n the rapidly evolving and turbulent landscape of Pakistan’s financial technology sector, electronic money institutions find themselves at a crossroads amid regulatory curbs on margins, increasing cost of doing business and other operational challenges.

The recent news about a distress deal between SadaPay and Turkish fintech Papara, which was preceded by a similar sale of Finja to OPay, have cast a spotlight on the precarious position of fintech companies in the country. This underscores the need for regulatory intervention to ensure the stability of the sector.

The investment climate for start-ups in Pakistan has notably shifted in the past few years. The once-burgeoning flow of venture capital that marked the mid-2010s has experienced a significant downturn. In the heyday of Pakistani tech startups, investments flowed generously, fostering a vibrant ecosystem of innovation and entrepreneurship. However, in 2023 Pakistani start-ups managed to attract only $75.6 million, a drastic reduction (77.2 percent) year on year.

Economic uncertainties, coupled with global financial constraints, have led to a cautious approach on investors’ part. This drying up of funds has placed additional pressure on EMIs and tech start-ups, which already face operational and regulatory challenges.

The macroeconomic conditions of the country, particularly the rampant inflation and currency devaluation, have further aggravated these difficulties. Companies like SadaPay that aimed to revolutionise the digital finance space have been hit hard by these economic tremors.

Inflation has eroded the purchasing power of consumers, making it challenging for EMIs to maintain a steady growth in user base. Moreover, the depreciation of the Pakistani rupee against major currencies like the US dollar has added a layer of complexity to financial operations, especially for fintech firms dealing in international transactions.

Adding to the woes of EMIs and startups, the government has introduced new fiscal measures, including increased taxes on transactions, a super tax on certain sectors and higher income tax rates for salaried individuals. These measures, intended to bolster the national treasury, have placed a heavier burden on the fintech sector. The increased tax on transactions directly impacts the bottom line of EMIs, which operate on thin margins in a competitive landscape.

Furthermore, the hike in income tax for salaried individuals has had an unintended consequence on the tech talent pool in Pakistan. The allure of freelancing, which offers tax incentives and payments in stronger foreign currencies like dollars, has become increasingly attractive. This shift is not only due to the financial benefits but also the flexibility and global exposure that freelancing affords.

As a result, EMIs and tech companies face an uphill battle in retaining talent, with professionals opting to freelance for foreign tech companies or pursue opportunities abroad, notably in the US and Saudi Arabia. This talent drain not only deprives the local tech ecosystem of its brightest minds but also challenges the growth and innovation potential of EMIs.

Economic uncertainties, coupled with global financial constraints, have led to a cautious approach from investors. This drying up of funds has placed additional pressure on EMIs and tech start-ups, which already face regulatory challenges.

Regulatory limits restrict the transfer of funds from traditional bank accounts to digital wallets to a meagre Rs 5000, making it impossible to conveniently fund digital wallets. This is concurrent with caps placed on interchange fees chargeable by EMIs like SadaPay and NayaPay who issue debit cards to citizens underserved by the traditional banking sector.

Such restrictions act like ankle chains for the start-ups to generate revenue from customer deposit float and transaction fees as they attempt to stay afloat.

The State Bank of Pakistan is urged to provide a framework that can prevent crises similar to those experienced by traditional financial institutions in the past. The SBP has demonstrated its commitment to ensuring the stability of the financial sector through strategic interventions.

In 2015, KASB Bank faced a moratorium due to its failure to meet the SBP’s minimum capital requirement. After six months, the bank was merged with Bank Islami Pakistan, aiming to protect depositors and preserve financial system stability. Similarly, in 2010, MyBank’s liquidity challenges led to its merger with Summit Bank, showcasing the SBP’s role in safeguarding depositors’ interest.

Concerns have been raised by employees and customers of SadaPay. Discussions on X and various websites such as glassdoor.com have highlighted allegations of unpaid salaries for months, pointing to potential deeper issues within this startup. These allegations, if true, not only raise questions about financial management but also highlight the struggles faced by EMIs in meeting required regulatory capital, sustaining operations and retaining talent in Pakistan.

The fintech sector has seen its fair share of aspirations and setbacks. Companies such as PayMax, Careem Pay, Checkout and YAP ventured into the EMI space with high hopes but found the journey fraught with obstacles, leading to the surrender of their licences and applications. The SBP’s lowering of margins on debit card transactions, high regulatory overheads, skyrocketing inflation and persistent depreciation of the Pakistani rupee have compounded these difficulties.

It’s pertinent to note that the State Bank of Pakistan has recently awarded five digital banking licences. None of the licensees have launched their services so far, possibly due to the challenges also faced by the EMIs. The increased costs and regulatory burden, coupled with the economic uncertainties prevailing in the country, may be hindering the progress of these digital banking initiatives.

While the issuance of these licences holds promise for expanding financial inclusion and innovation, without proactive measures to alleviate regulatory constraints and create a conducive environment for digital banking, these ventures risk facing a fate similar to the previous fintech aspirants such as Paymax and Careem Pay, ultimately jeopardising their viability and potential contribution to Pakistan’s financial ecosystem.

While the promise of digital finance remains vast, the path forward is mired in regulatory, economic and operational hurdles. The SBP’s proactive engagement and the formulation of supportive policies could be necessary for fostering a stable and thriving digital finance sector. As the landscape evolves, the resilience and innovation of Pakistan’s EMIs and the upcoming digital banks will be tested. With the right mix of regulatory support and effective internal governance, they can navigate these uncertain times towards a more secure and prosperous future.

The writer is career journalist with 15 years of experience specializing in e-commerce