Dinosaurs of the digital age

Various species of dinosaurs still walk the earth today. One of those is the traditional commercial banks. That was single biggest learning from the Digital Banking & Mobile Payments Summit 2017 organized by TerraBiz last week.

Perhaps in recognition of this, the State Bank of Pakistan (SBP) is currently working on a concept paper for digital banking framework and ancillary regulations, such as those related to capital requirements. Speaking at the moot last week, Irfan Ali, SBP’s executive director on banking policy and regulations, said that the concept paper will be released soon by the SBP for the purpose of inviting comments from the stakeholders.

How soon would that be and whether the SBP is late or early in responding to the winds of change is another matter. What matters most at this stage is how flexible will be the regulatory framework for digital banking and mobile payments. Will it be flexible enough to allow innovation or will it arrest the growth of new models, products etcetera as the industry experiments in its evolution stage. And what are some of the key characteristics that a flexible regulatory framework has?

Based on our conversation with bankers and fin-tech experts at the moot, so far there are no clear cut answers, not even among the banking/fin-tech community. But that’s okay. This is the dawn of a new age.  As Dr. Ismael Shah, Chairman Pakistan Telecom Authority put it at the conference: the digital revolution is the fourth industrial revolution, characterized by a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres.  How will tomorrow look like? There are no clear cut answers. The only thing certain is that tomorrow will be remarkably different from today.

In the context of traditional banking, the biggest competition is coming from fin-tech players and solely digital banks. Arguably fin-tech players are so far confined to domestic remittance or G2P payments, but lending models, saving products, financial cooperatives, and the likes are in the works, and it will before time when fin-techs and solely digital banks start occupying a bigger space.

Fin-tech and digital banking players will have several advantages over traditional players, being fast and almost free is just one of them. They will also have the edge of better data analytics for tailored products and services to individual customers’ need. As a result, banking will become relatively more fragmented with the traditional players losing their chips as consumers build their own suite of products from a host of different providers.

With growing e-commerce models, the new economic model will morph into what can be called ‘democratization of production’ – where more and more average Joes will be producing one small thing or another and selling over e-commerce or other futuristic platforms. And this may eventually force banks to re-strategize their business models to focus on the SMEs.

A growing body of economic discourse also suggests that perhaps in 20 years the world will increasingly move towards (a) ‘de-growth’ (i.e. doing away with the obsession with GDP growth) and (b) ‘less-and-local’ in so far as commodities consumption is concerned. If and when that happens, banks in Pakistan and elsewhere will have to find newer business models. In addition, the very existence of traditional economic sectors in their current form, such as textile, meat or food, is questionable (See BR Research column: Cute Ideas, March 24, 2017). And that too should force banks to think hard about what to do twenty years down the line; banking after all is a long term business.

Many of these changes might not happen in Pakistan in the foreseeable future, but for many others it is when and not if. Responding to these changes, therefore, demands a sense of urgency. Whether banks in Pakistan will be able to do that depends on their boards and C-level leadership.