Digital banking

  • SBP should provide an enabling environment to banks and customers based on international best practices

THE dawn of Financial Technology (FinTech) brings with it many opportunities and challenges for the traditional banking sector in Pakistan. FinTech i.e. digital banking is likely to skyrocket if adequate awareness and security of data are provided to customers. The latest players in the financial market including TPL Rupya, Monet and FonePay are set out to disrupt traditional modes of banking.

The Payment Systems Review, January-March 2018, issued by the State Bank of Pakistan (SBP), confirms the rapid growth of digital banking in the country. According to this review “digital channels have been rapidly replacing paper-based transactions as payments through Pakistan Real-Time Interbank Settlement Mechanism in the third quarter of FY18 stood at Rs 90.1 trillion against Rs 38.8tr in paper-based”. It further provides that ” there are 14,850 banks branches reported by 45 Banks/Microfinance Banks, out of which 117 are overseas branches. All branches in the country, except 23 are proving online banking services to their customers. There are 13,835 ATMs and 53,509 POS machines in country. In addition to these, banks offer Internet, mobile phone and call centers/IVR banking facilities”.

The National Financial Inclusion Strategy aims to encourage people to have an account at a formal financial institution. This will help to document the economy and make it more inclusive via branchless banking (BB). It is claimed that BB will provide a cheaper and more efficient model than conventional branch-based banking, allowing customers to avail financial services with their mobile phone. BB can also be used to provide financial services to unbanked communities where physical branches do not exist.

In order to capitalise on these opportunities, the SBP will have to provide an enabling environment to banks and their customers based on international best practices. So far, there appears to be no consolidated legal framework or comprehensive guidelines for establishing and regulating independent ‘digital banks’ in Pakistan. The SBP should introduce a separate category of banking services through the promulgation of a Digital Banking Framework (DBF).

As per the FATF plan, nine targets have to be met before January 2019, about 13 by May 2019 and the remaining by September 2019 in order to avoid slipping from the grey list to the black list

In view of the fast-growing use of digital banking, banks/FIs should make their customers aware of the use of digital services and the security of digitally processed financial transactions. Gaining the trust of customers who are reluctant to use technology in financial matters is challenging. To facilitate them, the Branchless Banking Regulations, 2016, may be translated into all languages spoken in Pakistan. Further, certain regulations need to be refined for the Banks and elaborated for the customers. For example, Regulation No.7 relating to Risk Management Programmes may be elaborated as to how ‘technology-related risks’ can be avoided by providing ‘IT security measures’. What exactly are those ‘risks and measures’? Customers should also understand Regulation No.8 providing for Customer Protection, Awareness, and Complaint Handling. Considering the rate of illiteracy, the frequency of fraud, and the probability and history of financial scams in Pakistan, as well as the hesitation of our old-age population to use technology, banks should be required to launch an active media campaign to educate the people as to the advantages (and risks) of digital banking.

To prevent money laundering and terror financing, special attention should be paid to banking through digital channels. The Financial Action Task Force (FATF) has placed Pakistan on its grey list. FATF has stressed Pakistan’s “structural deficiencies” in anti-money laundering (AML) and combating the financing of terrorism (CFT). Any misuse of digital banking services will affect the integrity and reputation of Pakistan’s financial markets; foreign investors and banks are generally reluctant to do business with countries that allegedly finance terror or lack strong mechanisms to prevent such financing.

As per the FATF plan, nine targets have to be met before January 2019, about 13 by May 2019 and the remaining by September 2019 in order to avoid slipping from the grey list to the black list. Financial institutions will have to comply with these targets while, at the same time, offering digital banking services to the customers. The SBP should instruct banks to check their links regularly and financial institutions should prohibit keeping business connections where Know Your Customer (KYC) requirements are not fulfilled. The SBP must strictly implement a legal and regulatory framework to counter the money/value transfer services (MVTS) threat. Pakistan should have an updated list of how many illegal money remitters exist in Pakistan and enlarge enforcement against all proscribed groups and individuals.

In the absence of strong security measures (i.e. firewalls, software, data protection laws) customers’ data will remain exposed to be misused by cybercriminals. Banks should provide awareness and adequate protection to the customers. The SBP should strengthen monitoring mechanisms and conduct a regular review of its regulations.

In a nutshell, the SBP should introduce a comprehensive legal framework ensuring security of digital financial transactions. The rules regarding technology-related risks and security measures may be elaborated. The SBP must improve the overall efficiency, protection, and effectiveness of financial transactions (including transfer of funds through digital channels) helping Pakistan to meet the FATF targets.