Financial Technology and Corporate Finance in Pakistan: Analytical Essay

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1.0 Introduction

Technology is nowadays changing the way of finance, accounting, and banking companies do business. Automation, A-I (artificial intelligence), and other forms of technology are causing organizations to change their strategic direction of how they approaches management, promote, hire, or retain their employees. Leading the charge is Fin-tech. The word Fin-Tech normally referred as (Financial Technology) is not a product or any app, it is basically a technology that has made online transactions and operations more effective and smooth and has made life of consumers much easier. It helps business owners, companies, and consumer to manage their financial operations easily by just simply using specialized algorithmic PDAs such as mobile phones, tablets or even smart watches. The services such as mobile banking, investing services, online banking, money transfer or payment services, cryptocurrency, fundraising, and asset management fell under the umbrella of Fin-Tech. Fintechs also plays a significant role to financial institutions by providing them the products and services that help them running their operations smoothly and efficiently and helping them in spreading of the industry.

Corporate Finance is the area of finance that deals with financial and investment decisions that managers take to increase the profitability ratio and most importantly the value of the firm. It also deals with the sources of funding and the capital structure of a company. Basically, it is the division of a company that deals with business needs, planning the finance, arranging the funds, investing, and monitoring. The Corporate finance departments basically look into governing and overseeing the corporation’s financial activities and capital investment decisions. Such decisions include whether to pursue a proposed investment, whether to pay for the investment with equity, debt, or a hybrid of both, and whether shareholders should receive dividends. Additionally, the finance department manages current assets, current liabilities, and inventory control.

Financial Technology’s market is now expanding with an increasing diversity in scope of businesses, funding sources, and geographically in Pakistan. As Pakistan is still in development phase many rural areas of Pakistan are deprived of technology. Access to electricity is very limited. Areas like interior Sindh, Punjab, Khayber PakhtoonKhuwa and Balochistan are still facing many challenges regarding electricity but as of now as the development is in progress Fintech companies have started operating in these areas. For consumers, financial technology offer personalized and interactive services by allowing them to conduct transactions over their mobile device, boosting customer experience. Among the notable services that allow consumers to make online payments are UBL OMNI, EASYPAISA and JAZZ CASH can be related as they have started their operations all over the Pakistan and their prime focus was to ease up the transaction process especially in rural areas where the amounts of banks are very limited.

2.0 Literature review

2.1 Financial Technology’s Growth in Pakistan

Fintech growth has been driven by numerous factors, including technological evolutions, digitalization of financial services, e-commerce influence on consumer demands, increase in the number of online transaction apps, and much more.

Firstly if we consider the technological factors or evolution of technology, it has a significant role in the advancement of FinTech across the globe. New algorithmic software-enabled many PDAs to work efficiently and smoothly in order to carry out task. The innovation and advancement of smartphone devices with new features, has led people to opt for financial services that are readily available on mobile phone, such as money transfer, online transactions and payments, and even mobile banking.

Digitalization of financial service has also played a vital role in boosting up FinTech across the globe, especially in Pakistan; people were used to of same old traditional banking system, by visiting bank and carrying out their processes. With the introduction of FinTech, according to studies and PWC surveys in US, 49 % people are now using their Laptops and mobile phone for their financial management instead of visiting bank personally. Moreover, now a day’s online cab system like Uber, Careem or Bykea are being introduced to make travelling within or out of city more easy and safer, as well as cheaper.

Furthermore, if we consider the consumer demands, we see that to cater their needs e-commerce has further facilitated transformation of digital payment through online wallet system such as UBL omni or easy paisa or jazz cash, etc.

Financial Technology is growing in Pakistan exponentially, aiming to replace the traditional financial services, even if it is not trying to replace it, it is there to help or facilitate people to ease up their transaction procedures e.g money transfer, online payment, etc. The Government of Pakistan have identified many ways they would be using Financial technology to implement their policies, one of the example is to replicate the health insurance, which they implemented in KPK, a health card having coverage above half a million, creating a source for everyone to have access to excellent health care regardless of their income thus providing a chance to live a better and healthy life.

