Financial Inclusion for Pakistani Employees: Our Investment in Abhi
Why do we have checking accounts?
Well, if it’s your first checking account, then 1) it’s a place to keep your money, (usually) with a card attached to it, is 2) a way to pay for stuff without having to hold cash, and 3) serves as a trusted place to receive the money you’ve earned through your hard work.
This all sounds very logical, but very often people hold checking accounts at more than one bank, and, therefore, have multiple options on where they keep their money.
But… wait a second. Why open a second bank account?
A second bank account can serve a variety of purposes. Maybe the perks associated with this bank account are better than the first one. Maybe your employer worked out a deal with this specific bank and you can only get paid into an account at this specific bank.
Or maybe the experience of opening and maintaining an account at your first bank was so annoying, you turned to a platform that is much more user-friendly. This last case, as we know, is what allowed neobanks to propel themselves forward on the world stage
The neobank monetization problem
Now, when you look into a bank’s financial statements, checking accounts are not a particularly profitable or revenue-generating line of business for them. Sure, they might generate a few fees here and there, but by no means is it their primary source of revenue. This is especially true when checking accounts do not have a very high balance. Enabled by their banking license, banks make money from lending out a customer’s deposits.
For checking accounts to be profitable (from a unit economics perspective), the amount that the balance generates from interest and other smaller sources of revenue needs to be higher than the cost to 1) acquire the customers deposits and 2) maintain the checking account. The lower the balance is, the less interest revenue it can generate from lending the deposits out. This, among other important reasons (more on that later), is why banks want to command as much of a customer’s money as possible.
Neobanks, however, as chic and savvy as they looked for the consumer, had two fundamental problems: Most lacked banking licenses (at least when they first launched) and they were often their customers’ second bank account. This is because users loved the functionality (fast and seamless payments, digital maintenance, zero fees, etc.) and brand that came with the account, but they didn’t trust a nascent digital platform enough to keep ALL or even most of their money there.
Being a second checking account meant customer deposits were not very large, or at least not as large as they could be. And even when the balance on the account was high, due to their lack of a license, a neobank could not generate interest revenue from lending customers’ deposits.
Sure, the overhead cost to command those deposits was lower than a traditional bank (after all they didn’t have whole physical branches to sustain and anything maintenance related came down to writing a few lines of code) but interchange revenue from swiping the card is minimal and requires massive scale before it starts to become significant. This coupled with fees for premium accounts were the only monetization opportunities for most up-and-coming neobanks.
Payroll: The neobank’s holy grail
In their search for additional revenue sources, neobanks very quickly learned that there was another fundamental reason why traditional banks want to have the highest share of a customer’s wallet: data.
The higher the percentage of a person’s income is kept with you, the more you know about that person’s financial situation. That is valuable to banks because the more they know about a person’s financial situation, the better positioned they are to offer them financial products that serve their needs. This often translates into banks vying for a customer’s payroll balance and eventually their savings.
With this in mind, neobanks knew they had to find a way to become their customers’ primary bank account, the place where they deposited their main source of income: their payroll.
This was no easy task. Overcoming the trust barrier takes a really long time and even the biggest players still struggle with it today. But what if a company had found a way to get access to payroll deposits and all its accompanying data goodness from day one?
Abhi: Get your earned salary whenever you need it
Abhi reimagines how employees get paid by allowing them to access a portion of the salary they have already earned, rather than having to wait to receive it all at the end of the month.
It integrates directly with leading Pakistani employer payroll systems and, upon the user’s request, advances them a portion of their current month’s salary. Abhi then collects that directly from the employer’s payroll system when payday comes. While this can be seen as a loan to the employee, the risk is significantly reduced, as the responsibility to repay falls on the company, not the individual.
A company is obligated to make payroll anyway, Abhi is just a bridge to get it to its people faster. On its own, this is an attractive proposition for employer and employee alike. Employees overcome cash flow constraints as they can access their wage whenever they want, and employers have happier, less financially stressed employees who can help the company grow.
The real magic, however, happens when one takes a step back and looks at what Abhi is actually enabling. By becoming the conduit by which people receive their salary, they effectively become what those earlier neobanks could only dream of.
A financial services ecosystem for employer and employee
The Abhi wallet has access to the best indicator of a person’s financial standing, their income. On the back of this data, Abhi can build targeted and useful features for employees. Not only do they get a view into money out - or what the customer is spending money on - but also money in - or how much the customer is earning. This puts them in the perfect position to build and offer other financial products to the customers, be it short-term loans, insurance, savings accounts, mortgages…you name it!
And it doesn’t stop there. It turns out that payroll is not only a good indicator of an employee’s financial position, but aggregate that across the entire organization and it becomes a great indicator of a business’ financial health. By connecting to a company’s accounting systems, Abhi gets a uniquely transparent view of how that company manages their finances and, once again, can structure financial products (only this time for the business) using this proprietary data set.
Teamwork makes the dream work
Abhi has been able to position itself as market leader mostly due to the tenacity of its founding team. Omair’s leadership and deep financial expertise from heading teams at Morgan Stanley and a variety of PE funds, coupled with Ali’s operational prowess and knowledge of the market, has allowed them to scale the company to 650k users a mere 10 months after launch. Their ability to communicate their exciting vision for Abhi and execute it by signing clients like Bank Alfallah or United Bank Limited immediately convinced us we were dealing with a world class team.
And there is clear evidence for this! Traditionally, in markets where Abhi’s earned-wage-access model is being carried out by more than one player, they are forced to focus on either the employer (B2B) or the employee (B2B2C). However, the team’s ability to integrate into a company’s systems and their position as market leader in Pakistan has allowed them the rare chance to focus on both. Today, the company offers a breadth of financial services to both salaried individuals and the companies that employ them. Now isn’t that neat?
All of us at Speedinvest are incredibly excited to partner with Omair and Ali in their journey to radically change the lives of millions of Pakistani employees and businesses. We can’t wait to see what’s in store for them.