Banking bosses will admit that it’s not challenges related to demanding shareholders, complex regulations or leading teams that keep them up at night, but the risks they know exist but can’t identify, like data security or some startup upending their business model. For decades, well-dressed men occupying formal offices in important downtown buildings have controlled the nation’s financial plumbing. Bankers’ serious image isn’t veneer. Rather, it’s aimed at gaining customers’ trust that their dealings are a cut above the village moneylender or the local mob boss. They realise that a reputation-damaging security breach or some startup business upending their cloistered existence is a nightmare that may come to pass. In a building off leafy Gregory’s Road in central Colombo, one such startup has gained enough traction to have the industry piqued.

A mobile application developed by these t-shirt and jeans clad, young software developers has been downloaded to 50,000 smartphones and used to pay for tens of thousands of purchases where money or a credit card would have otherwise have had to be used.

Nazeem Mohamed turns down a colleague’s invite for a Thai lunch, leans back in a manager’s chair of an office that appears sans any personal trappings and contends that the FriMi app, which he manages, is a formidable offering.

To prove how it’s catching on, he rolls a Facebook video were young app adopters regale the interviewer its ease of transacting stories at fashion store Kelly Felder.

It’s easy to see how the app impresses current and future yuppies. By providing a mobile number to a cashier, they are able to pay for purchases through the FriMi app, which prompts for payment approval. One gushing customer recalled her first FriMi transaction to pay for books purchased at a giant pop-up sale called Big Bad Wolf in October 2017.

FriMi is not the only mobile payment app in the market, but it’s certainly one that young people seem to consider cool to be using. Mobile payment apps have to be robust and include useful features; however, to successfully appeal to millennials, they also have to be perceived to be ‘cool’. Against competition, FriMi’s ‘coolness’ appears to be winning it market share.

FriMi users get SMSes promoting discounts they can unlock by paying though the mobile app for anything from pizza and online shopping, to other stuff young people like to spend their money on. At some pop-up weekend street food markets, which are popular millennial hangouts in Colombo, all vendors accept FriMi payments.

Bankers will soon start losing sleep if FriMi converts its early appeal into solid market leadership. What will surprise some is that FriMi, which launched in late 2017 after a year and a half under development, is owned by a commercial bank.

Its hulky, t-shirt clad boss, masquerading as a startup founder, is a Nations Trust Bank (NTB) employee. “NTB has ring-fenced this like a startup,” points our Nazeem Mohamed, who between his new NTB career and one with HSBC, founded an Internet startup.

As they are risk managers, bankers instinctively allow caution and their control mindset to dominate their approach. To launch and scale an internet startup demands an approach diametrically opposite, thereby NTB’s leadership team decided to allow the FriMi operation to be located separately, but also freeing it up to undertake risks and fail if that’s what it takes.


THE SCALE OF THE OPPORTUNITY is staggering. Sri Lanka has more than six million smartphones, or around a third of mobile numbers are connected to smartphones. It’s conceivable like as in most other Asian countries that people here will soon expect to pay, borrow money and invest using just an app on their smartphone.

Improvements in payments infrastructure haven’t undermined traditional finance at scale; however, its potential is causing goosebumps for bankers. Despite the complexity of modern banking, the principals are simple. Bankers are middlemen who earn commissions by accepting savings deposits and lending those monies to ones requiring it for investment or consumption. Banking is an essential service, but reducing or ridding intermediation costs suits borrowers, lenders and economic efficiency.

Fintech (short of ‘financial technology’, referring to internet-based payments, banking and investment), as these services are now known, is spreading across the world. People are using smartphones to access fintech services.

It’s difficult to ignore that smartphones are no longer just yuppie playthings. In the last decade, they have empowered millions of rural poor people, compensating for poor public transport, difficulty obtaining information about government services and making small businesses more efficient. How fintech evolves depends largely on local circumstances, traditions and consumer preferences. Over the last few years, LankaClear, the company facilitating cheque clearing, the ATM switching platform and fund transfers between bank accounts, has been growing its fintech importance.

Fintech’s promise extends beyond shaking up a stogy banking system. Its low costs will cut economy-wide waste, lower transaction costs, make small businesses more efficient, bring convenience and lead a flourishing of e-commerce. However, Sri Lanka is now a laggard. China’s large but unsophisticated financial sector was primed for disruption, and the resultant fintech boom has handed China, its businesses and consumers a major advantage. Regulators can upend a system at will. In 2014, India’s regulator announced that it would introduce a license for so-called ‘payments banks’.

Subsequently, that government took out of circulation low denomination notes, boosting fintech prospects dramatically. On the other hand, in Sri Lanka, bureaucratic apathy and juvenile squabbling about the way forward have diminished prospects for fintech to flourish.

Because it’s likely that people will choose to transact, invest and borrow money using their smartphones, given the choice, the interest for fintech market leadership is high. However, it’s become clear that, unless startups are able to challenge incumbents like banks and credit card companies, a fintech takeoff and its associated benefits will stall.