2.2 List of FinTech Companies in Pakistan

Pakistani fintech: here are some of the best you need to be aware of.
AutoSoft Dynamics: It is a company that develops financial applications for different businesses.
AbacusConsulting: Like auto soft dynamics, this company also specializes in developing software that are known for financial calculations and that helps smoothing business operations.
Finja: An effort put to produce innovative financial services accessed through digital means like mobile laptops, palmtops, etc. It is Pakistan’s first payment solution payments in real-time.
Easy Paisa: This app is developed by Telenor Pk and it allows user to do multiple task such as utilities bill payments, money transactions, or mobile top-up or purchasing, cinema tickets etc.
OneLoad; This application is especially designed to facilitate user to top up their mobile accounts using mobile phone while sitting at home/ offices.
Payload: This company accept bitcoin payment in Pakistan and it is one of its first kind to operate in Pakistan.

2.3 Challenges and Opportunities face by Fintechs in Pakistan

FinTech industry in Pakistan faces many hurdles including no support from larger organizations and government in regularizing their body and providing them with sufficient funds. Secondly, it happened many times that these companies faced many complicated and unfavorable regulations that halted their operations disrupted their revenues or income. No proper funding was done at their early stages, when they are just stepping into the new world of innovation. They face many problems in getting their license like it is mentioned earlier that they faces regularization problems. Moreover if somehow companies start its operations no one takes the responsibility to mentor it. No interest in the company’s operation is shown by the government or larger organizations. These were some legal and funding issues however if we look to the demographic issues, there are many places in Pakistan and not only in Pakistan but across the globe where people are deprive of basic necessities and in those areas these companies cannot operate. Backward areas where there is very limited access of internet, cannot fulfill the need of these companies, for example, Careem is very well known company for online booking of cab, however they fail to operate in small cities where there is very limited sources of internet, and where technological advancement chances or probability is extremely low, like below the belt. Furthermore, security issues are also vital threat to these companies, like hackers can hack into personal account and can retrieve data of millions, and can manipulate it. So security is an also a significant threat.

Well now if we discuss the related opportunities of financial technologies companies in Pakistan, it would not be wrong to say that they have a bright future in excelling here. Pakistan is the sixth largest population in the world and is amongst the most numbers of technology users. Secondly, 15 % of Pakistan’s financial ratio is low as compared to 33 % average ratio for middle-income countries. Moreover, on the basis of comparative studies it is expected that 25 million of debit card may come online through local payment gateway. Furthermore if we consider technological opportunities we see that 61 % of internet users are present in Pakistan. In 2016 there were 16.6% smart phone users in Pakistan which is expected to grow to 51% in 2020. In addition 92% of the land has telephonic and internet coverage that allow these companies to grow more. So considering these factors we see Financial Technology Industry has bright future in Pakistan.

2.4 Impact of Fintech on Corporate finance

Corporate finance this term describes itself as the interaction between a company’s managers and investors and its impact on company value. i.e. the theory of corporate finance tries to explain financial contracts and investment behavior arising from the interaction between managers and investors (according to this theory, managers should make unbiased forecasts of future events and use them in making decisions that best suit their own interests) (Baker & Wurgler, 2011). According to corporate finance many business executives and investors act rationally when taking financial decisions. If the assumption of rational behavior is correct, managers can expect that capital markets are efficient, implying that stocks and bonds are priced correctly at every given moment.

Now a day as long as people have the access to internet facility, they can actively use their smartphones and other PDAs for online banking. Innovations in technologies especially financial technologies and their growth has given rise to new opportunities and they are increasing day by day and it wouldn’t be wrong to say that this is due to growth of modern internet and its penetration into our society. This modern technology has allowed users to open up their bank accounts while sitting at home without their physical presence at bank, until it is not urgent to be present. With the help of technology they can link our bank account to our mobile phones using their applications and this can be use it to monitor our transactions on daily/weekly or monthly basis. Like it is being mentioned before that smartphones can be turned into a “digital wallet” and can be use for transaction purpose. One of the most common examples now a day is of cryptocurrency, the payment can be done by transferring BITCOINS through E-Wallet.

