Banking reforms through digital transformation


The history of banking is as old as the human civilization as it evolved from hunting and food gathering to practicing agriculture for the survival. The banking can be traced all the way back to 2000 BC when the “grain-money” and “cattle-money” were introduced in the society. As a result, the merchants (prototype bankers) started giving out grain (seed) loans to the farmers (for their crops) and traders (for carrying & delivering the goods between the cities). Some studies suggest that Babylonia and other cities of Mesopotamia had well-defined lending practices by more than 4000 years ago. More structured banking with record keeping was introduced during the 14th century in Italy and was dominated by the rich merchant families of Florence, Venice, and Genoa. The most famous Italian bank, the MediciBank, was founded in 1397 by Giovanni Medici. Banca Monte Dei Paschi di Siena is the oldest surviving bank that was founded in 1472 in the Tuscan city of Siena. The modern-day banking with the Fiat money (notes and coins, without gold backing) originated in Europeduring the First World War for financing the war expenses. Later, as more countries started issuing their own Fiat currencies, the Central Banks were created to regulate the banking industry in their own jurisdictions.
During the start of the pandemic, physical movements were restricted forcontrolling the COVID-19 spread. Because of the movement restrictions, digital revolution speeded upand permeated in our daily lives. From contactless payments, internet shopping to tele-medicine; virtual classes, sightseeing, groceries & meals homedeliveries, maid services, etc. all became very common.Behind all these first of their kind novelties and conveniences, it was the digital platforms and the banking that were facilitating the transactions. Even though the pandemic is still with us, and now the merchants as well as the banks are offering hybrid operations (in-person & virtual services),but after experiencing the convenience of buying and selling through the virtual platforms, the consumers have become now savvier and more educated.They don’t just want to compare the merchants or bank names, their sizes, or locations (for convenience), but now they compare the values and overall, their personal experiences with them. With the increasedadoption of the digitizationresulting into additional real-timeconveniences, consumers are embracing other online services at an unprecedented pace.And this tidal wave of the digital revolution iscreatingenormous ecommerce opportunitiesthatis delivering seamless and transparent transactional details with instant confirmations andaccount balances.
Ecommerce was pioneered by Amazon and was exploded in China by Alibaba and Tencent. Its success in China and later elsewhere was based on the use of the Big Data that provided customer interactions and their preferences of products likings and interests during their shopping on their platforms. Also, browsing behaviors and purchasing of items gave Alibaba and Tencentfurther insightsinto the consumer tastes. All this information has always been there, but due to the absence of the digital portals, it was not accessible.
Now, China is thriving on ecommerce and consumers are creating robust and vibrant market economy with passion for owning the western brands. Prior to Alibaba and Tencent’s entrance, there was lack of trust between the customers for making the payments and the merchants to delivering the merchandise. However, by guaranteeing of the payments to the merchants and the merchandise delivery to the customers, Alibaba and Tencent brought confidence and trust by becoming the arbitrators for the transactions. This unleashed a vast interest in many millions of customers and merchants for buying and selling the merchandise using these ecommerce platforms. The trust provided an insight to the ecommerce giants to start their own payment system in direct competition with the Chinese banks, who have been historically slow, cumbersome, inflexible, and unfriendly. The friendly and agile smart-payment systemthrough “Alipay” and “WeChat pay” completely bypassed the credit/debit card use in China. This created challenges to the Chinese banks and financial institutions who were counting big profits from the explosion of the ecommerce by issuing their own credit/debit cards to the consumers. When the Chinese banking industry noticed slipping of their control on the consumer banking, they approached the central government for its help against the ecommerce giants. As a result of this, the central government has rolled out new laws to regulate what the ecommerce giantscan do and how far they can go in the finance and banking space with their services. To learn from this experience and stringent regulations, the entire banking industry is going through the digital transformation and revamping its entire operations to user friendly and consumer focused. To support this notion further, Chinese Central Bank has accelerated its own digital transformation journey and to put further impetus in this landscape has already rolled-out its e-Yuan (digital national currency) in the major cities. With its limited butstellar initial success in its digital currency, the Central Bank has made its top priority to roll-out the digital wallet nationwide soon, including in the rural areas to make it inclusive, beneficial and time savings for increased productivity andfor more family time.
To benefit from the digital revolution, Pakistan Central Bank (SBP) needs to revamp its entire operations from inside out. Putting band aids or doing by piecemeal is not only be unproductive and costly but it will also create a lot of confusion and frustration to customers’ experience. Thus, at this stage,the Central Bank must overhaul the entire banking system by mandating thebanks to transform their entire infrastructure using the smart-digital platforms. Additionally, SBP must also make fundamental changes to its own operations by transforming its processes into clients friendly-seamless experience from start to finish with full transparency, built-in robust security protocols, stronger guard rails to repel any cyber intrusions, laser focused inter&intra bank communications, and on demand agile & customizable clients interface.
