Naureen Hyat holds over a decade of experience in the financial services industry with a strong focus on financial inclusion. Her expertise includes digital lending, microfinance and risk management. Naureen’s major focus has been on Pakistan’s digital financial inclusion where she has established two fintech companies, one with a B2B and other with a B2C model. One of her companies was acquired in 2022 by a Swiss entity, Zood.

In an in-depthconversation with the Global Woman Leader magazine, Naureen shares her views on digital lending and traditional lending while shedding light on BNPL. She also talks about the e-commerce industry and her experience in the industry.

Read on to know more about the insights covered during the conversation.

In today's business landscape, what are the distinctions between digital lending and traditional lending? How do these differences provide advantages for both consumers and businesses?

In terms of providing financial services, it greatly depends on the ecosystem and its maturity. I wouldn't downplay the significance or value of either. While traditional financial services or conventional modes of financing are crucial, they primarily cater to the base of the pyramid. They serve as the foundation for reaching the masses, particularly in markets like Pakistan or India, where a large portion of the population lacks access to digital mediums. First, they don't have digital literacy. Secondly, they don't have financial literacy. Furthermore, they face mobilization challenges which deters access to brick-and-mortar branches.

Additionally, there exists a majortrust deficit in the formal financial system owing to a lack of understanding of financial systems, which is why hand-holding them and providing traditional modes of financing on the ground becomes very important.That's also how we started off in Pakistan, with the microfinance sector which was primarily focused on poverty alleviation. This involved on-ground financial inclusion, where these institutions went into far-flung areas and set up shop in those rural or peri-urban areas. There was a focus on educating these masses, as well as onboarding them in a non-digital manner so that it educated them and build trust with tangible communication.

The advantage of being on the ground is the ability to create comfort for the borrower while creating awareness on different financial products in light of the customers’ varying capacity to interpret. The merit of a traditional system is creating  human touch, breaking barriers, building customer faith, and sometimes communicating better with the customer to understand their needs. This aspect of the traditional system facilitates transitioning to the digital side. Simply entering with a digital financial product might not be the right approach in emerging markets like Pakistan.This is where the digital financial model comes into play. Digital products enable faster scaling and reaching a wider audience, leading to economies of scale, cost-effectiveness, and time efficiency. However, the challenge lies in assessing customers without sufficient data, building trust in the financial system, and ensuring customer literacy about digital products. Balancing high tech with high touch is crucial.

Hence So, both approaches have their merits and demerits. For a digital strategy to succeed, having the right ecosystem and market readiness is crucial. Without the necessary payment infrastructure, customer data, regulatory framework for digital accounts, customer literacy about digital services, and access to suitable devices, digital financial inclusion can face significant challenges. Without these foundational elements, attempting digital financial inclusion can be futile. In essence, without the necessary building blocks, it's difficult to construct a successful digital financial inclusion strategy.

In e-commerce transactions, what is the functioning of BNPL? What advantages and risks does it present to consumers in terms of payment flexibility?

Over time, especially in the present, markets like Pakistan and others with high inflation are facing tough times for consumers. In high-pressure environments, liquidity challenges have become more common. Buy Now, Pay Later (BNPL) solutions can help people manage cash flows and make purchases, whether necessities or luxuries. Examples include heaters for winter, ACs for summer, or refrigerators, all of which are considered necessities.

BNPL facilitates financial management, particularly as e-commerce expands. Its benefits are pronounced in markets where payment methods can be challenging. It boosts transaction activity for e-commerce and allows installment purchases. However, it carries both advantages and risks. Responsible lending is crucial to prevent consumers from over-indebtedness. Lenders must ensure they do not encourage excessive borrowing. Without such oversight, consumers may accumulate unsustainable debt. Regulatory frameworks vary, and without proper monitoring and access to data, consumers' borrowing history may go unchecked. Strong credit bureau systems are essential for assessing consumer loan usage. Despite risks, BNPL offers the major advantage of cash flow smoothing.

Managing indebtedness well can actually improve people's standard of living. For those who couldn't otherwise afford appliances like a fridge or heater, spreading payments over several months makes it feasible, ensuring comfort, especially in harsh winters. Advantages include better cash flow management and enhanced quality of life. BNP loans can start small, aiding in building credit history for eligibility for larger loans from reputable institutions. However, poorly regulated entities may lead to financial instability, impacting consumer decisions.

In the growing trend of digital lending or BNPL in e-commerce, what key performance indicators (KPIs) should businesses prioritize to gauge success effectively?

