The Rise of Digital Banking in Pakistan

Among the various consequences of the COVID-19 pandemic related to the global shift toward digitalization, a noteworthy one was the widespread embrace of digital banking services across the globe. Three years ago, when lockdowns and social distancing measures became the standard practice, conventional banking procedures, which typically took place within physical branches, were disrupted. Faced with the difficulty of physical banking, individuals shifted towards digital channels to meet their financial requirements.

With the increased usage of digital banking services, these services began to enhance and innovate in response. This marked the beginning of an era in which the convenience and accessibility of digital banking empowered individuals to oversee their accounts, settle bills, and handle everyday transactions safely from the comfort of their homes. Traditional financial institutions also adjusted by improving their digital services and security measures, delivering a safer and more convenient platform for customers to access banking services.

But what is Digital banking?

Digital banking, often referred to as online banking or Internet banking, is a banking system that enables customers to perform various financial activities and transactions using electronic devices and the Internet. It offers an alternative to traditional, brick-and-mortar banking by providing convenient and secure access to financial services through digital platforms.

Key features of digital banking typically include:

1. Account Management: Customers can check their account balances, view transaction histories, and manage their accounts online.
2. Fund Transfers: Digital banking allows for the transfer of funds between accounts, both within the same bank and to external accounts. This can include bill payments, wire transfers, and peer-to-peer payments.
3. Online Bill Payment: Customers can pay their bills online, from utility bills to credit card payments.
4. Mobile Banking: Most digital banks offer mobile apps, enabling customers to access their accounts from smartphones and tablets.
5. Remote Check Deposit: Some digital banks allow customers to deposit checks by taking pictures of them with their mobile devices.
6. 24/7 Access: Digital banking services are available 24/7, allowing customers to conduct transactions at their convenience.
7. Security Features: These systems often have advanced security measures, such as encryption and multi-factor authentication, to protect customers' financial information.
8. Customer Support: Many digital banks offer customer support through various channels, including online chat, email, or phone.

The Rise of Digital Banking in Pakistan

The year 2009 was a transformational year in Pakistan's digital banking landscape when mobile financial services were introduced. Acknowledging the problems faced by numerous Pakistanis in their attempts to access conventional banking services, Telenor Pakistan, motivated by a profound vision to address the nation's financial issues and explore a vast, unexplored market, introduced "Easypaisa" - Pakistan's inaugural online payments application. Leveraging the extensive use of mobile phones, Easypaisa undertook a quest to build a financial ecosystem that was both accessible and inclusive while fostering innovation.

Using Easypaisa, people could utilize their smartphones to transfer funds, make payments, and avail a range of financial services, allowing seamless money transactions and financial management. This groundbreaking strategy signified a turning point in Pakistan's financial arena and made digital banking readily accessible to all.

As is typical in any industry, over time, numerous competitors emerged to challenge Easypaisa. These competitors acknowledged the underutilized potential within mobile financial services and digital banking, so they aimed to establish their presence in this burgeoning domain. JazzCash, a product of Jazz (formerly known as Mobilink), emerged as a significant contender, providing an extensive array of services, such as mobile wallets, money transfers, and bill settlements. United Bank Limited (UBL) launched the UBL Digital App, offering customers a range of digital banking services for handling accounts, transferring funds, and making bill payments. Meanwhile, Habib Bank Limited (HBL) made its entry into the digital banking arena with the HBL Mobile app, allowing users to effortlessly access their accounts, send money, and settle bills. Zong, a prominent telecommunications company in Pakistan, started off with its 'Pay Max' service, thereby expanding the choices of mobile financial services for clients.

Several other competitors emerged, often focusing on the mobile financial services theme and addressing particular industry challenges. The rise of these contenders not only mirrored the increasing desire for convenient digital financial services but also encouraged innovation and customer-friendly solutions within the industry. This healthy competition in the digital baking industry continues to serve consumers by affording them more choices to meet their digital banking requirements.

Growth in the last 5 years

Although mobile financial service providers like Easypaisa experienced significant financial losses in their initial years, they showed remarkable resilience and witnessed substantial growth in their customer base.

A research study carried out by "Insights" explores Easypaisa's progress over the past five years, uncovering a compelling story of increasing users and a consistent decline in financial losses. The study demonstrates a significant growth in the customers of Easypaisa over the past five years. Furthermore, it indicates that the company has finally begun to transition from a period of financial losses to a profitable stage.

This trend underlines the growing embrace of digital financial services throughout Pakistan.

Effects of Covid-19 on the Growth of the Digital banking Industry in Pakistan

The COVID-19 pandemic has been a catalyst for the growth of digital banking in Pakistan, as it prompted a strong shift in the behavior of bank customers towards digital channels. According to a report by the State Bank of Pakistan, the number of internet banking users increased by 26%, mobile banking users by 36%, and e-commerce transactions by 82% in 2020 compared to 2019. Digital banking was on the rise, and it was time to formalize its presence.

During the COVID-19 pandemic, the State Bank of Pakistan took several steps to promote digital banking. These measures included letting banks use cloud services from outside companies, creating a common QR code system for payments, establishing a database of restricted individuals and politically influential figures, boosting digital efforts in banks, and introducing regulatory relief to encourage transactions without the need for physical branches.

Although the government distributed its COVID-19 relief package through mobile and other digital means to reduce the use of physical cash, there was still a significant gap in fully embracing digital banking as a separate and well-defined category within the banking industry.

