According to the State Bank of Pakistan (SBP), in 2008 there were 35.5 million transactions using credit cards with Rs. 201.5 billion in value. The central bank’s data shows that 87.2% of these transactions were POS transactions, the next 10.2% were eCommerce transactions, and the remaining 2.6% transactions were at ATMs.
“By the end of June 2018, there were 21.7 million debit cards in circulation in Pakistan,” said Ariba Shahid, a business journalist for Profit magazine. “These cards processed 441.1 million transactions worth Rs 5.1 trillion after attaining a 21.8% and 23.4% growth in volume and value respectively over 2017. 96.8% of the value of transactions were processed at ATMs, and 2.9% at POS. The average transaction size by debit cards is larger than that of credit cards and are Rs 11,583 and average at 20 transactions per card.”
She added that statistically speaking if you have a credit card in Pakistan you belong to a minuscule 0.76% percentage of the population. And this is just one example to show how fake or bad news can travel much faster than good news, seeing as every Careem driver insists on asking customers if they are paying on cash or card, without realizing that there’s a 0.76% chance the customer even has a card.
Fake or bad news has even hurt the insurance industry in emerging markets, with a 2018 Lloyd’s report stating that there is an insurance gap of $27 billion in India, with rural areas contributing greatly to this gap. The 2018 Financial Stability Review from the SBP suggests that there is room for growth in the Pakistan insurance sector, with less than 1% of the population tapped into.
“The asset base for the insurance sector has been estimated to have grown by 10.88 percent to PKR 1,435 billion as of December 31, 2018, mainly due to an increase in the Life Insurance business,” said the report. “Investments and properties have registered an increase of 12.11 percent to PKR 1,128 billion as of December 31, 2018.”
According to a report by the Insurance Association of Pakistan, market penetration in Pakistan is only 0.94% of the total GDP.
“Issues of religion, mis-selling, opaqueness, and products/processes that belong in the last century have plagued insurance in Pakistan,” said Hunain Kapadia, the co-founder & CTO of Smartchoice.pk, the largest online market and comparison solution in Pakistan for insurance. “The religion question has recently been tackled with the onset of Takaful companies and products – Takaful being to Insurance like Islamic Banking is to Conventional Banking.”
In an op-ed with MacroPakistani, Kapadia shared that mis-selling has been a rampant issue primarily due to the chosen distribution channels.
“Ask anyone who has been sold a savings-based life insurance policy through his or her banker with claims of payback within 3-4 years,” he wrote. “It is probably a story of how they were guilt-tripped into buying the product and of paybacks that never came in the promised time. When they tried to cash out, the cash value was less than what they invested. This scam is perhaps best depicted by the real-life viral video of the famous Ainak Wala Jin:”
The individual insurance industry can be broken down into two major categories which are Life and General insurance. The reasons for low penetration are:
- The general population is neglected by legacy insurance companies.
- The benefits of insurance are not explained.
- The monthly annual premiums are not affordable for the average Pakistani.
- The whole ecosystem is manual hence low penetration and challenges in getting traction.
Speaking with Founder Pakistan, Kapadia said that the market penetration remains low due to a lack of awareness and lack of customized products that fit the need of the mass market customer from benefits, pricing, and payment terms perspective.
He said that a slow, cumbersome, and opaque claims process with no strong regulations around it gives rise to the narrative that insurance companies don’t pay out claims, although that is not the case and we have the numbers to prove it.
Recent developments around know your customer (KYC) guidelines set by the regulator are also a big turn-off from the customer experience perspective.
“The question of religious perspective has largely been addressed by the onset of Takaful companies and products which are the Sharia-compliant version of insurance,” said Kapadia. “Similar to what Islamic banking is to conventional banking, Takaful is to conventional insurance. There are 2-3 purely Takaful companies in the market and every major insurance company has a takaful window for takaful products also.”
As with Careem drivers assuming every customer needs to be asked whether they are paying by cash or card – even though the data shows that less than 1% of the population has the latter – the data shows that claim denial in Pakistan is also in the single digits, while the perception is that the practice is widespread.
“The perception that plagues the market is that you will get your money back if there are no claims,” said Kapadia. “While it’s true for some life insurance products, this viewpoint has primarily been built because insurance has been sold as a savings product in the local market and requires re-education when it comes to risk-mitigation based products, which is the actual use case of insurance.”
The InsurTech opportunity
Some startups have taken control of the situation by recognizing an opportunity in this untapped market. Such as Smartchoice.pk which is an insurance marketplace dealing in both health and general insurance, They also recently launched their insurance solution company for SMEs called Smartbenefits.pk.
Some areas that have a gap according to our research are:
- Insurance for gig workers.
- Insurance for personal gadgets and appliances.