Majority of Pakistan’s population still prefers cash for all kinds of transactions, and this makes its economy a cash heavy, like most of the underdeveloped and some developing countries. In metropolitan cities and among the younger educated generation (Gen Y&Z), credit card, debit cards (cash cards) and the ATMs are becoming popular, but on a very limited scale. Even in the big cities, including Karachi-the commercial hub of the country, true digital payments are rare, mostly because lack of trust in the system and absence of reliable infrastructure. Current government is making some efforts to digitize its economy, but it is mostly geared toward the diaspora’s needs and taxation processing. Nevertheless, the speed at which the digital regime is being rolled out will take more than a decade to digitize even 50% of Pakistan’s economy. By that time, most of the infrastructure will become incompatible to process the explosion of the data (Big Data) that is being generated by the consumers with the continued advancements in technology and data driven applicationsfor everyday life. If Pakistan really wants to participate and benefit from the digital revolution, first it needs its entire digital ecosystem to have capacity and capability to continue to process the gargantuan amount of data (Big Data) that is being generated at the speed of clicks, and to disseminate it to its stakeholders (consumers, banks, financial institutions, credit agencies, taxation departments, etc.) in the shortest possible time. Any delays or hiccups in processing the real-time data could result into unrepairable damages, including significant economic losses!
Banking is the nerve center of every economy; thus, it make sense to start the digital transformation journey from the banking sector, with the Central Bank playing its pivotal role in monitoring and maintaining a good balance in the entire financial ecosystem. Transformation should start from the backend and training of the support personnel for smooth transition and transformation of the antiquated current banking system that is based on paperwork, filling of multiple forms, including tuition & exam fee payments, loan applications, business financing, foreign currency approvals for the imports payments and overseas travel costs. Switching to the digital smart-payment system, will not only eliminate the human errors, but it will also add speed, efficiency, cost savings (paperwork/forms elimination), and transparency to the entire transaction chain, from start to finish. Additionally, it will eliminate ubiquitous interference by the government officials in hiring, “favors” practices, loan approvals, and inconsistent and sometime contradictory banking and financial policies. Because of these prevalent practices, most of the international banks have left Pakistan or ceased their consumer and retail banking services. Besides the above-mentioned reasons, lack of modern-day credit and solvency laws and enforcements scarcity of the currently available avenues against the non-performing loans have also influenced their decisions for departures. The few Western international banks left are catering their services just to the commercial sector. The most well-known international consumer bank, the American Express has pulled out of the country a long time ago. In Karachi, the commercial and financial hub of Pakistan, only Standard Chartered Bank is offering consumer banking, in addition to the commercial services. This shows how weak the banking regime and unhealthy capital & financial environments exist that have made the banks to leave Pakistan in droves to avoid any unintentional violations of the international banking or unknowingly becoming victim of the money laundering (ML) and terror financing (FATF).
On the other hand, there is a proliferation of local banks and their branches have been growing nonstop in major cities! As a matter of fact, just the current number of banks and their branches will make their oversight and compliance by any Central Bank a nightmare and an overwhelming task, as it will require an army of the regulators for monitoring and enforcing the banking rules. Other countries, advanced economies as well as the developing ones, both are reducing their banks under the pressures of their central banks to help reduce the channels for money laundering and terror financing. Their numbers are shrinking, either through the mergers or making them insolvent due to violations of the banking rules or the best banking practices. According to the world bank and other studies, Pakistan is the country having banks in the100s and their branches in 100s of 1000s nationwide. This sheer abundance ranks Pakistan with the highest number of banks in any country with its size of economy and rural & urban population split. Additionally, with the digital currency on the horizon, most of the transactions will be conducted using the internet banking, making physical/in-person banking an obsolete. Before arriving to this milestone, banks in the other countries have already been reducing their branches to stay profitable by streamlining their operations through divestment of their fixed assets (buildings) and variable costs reductions, resulting into freeing up of their working capital. These strategies areallowing these banks to cater their services at the speed of light; without letting their clients to stand in lines or waiting in the lobbies for their turn to talk to their bankers. This overview clearly shows that Pakistan banking system really needs some structural changes and reforms to make its operations more productive and transparentto be in line with the global banking standards and best practices.
Banking reforms through the digital transformation (Ai & ML at its core) will allow to leverage the Big Data for creating more efficient, transparent, inclusive, personalize, scalable and robust system that will result into cost savings, higher profits, loss elimination due to human errors, better controls (inside/out), timely interventions before loans becoming non-performing, laser focused communication and overall, the best clients experience resulting into lifelong clients retention for their all the financial needs. In other words, banking digitization willcreate ripple effects that will benefit the entire landscape of the economy through:
. Fast economic recovery
. Financial agility
. Monetary & fiscal stability
. Credit monitoring & timely interventions to avoid insolvencies
. Smooth structural changes (energy transition, green initiatives, workers training, projects progress monitoring)
These actions will create fertile climate for the entrepreneurship andnew business startups, where innovation & creativity will be thriving,and creating new-higher paying jobs in the 1000s. This climate will also be creating vibrant circular economy and adding new sources of tax revenues. Additionally, the digitization will add new momentum in the ecommerce spacethat will stimulate the consumptionand will accelerate the economic growth by many folds or at leastby 7% as has been stated by SBP.
Just the past Saturday (December 11, 2021), Dubai has announced that it has completely transformed its entire government ecosystem of more than 45 agencies into digitized (paperless) operations. The digital transformation has eliminated 336 millionof paper transactions resulting into a combined 14 million manhours work reduction, resulting into 1.4 billion Dhs (>US$380 million) annual cost savings.
Thus, by adopting Dubai’sproven smart-digital transformation, Pakistan can easilyachieve much higher cost savings through digital transformation of its entire ecosystem.By selecting banking and financial as the urgent prioritysectors for thetransformation, Prime Minister Imran Khan and his PTI government, bothhave got the golden opportunity and the environments (domestic & global) for creating a landmark and an enduring legacy,that will be remembered as the next major milestone in Pakistan’s history making!

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