Announcement of a Regulatory Framework to Support Digital Banking by SBP

With the simplification of the bank account opening process, Pakistan experienced a surge in fraudulent activities, indicating a pressing need for stricter regulations and enhanced security measures in the digital banking sphere. The ease of account creation inadvertently led to the exploitation of digital channels by for fraudulent purposes, including identity theft and financial scams. To address these growing concerns and ensure the integrity of the financial sector, the State Bank of Pakistan (SBP) had to take proactive measures. Thus, as a significant move to establish digital banking as a recognized method of financial transactions in Pakistan, the State Bank of Pakistan introduced a set of rules and regulations. These regulations allowed digital banking institutions to become publicly traded companies by registering with the Securities and Exchange Commission of Pakistan (SECP).

The State Bank of Pakistan published a preliminary version of the new framework on March 26, 2021. Over the following year, they gathered feedback through targeted surveys and discussions with various stakeholders to enhance and complete the framework. The official announcement of the framework was made on January 21, 2022. A total of 20 digital banking companies applied for the license based on the new framework. Five of them were awarded licenses. In January 2023, those five digital banking companies were awarded NoCs as the second step. These companies were:

• Easypaisa (Telenor Pakistan B.V, Ali Pay Holding Limited)
• Hugo Bank (Getz Bros and Company, Atlas Consolidated Pte. Limited., M & P Pakistan Private Limited.)
• KT Bank (Kuda Technologies Limited, Fatima Fertiliser Limited, City School Private Limited)
• Mashreq Bank (Mashreq Bank UAE)
• Raqami (Kuwait Investment Authority)

This announcement presented an exciting opportunity for Easypaisa. The company could now significantly reduce the costs in supporting its extensive user base, which was actually a major step in its sustainable growth.

Issuance of IPA and an exciting future

The State Bank of Pakistan kept working on this matter and recently, on September 20, 2023, it granted In-Principal Approval to the five companies mentioned earlier. This approval allowed them to officially launch as digital banking institutions in Pakistan.

That was the third step in the regulatory framework introduced by the State Bank of Pakistan. When these companies reach the last stage(commencement of commercial operations), they will be able to operate commercially and contribute to the growth of the digital banking industry in the country.

Role of Identity Verification Services (Such as truID)

Identity verification services are essential in the digital banking industry for multiple reasons. Firstly, they enhance security by confirming the identity of users, reducing the risk of fraud and unauthorized access. Compliance with legal regulations also necessitates thorough identity verification. Failure to do so can result in legal and financial consequences. Moreover, these services help in risk management by identifying high-risk individuals and transactions, which is critical for preventing financial crimes. Identity verification is also important for building customer trust and streamlining onboarding processes. It enables global reach by verifying the identity of customers from different countries, facilitating the expansion of digital banks.

As the digital banking wave swept across Pakistan, revolutionizing financial transactions and accessibility, it brought with it a new set of challenges, particularly in terms of security. The increased reliance on digital channels raised concerns for banks regarding the authenticity of users and the vulnerability to fraudulent activities. The State Bank of Pakistan, recognizing the critical need for robust security measures, mandated stringent customer identity verification protocols to safeguard against potential threats.

(According to a recent industry report, cyberattacks on the financial sector in Pakistan saw a staggering 60% increase in the last two years, underscoring the urgency for enhanced security measures in the digital landscape.)

Enter truID: Redefining Identity Verification

In response to the banking industry's escalating demand for a reliable, secure, and swift remote identity verification services provider, truID emerged in late 2020 as a prominent player in the realm of identity verification services. Addressing the challenges posed by increasing cyberattacks and the ever-evolving landscape of digitalization, truID introduced a robust and secure remote identity verification system capable of verifying customers in under 30 seconds.

Due to its excessive and in-depth research and development, truID swiftly rose to prominence, positioning itself as a competitive leader in remote identity verification services. Shortly after launcing its MVP in the market, the company achieved a significant milestone by securing its first client - MyTM. Over the course of three years, truID continued its journey, acquiring numerous clients, with Askari Bank being a recent addition. Notably, Askari Bank leveraged truID's services to verify over 80,000 individuals to date.

Offering a diverse range of identity verification solutions! truID's advanced Liveness Detection uses AI to swiftly analyze facial expressions and skin features, preventing fraud without requiring specific gestures. Document Authenticity Check ensures ID legitimacy through smartphone scans, multi-stage AI validation, and landmark scrutiny. ID Selfie Matching employs AI algorithms to compare ID photos with live selfies, accommodating natural changes for accurate matching. Touchless Biometrics captures fingerprints using a smartphone camera, ensuring robust matching with government databases. Accurate OCR automates information extraction from ID documents in both English and Urdu, enhancing identity validation without manual input.

One remarkable aspect of truID's verification system is its efficiency — it verifies customers in under 30 seconds, making it 120 times less time-consuming and costs 16 times less than manual verification. Furthermore, truID's user database boasts an impressive 0% false positive rate. truID's system operates entirely through users' mobile phones.

truID uses an advanced system integrated with the Digital Bank app, using secure token requests that interface between the truID server and the client server. This process fortifies data integrity and confidentiality, ensuring robust authentication and seamless information exchange while upholding stringent security measures.

While digital banking is still in its early stages in Pakistan, service providers like truID play a crucial role in fortifying the digital banking industry. By offering reliable identity verification services, truID contributes to industry growth and enhances overall customer experiences.