- Insurance for products sold through eCommerce. ( on the merchant side)
Among the leading insurance technology (InsurTech) players globally, the roundabout solution offered by Extend.com holds promise to tap into a new market around insurance. Extend uses technology to modernize the warranty industry in the US. Any eCommerce merchant can use Extend by deploying their API or integrating their eCommerce store. This makes it easy for merchants to value add and also adds another revenue stream for them.
Imagine that at the Daraz.pk checkout, you have the option of paying extra for an extended warranty. This makes money for the website, the insurance provider, and the API bridge provider. At the time of sale, the merchant collects the full price of the warranty, which includes the premium, Extend’s service fee, and a margin for the merchant. Extend later bills for the premium and service fee, and merchants keep the margin.
A seasoned eCommerce marketplace leader told Founder Pakistan that in terms of product-market fit, the concept of offering extending warranty at the end of the checkout experience had been tried by Daraz, Yayvo, and Telemart. The first versions of BNPL were also experimented with on these platforms.
He added that neither was a success on these large marketplaces because the final customer rarely signed up for them. The technology, Founder Pakistan was told, needs to be seamless and a singular product that acts as a bridge between companies such as Jubilee and TPL Insurance with companies like Telemart and Daraz is key.
“However, the market is now changing, it might be an opportune time for this,” he said. “Getting on board multiple marketplaces or stores will be critical though and the tech needs to be seamless.”
Product market fit meets timing
It is either the lack of product-market fit or the lack of localized execution that leads to the failure of a startup. Some say they are the same, yet consider that Sukoon.com was a bridge between blue-collar workers and homeowners, which failed because the former always tried to cut Sukoon out of its share of the revenue that could be earned via the lead generated.
Yet, Kalm.pk has the same model only that it recognizes that culture eats strategy. And so Kalm.pk employs all outsourced home-focused labor, removing the incentive for either the worker or the homeowner from cutting off the platform. Homeowners that do so lose the liability assurance that Kalm.pk provides and workers that do so lose the steady income that Kalm.pk guarantees them.
While the concept of BNPL may not have worked for Daraz, Yayvo, and Telemart in the past, it has seen success amid Dastgyr and other B2B online marketplaces that recognize which part of the value chain they ought to provide credit facilities to. Similarly, the new execution of offering extended warranties will need to be localized to win.
The closest replica of Extend.com in Pakistan is Hefazat Technologies which has a similar scope of services. Founded in 2022 by Kash Rehman, a limited partner at Sarmayacar and an investor in Lettus Kitchens, Hefazat Technologies is currently securing deals with one-click-checkout solution providers, online marketplaces, and insurance companies.
Hefazat currently offers purchase protection and an extended warranty. Purchase protection safeguards gadgets & appliances against accidental damage, armed hold-Up, or even burglary. With an extended warranty, a consumer has an option to increase the warranty period by six months or one year depending on their preference.
Speaking to Founder Pakistan, Kash Rehman mentioned his team is laser-focused on launching an MVP with just a few partners.
“Given my experience with my last two tech startups in the US, it is much easier to learn from your early product with a few large early customers,” he said. “It is also much easier to scale after that so keeping that in mind we have only partnered with a few select partners”
He also mentioned that the purchase protection policy offered by the marketplaces was not successful for multiple reasons:
- weak tech integration
- high-risk rates provided by insurance companies
- poor customer service provided by insurance companies
- non-digital (phone/paper) based claim filing process
- poor tech or in most cases no tech at all to prevent fraudulent claims
These are the reasons why insurance companies have failed to penetrate the Pakistani consumer market for such products.
Speaking to Founder Pakistan, Kash Rehman mentioned extended warranty is a new product for Pakistan so we have to educate the local market on its benefits from scratch.
“The best way to do this is to offer them this product for free in the beginning via our B2B embedded integration with appliance and smartphone manufacturers,” he said. “ The manufacturer is paying Hefazat the premium for the coverage from their marketing/customer acquisition bucket and providing the 2nd year extended warranty to the customer complimentary”
He also mentioned, “This strategy will help Hefazat educate the customer on the value of a 2nd-year coverage on expensive assets they own once they go through a claims process in the extended warranty coverage period,” he said, “Once this value is established, our understanding is B2C extended warranty product will start selling where the customer pays the premium now”
Speaking to Founder Pakistan, Kash Rehman mentioned, that we don’t need to re-educate the market on Purchase protection products as this product already sells in the marketplace due to customer interest.
“The interest has always been high when purchase protection product has been initially launched via online marketplaces,” he said, “once customer trust was broken, penetration of the purchase protection product suffered, Our approach is fully hands-on allowing customers to experience awesome customer service which will allow them to gain trust in Hefaza, This strategy will help us gain market share without compromising Customer trust”
Hefazat currently has six partners in total which include Dawlance, Telemart, Salam Takaful, EFU Life, Dcode, and Finpro. Founder Pakistan is bullish on the InsurTech space and believes this space is ripe for disruption. It remains to be seen how the extended warranty business booms as a result of Hefazat Technologies and how many replicant players emerge.