a total of Rs33 billion in them, a tiny fraction of the Rs15,126 billion in total bank deposits in Pakistan at the end of March 2020.
The average transaction was just over Rs3,100 and with over 407 million transactions during the quarter, the total volume of transactions processed by the branchless banking network in Pakistan was Rs1.3 trillion. That sounds impressive until you consider the fact that the banking sector as a whole processed 145 trillion in electronic transactions during the same period. And that number does not include cash transactions at banks, and general cash transactions in the economy as a whole. Branchless banking, in short, is a small blip in the grand scheme of the larger Pakistani economy.
Meanwhile, Pakistan’s financial inclusion statistics make for some depressing reading. According to the 2015 Access to Finance Survey conducted for the State Bank by Gallup Pakistan, only about 23% of Pakistan’s population has access to formal financial services, a number that is somewhat helped by the mobile banking and branchless banking sectors, but certainly not enough to make a serious dent in the unbanked population.
The solution, of course, is obvious: persuade the banks and the telecom companies to collaborate and utilise their technology and financial infrastructure to create a low-cost banking solution for the unbanked population. That, however, appears to be easier said than done, given the competitive nature of the financial services industry in Pakistan in general and the competition to become the dominant payments platform in particular.
The SBP’s solution to the problem? If they will not play nice on their own, force them to do it.
Enter forced infrastructure sharing
In trying to get the banks and mobile companies to play nice, the SBP with the help of Pakistan Telecommunication Authority (PTA) decided to create a regulatory framework that will force infrastructure sharing. The theory here is that shared infrastructure will lower the costs for each transaction, and persuade more people to use the system than the way people are currently using it, where the average branchless banking account has less than Rs600 in it at any given moment in time and people only use them for specific transactions.
Banks have shared their ATM infrastructure for some time now and recently there is precedent in the mobile communications space as well, where telecom companies have finally started sharing their cellular tower infrastructure. By having several companies share one set of towers, each individual company is able to expand its network at a much lower marginal cost than it would if it sought to build out the towers entirely on its own.
The problem in financial services, however, is that the matter is a bit more complicated than simply adding network antennas to the same set of towers. What is needed here is a joint set of protocols that allow for interoperability between each of the branchless banking providers. That interoperability is something that the State Bank is now mandating through the introduction of the Asaan Mobile Account (AMA).
There are currently only 15 financial institutions – including telecom company-backed microfinance banks – that have licences to operate branchless banking networks in the country. Even some of the fairly large-sized banks like Faysal Bank do not have this license. And most of those who do, do not have an active agent network, however, in large part because building out an agent network is expensive and the total transaction volume has been relatively small, discouraging new entrants from starting operations, even though they have regulatory approval to do so.
But even more than the cost is the fact that the banks simply cannot get their own branchless banking to rural areas in Pakistan without having access to USSD (Unstructured Supplementary Service Data), something only the telecom networks could give them before. For rural areas, broadband internet is a distant dream, 4G is rare, and the existing network of 3G towers is sporadic and not close to seamless. With this situation, it makes no sense for either customer or agent to get expensive and unreliable internet to be able to access the branchless banking solutions that banks like HBL are offering.
In fact, even if USSD is more expensive or not as easy to operate, people in these areas have no other options, and neither do the banks as long as they do not have a USSD system of their own. The big banks are much bigger than the banks set up by the telecoms, so they do have the money. There just is not any point to spending it because it would not work.
Even in urban settings, like Lahore and Karachi, while internet coverage is strong, most agents are not willing to invest in the internet and prefer to work through the less fussy USSD system. Once again, banks would need the telecom companies to give them USSD access, posing a significant barrier to entry for the big banks.
The interoperable network, powered by a third-party service provider (TPSP) that will create a unified, completely interoperable system will change that. It will create a single system of USSD codes through which both customers and branchless banking agents will be able to conduct transactions through accounts at any one of the banks that has a branchless banking licence.
And the SBP has mandated that the all branchless banking companies – whether they be banks or telecom companies that operate branchless banking operations – open up the entirety of their agent network to this interoperable AMA network, effectively forcing each company to share its entire network with all of their competitors.
The company selected as one of the first to build out the software that will serve as the backbone of this shared infrastructure is Virtual Remittance Gateway (VRG), a technology company owned by the Pathfinder Group, owned by Ikram Sehgal. The Pathfinder Group owns two of Pakistan’s largest, privately held security services companies: the Security Management Services (SMS) that provides security personnel; and Wackenhut Pakistan that provides cash-in-transit and ATM replenishment services. And like a true ex-military man and a strong advocate of his platform, Sehgal likes to draw parallels between RMA (Revolution in military affairs) a theory about the future of warfare and his payments platform by calling it “RDA (Revolution in digital affairs)”.
