Although India receives a great deal of attention in South Asia, the economies of Bangladesh, Pakistan, and others have enormous development potential.
India has long dominated fintech in South Asia, whether in terms of overall investment, unicorns, or the broader ecosystem. Despite the fact that India will continue to dominate the region for the foreseeable future, its neighbors have a growing number of market opportunities.
In fact, Pakistan and Bangladesh have two of the world’s largest unbanked populations, and Nepal, despite being a much smaller market, is developing its fintech ecosystem rapidly. In all three nations, the payments sector is expanding rapidly, while digital banking is ascendant in Pakistan and Bangladesh.
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In South Asia, unlike most of East Asia, digital banking has the potential to become a major industry because the market demand is genuine, regulators are motivated to support the digibanks, and incumbents are less able to sabotage and/or co-opt the digital upstarts.
Pakistan’s Financial Technology Boom
In 2022, Pakistan’s fintech industry raised a record-breaking $97 million. The $17.6 million seed round that Dbank raised in 2022 with the help of Kleiner Perkins, Sequoia Capital, and Surge was the biggest transaction. Dbank intends to compete with the nation’s notoriously exploitative informal credit system.
Last year, the State Bank of Pakistan authorized the Pakistani payments company SadaPay to offer financial services through its smartphone app. SadaPay then raised $10.7 million in a seed extension round. Due to the decision of the central bank, SadaPay has been able to gain millions of new consumers. Boku, a London-based fintech company, forecasts that SadaPay will be the world’s fastest-growing mobile wallet between 2020 and 2025.
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In the meantime, Pakistan is expediting the sanctioning of digital banks, given that half of its 220 million population does not have a bank account. The State Bank of Pakistan announced the recipients of five digital banking licenses in January. Among them are Easy Paisa DB, Hugo Bank, KT Bank, UAE-supported Mashreq Bank, and Kuwait-supported Raqami.
The next stages for the five winners will be to incorporate a public limited company with the Securities and Exchange Commission of Pakistan, obtain approval in principle from the SBP to demonstrate operational readiness, and then begin the pilot phase. Once the pilot phase is complete, and pending SBP approval, the five digital banks will be able to commence their operations commercially.
Digital Banking In Bangladesh
Bangladesh, with a population of 169 million, of which 40 to 50 percent lack a bank account, is an ideal candidate for digital banks. In light of this and the government’s digitization and financial inclusion objectives, we anticipate that Bangladesh will launch its digital institutions relatively quickly. As part of its vision for a “Smart Bangladesh” by 2041, Dhaka intends for at least 75% of local transactions to be conducted digitally by 2027.
As reported by the Dhaka Tribune in April, “It [the initiative] aims to foster the inclusivity of all people in Bangladesh in order to ensure a decent standard of living for everyone while striving for a prosperous country with a lower Gini ratio.”
Under the proposed digital banking guidelines, online lenders will be required to provide consumers with bank cards and QR codes and to facilitate transactions using “advanced technologies” such as artificial intelligence, machine learning, and blockchain. These requirements should be straightforward to meet, as fintechs typically prioritize them regardless of regulatory mandates.
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Importantly, capitalization requirements are modest, which could facilitate the licensing of enterprising startups. Each online bank in Bangladesh must have a paid-up capital of 1.25 billion taka ($11.55 million), which is significantly less than the 5 billion taka requirement for conventional banks.
Nepal: Infancy But Rapid Growth
Compared to Pakistan and Bangladesh, Nepal’s fintech sector is much smaller and less developed, but this is rapidly changing. As is typical for emerging fintech markets, the initial emphasis is on payments.
Nepal introduced a national payment switch in November 2021 to combat the lack of interoperability between banks and e-wallets in the country. The payment switch will serve as the country’s primary retail payment rail, facilitating money transfers between banks, e-wallets, and non-financial institutions.
These efforts have produced results. From mid-March to mid-April, Nepal Rastra Bank (NRB) monthly payment system indicators indicate 7.7 million QR-based payment transactions valued at Rs23 billion ($175.2 million), compared to just 800,000 worth Rs2.7 billion ($20.6 million) two years ago.
In addition, the United Payments Interface (UPI) of India has taken a keen interest in the Nepal market, which it entered in February 2022. With the Nepal expansion, UPI’s real-time payment system will be adopted internationally for the first time. Thus, UPI will operate similarly for Nepali users as it does for Indian users in India.
NPCI stated in a press release that Nepal will be the first country outside of India to adopt UPI as the payment infrastructure driving the digitalization of cash transactions.
China and India Will Be Prominent.
We anticipate that the digitization of financial services will accelerate in Pakistan, Bangladesh, and Nepal, thereby expanding their respective market opportunities. In each of the three nations, there is an abundance of low-hanging fruit.
While prominent Western VC firms will continue to invest in these markets, we anticipate that China and India will continue to gain prominence in the region. India and Nepal, for instance, signed a cross-border digital payments MOU on June 1 that is expected to facilitate digital transactions for businesspeople, students, and vacationers from both countries.
Under the terms of the agreement, Indian tourists in Nepal will presumably be able to use Indian e-wallets such as BharatPe, PhonePe, Paytm, and Google Pay to make digital payments.
In addition, Alibaba and Ant Group founder Jack Ma made an unannounced visit to Nepal in late June, prior to a planned trip to Pakistan. Alipay has been present in Nepal for a number of years, but it is not a significant participant in the country’s payments market. It is conceivable that Ma traveled to Nepal because Ant Group wishes to launch its Alipay+ product. Alipay+ has been steadily expanding throughout Asia since the autumn of 2022.
Given the geopolitical tensions between China and India, we anticipate that Ant will investigate opportunities in the remainder of South Asia with greater vigor. Ant has a 20% stake in the leading e-wallet in Bangladesh, bKash, which will presumably apply for a digital banking license.
As a dominant player in the fintech ecosystem, its proposal will most likely be successful. According to Tellimer Insights, as of June 2022, bKash’s network consisted of 62.3 million consumers (37.5 million of whom were active), 280,000 merchants, and 295,000 agents. During the first half of 2022, it facilitated transactions worth $39 billion (3.4 trillion taka).
Moreover, Ant has a substantial presence in Pakistan’s fintech industry. It acquired a 40% stake in Pakistan’s Telenor Microfinance Bank from Norwegian mobile operator Telenor ASA in 2018 for $184.5 million. In addition, one of the recipients of a digital banking license in Pakistan, Easy Paisa DB, is a joint venture between Telenor Pakistan and Alipay.
Ant is well-positioned to capitalize on rapidly emerging opportunities in Nepal, Bangladesh, and Pakistan, despite its domestic challenges and India’s challenging market conditions. South Asia could eventually become as crucial to Ant’s international expansion as its more visible ventures in ASEAN nations.