It's not just limited to Buy Now Pay Later (BNPL); this applies to most lending players. From a business perspective, addressing key challenges is paramount. One crucial aspect I advocate for is ensuring lending makes sense economically. Simply expanding without sustainable unit economics is a flawed approach. Thus, optimizing unit economics is vital. For instance, in lending, focusing on KPIs like default rates, cost of funding and cost of acquisition is essential. Growth should be sustainable and profitable, not just for the sake of numbers. Cost considerations extend to technical operations, encompassing various digital expenses.

Besides operational costs and default rates, margin identification is crucial. For BNPL, the efficiency of e-commerce structures also matters. High return ratios impact backend operations directly. Refunds and merchant commissions are key considerations. For instance, our BNPL card partnership with MasterCard involves tracking take-rates, merchant commissions, and fee structures. Growth trajectory with e-commerce merchants is vital. KPIs may vary by product, but fundamentals include funding costs, operational expenses, default rates, and margins.

How can data analysis enhance ecommerce, drive personalization, and empower companies to better target and classify customers, ultimately optimizing operations and enhancing their effectiveness in the market?

Data plays a significant role in various fields like e-commerce and lending. In the realm of data analytics, focus extends to personalization and customization, delving into individual preferences. By scrutinizing data patterns, analytics can pinpoint product needs and customer preferences. This, in turn, informs marketing strategies, making them more targeted and effective, particularly in customer acquisition.Data analytics plays a crucial role in credit underwriting and assessment. By analyzing data patterns, we can assess a customer's suitability for a loan, considering both their willingness and ability to repay. This deep understanding of the customer's credit profile informs credit scoring algorithms, facilitating effective decision-making in lending.

Additionally, data analytics enables us to identify opportunities to offer additional products to customers as they progress. On the operational side, analyzing customer behavior provides insights into psychometric profiles, helping to understand browsing habits, purchase frequency, and return patterns, all of which contribute to a comprehensive understanding of the customer.

For instance, when a customer links their bank card, frequent delinking activity could signal a potential risk of default. In response, implementing targeted recovery messages or personalized soft recovery approaches becomes essential. Data analytics can delve into these details, influencing customer positioning, assessment, and recovery strategies.

Moreover, it plays a crucial role in product personalization, shaping the customer journey, and refining the user experience. By contributing to each of these areas, data analytics significantly enhances overall effectiveness.

What are some of the future challenges and opportunities for digital lending and BNPL in the e-commerce space?

Currently, several challenges persist, and while some may evolve, new ones could emerge in the future. Focusing on present concerns, one significant challenge, varying across markets, revolves around developing customer data for accurate assessment.Another critical issue is establishing recourse in the event of customer defaults. This often requires a robust infrastructure, sometimes necessitating regulatory or governmental intervention. Customers must be assured that there will be consequences for failing to repay loans promptly.

Furthermore, ensuring a well-structured payment infrastructure is essential for facilitating seamless recovery for both customers and businesses, even when customers are willing to repay. Additionally, costs within the entire payment ecosystem can significantly impact unit economics in lending.In today's lending landscape, a significant challenge stems from the cost of funding, both in digital and traditional realms. The surge in global discount and interbank rates directly impacts the operational costs of lending entities, potentially hindering growth until these rates stabilize.

Additionally, cybersecurity remains a persistent concern amidst the continuous advancement of technology and increasing tech literacy among individuals. As fraudsters become more sophisticated, entities must strengthen their systems and controls to identify and mitigate fraud instances effectively. Collusion among individuals for lending or borrowing, as well as identity spoofing, are common occurrences, necessitating robust mechanisms to address these challenges.As these challenges continue to evolve, so will the advancement of technologies and our responses to them. Yet, it's clear that regulators and governments will play a crucial role in fostering an enabling environment. This environment should ensure a sustainable source of funding, not only for traditional banks but also for non-bank lenders. Additionally, viable recourse mechanisms must be in place.

Furthermore, enhancing literacy, particularly financial and digital literacy, is essential. While entities can contribute to improving customer literacy, achieving widespread literacy requires concerted efforts on a national scale. Governments must take a proactive role in enhancing literacy levels, thereby fostering a conducive environment for the adoption of digital financial products by both entities and consumers.

Do you like to convey any general messages to our readers?

I acknowledge the significant presence of women in various fields, including lending. In emphasizing lending specifically, it's crucial to recognize that success requires a solid organizational structure and systems. Being prepared and understanding the external environment are vital aspects to consider.

To all the women pursuing their endeavors, I want to highlight the diverse opportunities available across different business models and industries. However, it's essential to align your path with a purpose that deeply resonates with you. Stay true to that purpose rather than pursuing ventures solely based on excitement or popularity. Commitment to your purpose will sustain you through challenges and turbulent times as you navigate your professional journey. That's my advice to all of you as you carve your path in the professional world.

QUOTES: Buy Now, Pay Later (BNPL) solutions can help people manage cash flows and make purchases, whether necessities or luxuries.