“The concept that we originally drafted when we were on the drawing board was to provide banking services to a user in a remote village in a far-flung area who is a very low revenue source for the telecom companies and he does not come on the radars of the banks at all,” says Abrar Ameen, Sehgal’s point man and CEO of VRG, in an interview with Profit.
“The challenge of financial services is that you have to bring these services to the said user. The sort of user who doesn’t make enough to get a data package and through that data package operate financial services. That is where we initiated the drawing board based on the assumption that 3G/4G are a luxury for him. So what sort of system would you be designing around that user?” says Abrar.
How the AMA will operate
As noted earlier, the AMA will operate on the USSD framework, which is akin to being able to send text messages to conduct mobile transactions. The USSD code system is one most mobile phone customers are familiar with. Each time they use a prepaid card to load more money into their mobile balances, they are using a USSD code to conduct that transaction (that *786 or *123 or similar code followed by the scratch card code that you use is called a USSD code).
Why use USSD instead of just mobile apps or something that is internet protocol (IP) based? Because although the vast majority of Pakistanis now have a cellphone (about 79% as of June 2020, according to the PTA), only about 38% of Pakistanis have access to a smartphone and the accompanying mobile broadband internet connection needed to have internet access on their mobile devices. Despite the influx of cheap, Chinese-manufactured Android smartphones, the majority of Pakistanis with a cellphone still use a ‘dumb’ feature phone.
Now, instead of having to build out their own agent network throughout the country, all a bank or mobile company that is licensed to operate a branchless banking network needs to do is sign up with VRG to connect their systems to VRG’s mobile financial systems platform, and they will instantly get access to all branchless banking agents throughout the country, dramatically lowering the startup cost of a branchless banking network.
Now, any customer will be able to open a basic bank account with any branchless banking institution that offers it, and use any branchless banking agent in the country to conduct cash transactions (whether deposit or withdrawal), regardless of which company signed up that branchless banking agent first.
The hope that the State Bank has is that this sudden opening up of the hitherto closed branchless banking networks will allow far more players to enter the system, and force the incumbents to begin competing by offering lower transaction costs and better overall services, thereby inducing more and more people to begin using the branchless banking system.
Banks most likely to benefit from this and most likely to promote the AMA scheme, and even start expanding their own agent networks, are Habib Bank and Bank Alfalah because both these banks have a high CASA (current and savings account) ratio that will enable them to provide liquidity to agents by lending them at a lower rate to carry out financial transactions.
Both these banks have further incentives because they are official partners of the government for the Benazir Income Support Programme (BISP) and receive funds from the government, even though these funds are disbursed to BISP beneficiaries through EasyPaisa or JazzCash. Both these banks are to gain a lot if they are able to convince the government to mandate opening an AMA account with Habib Bank or Bank Alfalah for disbursement of BISP payments.
“There was a great need for financial inclusion in Pakistan and we have been hearing for many years that the numbers for financial inclusion [people who are unbanked] were not coming down significantly. Our population was increasing rapidly because of which our overall ratio of banked citizens was also not coming down,” said Abrar.
The process for opening and operating an account is simple. A user can dial *2262# on a smartphone or a non-smartphone, along with their computerised national identity card (CNIC) card number and issuance date of the CNIC. That information is then passed on to the bank and the bank, based on regulations already in place by the SBP, gets the data verified by the National Database and Registration Authority (NADRA). When that verified data is received by the bank, they activate the AMA.
When an account is activated, AMA users will be allowed eight types of transactions that have been enabled uniformly for the customers of every participating bank. Those eight services include account opening, balance enquiry, mini-statements, fund transfers, mobile top-ups, utility bill payment, pin changes, and account closure. Following the commercial launch, these services will further be diversified to include, for instance, government-to-person (G2P) transactions such as those for the government’s cash transfer programs like Ehsas.
This creates an interoperable network from which, for instance, an Allied Bank account holder can go to an EasyPaisa or JazzCash agent and withdraw cash from their account. The charges might be a little more for withdrawing from the account other than EasyPaisa but that is what makes it attractive to the telecom companies to let it all happen. And these agents will always remain relevant. The masses that AMA plans to target would always need an agent’s services of assisted banking because of low literacy rate among these masses.
Interoperability will also allow any AMA user to use branchless banking services of any bank, regardless of whether they have an account with that bank. So, for instance, if one bank has the exclusive right to sell railway tickets through its payments platform, AMA account users will be able to purchase those tickets regardless of whether or not they have an account at that bank.
Through the existing merchant network of wallets and agents, any financial institution will be automatically enabled to provide cash-in and cash-out facilities for account holders of any bank.
In granting this licence to a neutral third party that is neither a bank nor a telecom company, the SBP hopes to reduce any friction that may result from companies being forced to share the infrastructure that they spent years and millions – if not billions – of rupees building up.