Financial technologies plays an important role is corporate finance. As corporate finance deals with the investment decision, funding sources, and capital structure of the company. So financial technologies help the firm to manage their operations, take decisions effectively by using different software and algorithms that are used on computer and smartphone. Such as mobile payments, mobile wallets, online investments, cloud computing, and software such as Investment Plus, Profit book, DAVIGOLD etc. Through which you can get to know that exactly where capital is being invested an in which sector you are being benefited/which sector of investment will help your financial earnings grow. Through this we can also get to know about our competitor’s activeness.

As mentioned earlier corporate finance is mostly about taking the investment decision, (when to invest, how to invest, and where to invest) by using different investment tools. Nowadays internet become major source of investing. It provide access to websites that allows online investment for example online investing website named as IQ option. These websites are very easy & simple to use and with the investment as low as 1$ it proves that they are inexpensive also. There are now video tutorial available on different websites providing with information about investing. There are websites available that provide with the facility of financial calculations online (e.g Financenter.com). Stock Quotes and portfolio tracking websites. There is a lot of price information available of bonds, mutual funds and stocks, such as information related to current interest rate of the country, information about the bonds availability on internet or mutual funds. The investors who have ample amount of knowledge about when to invest in particular stock can also use financial technologies in decision making, which include different online investment decision forums. Financial technologies plays a huge role in corporate finance sector as investor with the help of internet now enter order directly online. It makes investment easy and quick. No need of scheduling appointments with a financial counselor. Best investment sites include (MSN Money, CNET NEWS)

Secondly corporate finance also deals with the funding sources and by using financial technologies we can go for “crowdfunding” which is like providing funds to a project by collecting money in any amount whether it is small or large from people all over the world, with the help of social media, crowd funding websites and through other means using internet. Through crowd funding, the funds have been used to support many young and talented entrepreneurs to show cast their talent and to do something in order to compete in this tough business environment.

3.0 Hypothesis

H1: financial technology affects the corporate finance
H2: financial technology influence people to select it as a career
H3: future new innovations made in finance can be observed through digitalized application

The above-mentioned hypothesis creates link between Fintech and Corporate finance.

The H1 states: financial technology affects corporate finance

As mentioned in the literature cited above the financial technology play a vital role in corporate finance like as corporate finance deals with all financial operations and investment setup, fintech help them in smoothing their operations like one of the company abacus consulting is a Fin Tech company that make software for businesses.

The H2 states: financial technology influence people to select it as a career

Fintech such as careem and uber has influenced many people most them who are unemployed today, to choose it as their source of income and many of them has adopted as their permanent source of income like as a career.

The H3 states: future new innovations made in finance can be observed through digitalized application

Efficient market theory
Capital budgeting theory

Just need to use above theory as a referencing anywhere it is necessary. The research topic is quite new to this sector as previously work done on financial technology is not specifically linked to the corporate finance , rather corporate finance is used as linking bridge between new financial innovation in technology with firms’ performance. In this research, the impact of new technologies is directly linked with corporate financial sector so that the deeper aspects of the firms can be accessed.

4.0 Methodology

4.1 Unit of analysis:

The unit of analysis in this study is individuals. We conducted interview of some Careem Operators and some drivers who works for careem, they are very happy with this initiative and wanted more projects like this to start-up in Pakistan as they said that these technologies has eased up their work and has helped their sales to grow at faster rate because these technologies are user friendly and consumer are very satisfied using these app.

4.2 Research method

The research method involves how the data would be collected for the research in this particular the data collection method chosen is qualitative method. The qualitative research method is the one in which the primary data collection is through exploration and observation. As our goal of this research is to explore the reason behind Fintech’s Popularity in Pakistan and its impact on corporate sector of Pakistan. Moreover, the data collected is cross-sectional because this only a one time study.

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