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Executive Summary

On 1st April 2019, the State Bank of Pakistan announced EMI regulations targeting fintech for the first time to open Stored Value Accounts (Wallets) in an Open Loop Environment. These regulations were considered revolutionary for an innovation-suppressed market, marred by financial exclusion. The SBP has given approval to four (04) EMIs to launch commercial operations while six (06) EMIs are at different licensing stages. Besides, the license of one operator has been revoked due to non-compliance with regulations and one UK-based EMI withdrew its license this year.  As of March 2023, the operational EMIs have opened close to 1.6 million e-money wallets with a total outstanding e-money of Rs. 2 billion. 

It is pertinent to note that in March 2022, the State Bank of Pakistan announced the award of the Digital Banking licensing regime which was perceived as a superset of EMI-permitted activities, and hence eligibility of EMIs to apply for the Digital Bank license was also notified. Considering the changes in the financial landscape around the world, the State Bank considered it pertinent to announce the changes in the EMI regulations on June 21st, 2023.

We consider these regulatory changes to be aimed at enhancing the security and efficiency of the digital financial landscape in Pakistan while ensuring compliance with global standards and are applicable to both, existing and EMI license applicants in Pakistan. Through these changes, the State Bank aims to foster greater transparency, prudence, and innovation within the EMI sector and includes the below details:

Challenges

• Compliance with increased documentation: Adapting to the increased documentary requirements may pose initial challenges for EMIs, particularly for new entrants already in the middle of the application process. A newly established EMI with limited resources may face hurdles in compiling the necessary documentation, delaying their entry into the market. To address the challenge of compliance with increased documentation, EMIs can adopt a Regulatory Compliance Toolkit tailored to meet the specific requirements of the updated regulations. Additionally, they can collaborate with regulatory experts well-versed in the regulatory compliance processes. They can guide EMIs in understanding the nuances of the requirements and offer personalized support throughout the application process. As the subject matter expert, Dastak Accelerator offers a fast-track Regulatory Toolkit that enables fintech to adhere to the regulatory guidelines.
• Changes to the business plan: Identifying and defining target customer segments accurately can be challenging, especially for EMIs with limited market research capabilities. Failure to devise a robust market segmentation strategy may lead to misdirected marketing efforts and reduced customer engagement. The updated regulations also mandate EMIs to integrate an Exit Plan into their business models. This strategy prepares EMIs for unforeseen circumstances and ensures an orderly discontinuation of operations if required. To adequately address these changes to the business plan, EMIs can implement a comprehensive market research and business strategy consulting approach while integrating a reliable exit plan into their business models.
• Operational Planning: The updated regulations necessitate the inclusion of a detailed operational plan in the business model of EMIs. This plan outlines specific operational areas and strategies for service delivery which can be a time-consuming and resource-intensive endeavour for EMIs. By adopting a streamlined planning approach and integrating process automation, EMIs can efficiently develop a detailed operational plan. This proactive strategy optimizes resource utilization, ensures compliance with regulations, and fosters operational effectiveness, positioning EMIs for sustainable growth and success in Pakistan’s digital financial landscape.

Opportunities

Reach a wider customer base:

• The updated regulations have increased the monthly wallet limits for customers, including minors and freelancers. This will allow EMIs to reach a wider customer base and provide them with convenient and affordable digital payment solutions.
•  EMIs can now offer a wider range of payment solutions, including cross-border payments and escrow services for SMEs. This will make it easier for SMEs to do business locally & internationally.
• To maximize the opportunity, EMIs can implement tailored marketing campaigns and educational initiatives to create awareness. Partnerships with other digital platforms & third-party services should help create new financial products and focus on user-friendly interfaces, enhanced security measures, and incentive programs to drive customer engagement and adoption. 
• Diversifying services, offering localized support, and gathering user feedback for iterative improvements will further enhance the digital wallet experience.
• Further by aligning with social impact initiatives like financial inclusion and women empowerment and emphasizing the benefits of digital payments, EMIs can successfully attract a broader customer base, contributing to the growth of digital financial services in Pakistan.

Offer a wider range of payment services:

• The revised regulations have allowed EMIs to offer a wider range of payment services via APIs to FIs/Fintech/TPSPs, and inward cross-border remittances. This will allow EMIs to meet the diverse needs of their customers and provide them with a one-stop shop for all their digital payment needs. 
• By developing robust APIs, they can facilitate seamless integration with other service providers, providing services such as payments aggregation, bill/invoice aggregation, payment initiation, account information, and escrow services for domestic e-commerce transactions.
• Additionally, EMIs can offer inward cross-border remittances, enabling customers to conveniently receive funds internationally. 
• Customizable service packages for individual and business users, along with streamlined onboarding processes and advanced security measures, will attract a diverse customer base. 

Collaborations and Partnerships:

• To make the best of the opportunity presented by collaborations and partnerships, EMIs can form strategic alliances with banks and financial institutions to tap into their customer base and offer a wider range of payment options. 
• Additionally, partnering with e-commerce retailers and merchants can facilitate escrow and payment aggregation services, simplifying online transactions for consumers. 
• By collaborating with fintech companies and other financial institutions, EMIs can enhance security measures, improve service offerings, and drive innovation in the digital payment space. For example, EMIs can collaborate with banks to share fraud detection and prevention data. This will help them to better protect their customers from fraud or reduce costs through collaboration with other fintech to share the cost of developing and maintaining technology infrastructure.
• Jointly developing innovative solutions, engaging in co-marketing initiatives, and sharing data insights will further strengthen their market position. For instance, partnering with a fintech specializing in biometric authentication can bolster transaction security.