Though inflation is a common economic occurrence, a persistent rise over a protracted period of time can surely disrupt the economy and banking system of a country and others around the world. Inflation brings with it a slew of factors that affect the economy, from investment, lending, borrowing, business operations, interest rates, and a whole lot more. Even though the ramifications of surging interest rates are quite palpable and apparent, one has to look at the nuances in terms of the effect on FinTechs i.e Neo Banks, and how each particular subset of the banking sector is affected.
The banking industry has witnessed a metamorphosis as technology has greatly altered the dynamics and operations of financial transactions with the likes of FinTechs, Embedded Banking, Neo Banks, and more. As the industry evolves, so do the fixed parameters that come into play such as inflation, which plays a pivotal role in determining borrowing and lending, and interest rates. Pakistan is currently in an economic quagmire as it descends into political tumult that has even worse reverberations on the economy. Political uncertainty, unrest, and petty squabbles amongst politicians have further exacerbated the worsening situation as the economy has already suffered at the behest of a flailing economic apparatus and surging inflation.
Though the FinTech landscape in Pakistan is nascent, it has massive potential given that currently 64 percent of the nation is younger than 30 and 29 percent of Pakistanis are between 15 and 29 (an age group which we define as the youth)*. With mobile internet services now deeply penetrating the most remote places in Pakistan, access to the internet has changed the dynamics of payment solutions with players like Jazz cash, EasyPaisa, and others in the fray. Opening accounts has also become much easier for the general public as it is helping register the underground economy increasing financial inclusion.
Rising prices and inflation have wreaked havoc in the country, Headline inflation based on the Consumer Price Index (CPI) increased in June 2022 by 6.34% over May 2022 and increased by 21.32% over June 2021. These figures do paint a dismal picture, but it is imperative to understand how it affects the FinTech ecosystem. While the economy generally faces periods of booms and slumps, economists augur a not-so-positive future as inflation is expected to persist throughout 2022.
With the soaring price of oil, the onset of floods in Pakistan, delayed tranche from the World Bank, the financial predicament of Pakistan is currently unstable and meek. Though the rupee has now appreciated against the dollar and is gaining momentum, the entire country waits with bated breath for a monetary reprieve. To mitigate the impacts of inflation, businesses will need to monitor their cash turnover cycles more carefully as it is very volatile. FinTech organizations have to take all this into account. The neo banking (branchless banking) and FinTech industry took flight in a low-interest environment and has focused on innovative benefits and low or a non-existent fee service structure to entice the audience and gain customers. If interest rates continue to increase and become the norm, it will have a considerable impact on this market. Rising interest rates mean that customers would then have to invest aptly because choosing a bank to deposit money is influenced by the return on the investment and the business case to invest wherever you get a higher return will gain precedence if regular banks give the option of a higher rate. FinTech organizations and banks will have to strategise accordingly and focus on how to attract an audience and have a game plan ready.
Given that Pakistan witnessed a boom in the fintech industry as the companies attracted significant investment of more than $32 million in the first half of 2021 as against investment of $10 million received in 2020 in the same sector, there is potential and the bandwidth to grow. Companies like YAP, Sadapay, Nayapay, Raast, and others are making a foray into the market with a focus on FinTech to make payment solutions easier for the Pakistani audience. Inflation will still be a constant that all the major players will have to adapt to, making contingencies by working around it.
Higher interest rates these days is a challenge for FinTech organisations because any customer would prefer a better financial outcome. This will increase competition between neo banks and regular banks as fintech organizations will have to up the ante in terms of their offering i.e., features that inveigle the audience to choose them over brick and mortar banks.
Focusing on leveraging personalisation, automation, and predictive analytics to help customers be more financially successful will give neo-banks an edge over traditional banks while competing with other FinTechs. Shortcutting the laborious processes of opening accounts or applying for loans is also a huge selling point with customers who don’t have time or patience for jumping through hoops.
The caveat here is that conventional banks are also striding into the realm of FinTech, one example in the US is that of Wells Fargo. They are on the way toward launching a new banking virtual assistant app that will help customers automate financial tasks such as bill payments and will offer budgetary advice as well. Others are finding new ways to appeal to the audience by making their platforms smart, and helping the customer get various services under a single platform. First Foundation Bank in the US launched a mobile application that uses AI which helps coalesce all their data from across all their accounts and pragmatically plans and anticipates issues i.e., overdrafts. This added value acts as a safety net if Neo Banks do not offer competitive rates compared to the others.
Neo banks taking into consideration the market trends will need to take a proactive approach to anticipate their customer's needs as the market gets competitive. More players will gain prominence and will change the dynamic of the market. All these measures can be taken to circumvent how inflation can impact neo-banks and FinTechs but it is even more necessary to be prompt and prepared. Even traditional banks aren’t equipped to handle an environment plagued by inflation. In the given situation, increased pressure from competition could help reshape the industry with new and improved innovative financial products that provide value to the customer.
Ultimately, it is the customer that will benefit as the financial ecosystem and landscape is witnessing a change and a potential upheaval.
Pakistan Market Monitor Report
Fintech in Pakistan witnessed a boom as the companies attracted a significant investment of more than $32 million
Inflation Could Lay Waste To Many Fintechs In 2022, Unless They Act Now
Unleashing the potential of a young Pakistan