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Trend #01 - Savings & Investments 💰
For an average Pakistani millennial, there are few opportunities to save and invest. We breakdown how that presents us with a massive opportunity in the start-up space.
💎 Why It Matters
Smart saving and investing is the best thing Pakistan’s middle class can do for their future.
Very few people save or invest largely due to the following problems.
Opening a bank account is often a nightmare.
Mutual funds are almost all offered by traditional banking channels and are not very user-friendly.
Stock trading apps look half-baked, still exposing the archaic back-office processes and offer a sub-par user experience.
Stocks are still hard to understand for an average investor and the market is largely opaque.
Physical gold, while popular, does not allow for the flexibility and security that can make this a widely used option.
Investing in real estate is not accessible to an average earner.
“Committee” is probably the most widely used saving method but does not protect against inflation.
Adjusting for inflation, real-estate returns are usually highly exaggerated.
🎯 Solution: Automated Savings & Dumbed-Down Investing
Offer an easier way to save. For example, a good solution will allow me to move a portion of my monthly salary to a savings or money market account, round up my cashless purchases (transactions via an e-POS for example), and draw up a useful dashboard that I can use for decision making.
On the investing front, significantly “dumb-down” investment options. If we want to bring the benefits to the masses as opposed to just the upper or upper middle class, we will need to make it very easy for them to understand what they are getting into.
Total Addressable Market (TAM) in how we have defined the space above can be rather small. We think that an “exit” in the tens of millions is more like it. That’s not a bad thing but needs to be taken into perspective.
Strong fintech players will have the opportunity to move up or down (or cross) the (fintech) stack, but first, they need to streamline their core use case(s). If a start-up in this space for example can work with providing a better user experience to provident fund (employers and employees alike) and mutual fund users, can democratize other asset classes, and offer superior credit scoring, the TAM becomes a lot more interesting.
This sort of app provides a natural playground for game design. Note the emphasis should be on the game design, not gamification. Moreover, even without game design, the space can lend itself to strong network effects. The latter does demand quicker and bigger fund-raising (which makes sense in a winner-take-all like scenario), which may be challenging in the current economic climate.
🕑 Why Now
Timing matters; the Pakistani market seems ripe for a fintech (r)evolution. Things that are going for it:
The State Bank of Pakistan is introducing more business-friendly regulations, deregulating the industry in the process.
Digital banking and digital payments are in the works. The more these “layers” or components get solved, the easier it is for players “up the stack” to innovate.
Customer awareness with apps is at its height, with more people downloading and using apps for everyday things.
There are still a few questions marks, however:
The Pakistani middle class is still rather small (this of course is a much bigger problem and not just confined to fintech).
Macro environment is not helping raise the middle class, and may even shrink it in the next few years.
While being too early can be as bad as being too late, we’d rather be a bit early as opposed to being a bit late – since it is virtually impossible to time the market perfectly.
Pull transaction is still not possible (but we can expect it to be available soon), without which it will be hard to fund an account by staying within the app. Using a card instead can solve that, but will incur a transaction charge.
An alternative is to do what most (all) brokerage apps do today: Force a user to go out of the app to make the payment (via a check or IBFT for example). This makes for a bad user experience.
For the same reasons, a recurring depositis either not yet feasible or will incur transaction charges, which can be a non-starter.
Since we still have very few cashless transactions in the country, rounding up while possible is still going to offer a very limited opportunity, at least in the beginning.
While limited KYC can be completely done online, exceeding a certain deposit for example will require a physical KYC.
Middlemen (payment gateway, physical banks, Asset Management Companies (AMC), etc.) will take a cut. Once there is a digital AMC license and players can create their own financial instruments (mutual funds and the like), the overhead can be minimized. Another way to think about this is to expect it as the cost of entry – mostly upfront cost until the larger fintech infrastructure gets ready.
Awareness and Affordability
Whoever plays in this market has to up the bar on educating the masses of the benefits of saving and investing. Moreover, since there is little room for most people – even in the middle class – to save (or invest) money, it remains to be seen if we can move the needle in a significant way.
💸 It’s all about the money, money, and mone(tization)
With the recent downturn, investors will heavily favor the companies that can become self-sustainable sooner than later. A few ways to make money are as follows:
Percentage of Assets Under Management (AUM): This is a well understood model. It remains to be seen however whether we can generate a massive AUM without recruiting a few High Net-Worth Individuals (HNI) or corporates.
Commission on Trades: This is yet another business model globally. Yet, the trend has generally been to make most trades free (example: Robinhood).
Subscription: Acorns for example charges users when their monthly AUM, number of transactions or returns exceed a certain threshold. In Pakistan however, we yet have to find an internet product that charges a monthly subscription.
🌍 Global Players
StashAway (SG) Robo-advisory app with $1 billion+ in AUM by 2021.
🇵🇰 Local Players
Trikl (launching soon!) will be Pakistan’s first automated savings and investments app in Pakistan. There are more than 10,000 users already on their waitlist.
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There are a few crowd-funded / fractionalized real-estate investment platforms that will make it more affordable for people to invest in real-estate.
Moreover, if any government in the future starts to tax real estate returns like it should, the asset class will take a massive hit.
Something I am a big fan of, especially if they can be harnessed naturally.
This does pose an opportunity in the form of a possible integration with payroll engines, especially as they become more widespread.
A prime example of this could be how brokerage offerings actually make money -- that is, by leveraging on the richer few as opposed to the middle-class masses.
Trikl is an Alt company.