Similarly, financial institutions have started focusing on solving SME lending issues, a vast gap in Pakistan, especially for small companies. The Securities and Exchange Commission has granted twenty-one licenses to provide Investment Financial Services (IFS) licenses and issued regulations and policies enabling digital finance, including warehouse receipts Secured Transaction Registry and framework for Non-Banking Financial Companies engaged in digital lending.

Emerging Gap

While the results of all these efforts have started to appear, and financial inclusion has increased from 14% in 2017 to 30% in 2022, the gender gap has increased from 13% in 2017 to 16% in 2022. Similarly, there is a 10% Rural-Urban gap in financial inclusion.

Key reasons for the 70% excluded population are: do not know what mobile money is used for, do not know how to use a mobile wallet, and prefer to pay cash.

The main reason for still lagging and excluded segments is that most private sector digital financial services providers focus on the banked. At the same time, the unbanked are generalized as a population who do not want to get ‘documented’ and hence are reluctant to adopt digital means. The fact is, on the contrary. The unbanked population wants to use digital means; however, the current value propositions do not meet their needs. Furthermore, it is a researched fact that digital developments marginalize people with low literacy as their confidence in using digitally enabled solutions is extremely low initially, and the fear of making a mistake is a significant barrier to adoption. Hence these segments, primarily rural but also present in urban areas (especially the migrant workers), remain committed to old proven mechanisms and habits of using cash.

There has been little effort to develop solutions based on real-life profiles of these segments. A glaring example includes women, who are getting further marginalized as most FSPs, including fintech, consider all women of the same profile, resulting in a very low uptake of DFS among women. Social barriers and norms add to the issues of adoption among women. Another example is youth. High-level interaction with multiple universities and college-going students reveals that youth, even being digitally savvy and having mobile accounts, end up using cash since the FSPs are not focused or unable to develop youth-centric use cases. Lower revenue merchants (mom & pop shops) are another category where merchant acquirers rely on card-based discount rate models. This results in merchants resisting adopting digital payments as they see no real value in adding costs to their business without seeing an upside.

In summary, while we have many supply-side platforms set up, the approach for the ‘last mile’, or where the rubber meets the road, is predominantly non-customer-centric. The FSPs deploy a usual sales and distribution approach of deploying existing products with minor tweaks to the unbanked segments. Similarly, initiatives for market development that require patience and new approaches or collaboration with other suppliers and sometimes competitors do not go forward. The innovation in financial services remains within banked, and the service does not extend to the unbanked, who then rely on existing informal banking and cash mechanisms. 

 Digital Miles-A Financial Inclusion Innovation Lab

With the above background and the number of developments that have taken place in the last six years, there is an opportunity to create a dedicated Financial Inclusion Innovation Lab (FII Lab) to develop solutions and business models for converting the specific segments of unbanked to banked. The FII Lab will leverage the existing national digital infrastructure and develop solutions for the customers that solve their particular constraints and help transition them from unbanked to banked.

The FII Lab will utilize a human-centered design approach, identifying the issues and challenges faced at the “last mile” of the target segments, creating collaborations with on-ground suppliers locally present, and building local propositions. In addition, the FII Lab will specifically deploy Innovator’s method to develop solutions, and business models for the unbanked financial services use case. While appearing simple and intuitive, financial institutions do not follow the Innovator’s method. Business and product managers usually start with business models as a given and develop solutions that support existing models, reducing innovation scope. Digital Miles would implement the Innovator’s method to design solutions that may require creating a new business model that may not be present in the current digital financial services providers. After prototyping a minimum awesome product to solve a relevant problem that target segments have, Digital Miles would also endeavor to develop business models to scale the product.