However, despite the ability to offer differentiated transaction costs to customers of other banks who use their branchless banking networks, the telecom companies appear unhappy with this development.
The unhappy telecom companies
People in the banking industry, who chose to remain anonymous, told Profit that the State Bank’s mandate on branchless banking meant effectively extending the State Bank’s jurisdiction to telecom companies, which those companies perhaps feared.
In addition, sources familiar with the matter say that the telecom companies were hoping to get a more favourable set of regulations governing AMAs. Specifically, they did not want to give away the branchless banking agent networks they had built over years and at a cost of several billion rupees, to acquire users. They were hoping for a lucrative deal in return, and it was their lobbying that caused a delay in the launching of an interoperable platform.
The delay has been inordinate. The TPSP regulations came in 2017 whereas the SBP and the PTA had signed a Memorandum of understanding (MoU) in this regard in 2012. The State Bank had been planning to start the AMA since January 2018 and it has not been commercially launched yet after all these years. Even after the regulations were published, it took another few years to test and approve a company that could enable interoperability that could power AMA.
Incidentally, while VRG is the first company to launch its interoperability system, it does not have an exclusive licence to offer these services. The State Bank has made it clear that other companies are welcome to develop similar services, and one company – Digital Bridge Ltd (DBL) – has also secured a licence to offer these third-party services.
Some sources claim that this company was established by telecom companies to frustrate the whole third-party service provider (TPSP) initiative of the State Bank because the telecom companies possibly stand to lose a lot if it were successful. That remains a debatable assertion, however: if the market expands sufficiently, even a lower market share and a lower margin business might result in higher revenues and higher profits for the telecom companies.
Currently, TPSPs are only allowed to offer Asaan Mobile Accounts. VRG says that for people who do not have or would not have AMA accounts, and who have existing bank accounts outside of AMA will also be able to do basic financial transactions via the network of branchless merchants of EasyPaisa and JazzCash.
Interestingly though, one source told Profit that DBL has also received a TPSP license from the SBP. Sources say that DBL would also be launching a pilot program at some point which, if successful, will lead to a commercial launch. But if the telecom companies, as alleged, are backing DBL, it may be a less extensive system than the one VRG is launching.
It is perhaps a testament to Ikram Sehgal’s strong political connections – hosting the Prime Minister of Pakistan, and the State Bank Governor at the World Economic Forum at Davos, for example – that he was able to overcome the lobbying of the entire telecom industry and helped push this initiative through.
Officially, however, the telecom companies are now on board with the AMA initiative.
“Any initiative that allows people in Pakistan, who are massively underbanked, to be able to use technology to carry out their banking or financial inclusion needs is a wonderful step for the country. We are one of the largest adult populations who still rely on cash, which poses many risks. So we welcome any kind of initiative by any company in Pakistan that helps promote digital financial inclusion and we are fully supportive of the NFIS of the SBP,” Jazz CEO Aamir Ibrahim tells Profit.
VRG’s interoperable system
VRG’s TPSP license is finally here after rigorous testing from the SBP, and VRG is all set to launch its platform that allows the opening of AMAs from any telecom company’s network with any bank after it completed its pilot in March 2020. As it stands today, 11 banks are connected to the USSD platform of VRG while two more are in the process of completion of their integrations that will take the tally to 13 banks.
“We also are integrated with five telcos including the Special Communications Organisation (SCO) in Azad Jammu and Kashmir. VRG now has access to the 167 million subscriber base of all telcos,” says Muhammad Salman Ali, chief operating officer at VRG.
And because it has its own payment gateway, any transaction flowing through banks, VRG will get a part of anything that banks make on transactions. And telecom companies will also pay VRG a small share every time a mobile company deducts a charge from the consumer for every USSD code transaction. For VRG, the business is likely to be a low-margin, high-volume one that is likely to be quite profitable.
VRG’s bet looks safe for now as AMA is SBP’s initiative which it is pursuing to bank the unbanked under its National Financial Inclusion Strategy (NFIS). All of the marketing and publicity campaigns would be run by the SBP collectively with commercial banks and VRG might not be required to spend a dime on marketing.
From what various sources have told us, the SBP has created a fund in which commercial banks have also put in money besides SBP for publicity of this project. A source said that the fund is of Rs250 million for publicity, while another said that it is even larger than that. Besides this, commercial banks, if they choose to, will also be marketing AMA on their own as well.
While the AMA is likely to be an important step in expanding financial inclusion for now, however, it is difficult to ascertain for how long will AMA remain relevant in Pakistan, given the relatively rapid rise in smartphone and mobile broadband internet penetration.
But the relevant stakeholders have contingency plans. The USSD platform already has services for customers that already have bank accounts to link these bank accounts, and in case people switch over to smartphones, an application-based interface will be developed for smartphone users that will still have USSD enablement at the backend to make it functional, instead of the internet.