The conditions for fintech firms to flourish aren’t aligned, and the status quo favours stogy incumbents overwhelmingly.

ONE OF TWO BROAD APPROACHES are available for Sri Lanka to launch a fintech renaissance by financial disintermediation. The first is the route India’s central bank, the Reserve Bank of India, has taken with its 2015 guidelines, under its existing Banking Regulation Act of 1949, to license eleven so-called ‘payment banks’.

These light-touch licenses are designed to appeal to mobile phone companies and fintech firms. For now, these new breed of financial institutions will not lend money and will only accept deposits up to INR100,000 from a single customer.

Besides prohibiting lending and limiting deposits, payment banks can do most other things a commercial bank can, like current and savings accounts, issue ATM cards and debits cards, and offer internet and mobile banking services. Telco Bharti Airtel was the first payment bank to go live. What the Indian model has achieved that is likely to be disruptive is making it possible for any payment bank to create an online “digital wallet” by linking a bank account to a mobile app and getting them to spend it from there. This makes commercial banks uncomfortable, as anyone with a digital wallet can bypass the credit cards they issue, leading banks to lose both fees and customer data. In Sri Lanka, telcos Dialog and Mobitel have offered mobile wallets for some years without the widespread payments success enjoyed by companies like China’s Alipay and India’s Paytm.

Dialog’s eZ Pay, launched in 2007, tanked as potential users didn’t respond to the requirement to register with the telco and have an account with a specific bank –NDB, Seylan or finance company LOLC. The failure didn’t diminish its hunger for mobile money success, seeing how quickly such services caught on elsewhere.

The financially excluded are intimidated by paperwork, something Dialog learned with failed eZ Pay.

It was challenged in convincing the banking regulator, the Central Bank, to eliminate the need for customers to fill ‘know your customer’ forms and provide other information required to pair bank accounts with mobile wallets.

The Central Bank applied the principle of proportional risk, allowing low-value transactions and depending on the customer information already available with the telco for the mobile phone contract.

eZ Pay’s successor eZ Cash’s daily restrictions on transactions stood at Rs10,000. eZ Cash Power Users – who must fill-out additional paperwork to upgrade – can transact up to Rs25,000 daily.

However, Dialog’s eZ Cash and rival Mobitel’s mCash aren’t reflections of the future anymore. They are dependent on banks HNB and Commercial Bank, respectively, where they maintain funds matching customers’ cash in wallets, so balances can be settled should either go bankrupt. Banks have incentive to scuttle rival payment systems, as these may take away from their lucrative credit card business. Banks dominate this ecosystem, which also includes payment networks like Visa and MasterCard, and technology providers. In the payments chain, banks earn the most fees. In addition, people using a credit card pay for stuff with money they do not have, for which banks change interest. The Indian model of payment banks overcomes fintech firms having to be reliant on commercial banks.

A payment bank license can be graduated to providing credit, leaving incumbent commercial banks out of the loop. An alternative is to piggyback on credit card companies to access client funds, as do some Western payments systems like Apple Pay. Although paying though their phone’s FriMi app may appear novel, customers aren’t bypassing the financial sector plumbing. FriMi and similar but less popular apps by other banks and financial firms are only the interface linking a bank account.

FriMi comprises three layers: an app that is the customer interface, middleware that syncs with the bank’s main IT system, and the core banking system where all the normal banking happens.

NTB hasn’t just recreated a plastic card on a mobile phone. They are bypassing Visa, MasterCard and Amex – the “rails” in industry parlance – and earning a fatter margin, as there aren’t others demanding transaction fees.


REMOVING REGULATORY SPEED bumps along the path to allow fintech firms to connect with banks directly is the second approach, and one that floundered dramatically when the government agency leading the digitization agenda clashed with the Central Bank. Unlike in China, fintech firms here don’t have a free hand. Allowing small fintech firms to experiment has the advantage of sparking innovation. Once these ideas gain traction, regulators can start policing them heavily. If fintech companies don’t hold customer deposits, they have little chance of losing any of other peoples’ money.

In some countries, like the UK for example, banks have been mandated to allow fintech firms to link into their systems. This way, customers transact though apps, which allow fintech firms access to their money in the bank accounts. Sri Lanka’s Information and Communication Technology Agency (ICTA) implementing a government policy on digitisation was proposing a platform that would allow fintech firms to connect to banks securely. The advantage of such a platform is that it eliminates the need for fintech companies to individually negotiate access with every bank and the associated complexity of interphases. That was the thinking behind the so-called National Payments Platform (NPP). Multiple such platforms exist in some Southeast Asian countries, allowing startups to pick ones best meeting their requirements.

Without regulatory insistence, banks may back out of connecting to a platform that will result in their customers finding it convenient to transact with others. The platform will basically carry messages for payments or instructions, according to ICTA, and any transactions will happen with the existing financial systems.

ICTA’s former chief executive has claimed that the NPP architected and designed by an expert team had included inputs from industry experts and banks. He said the NPP’s governance framework was designed by accounting partnership KPMG.

Unless banks are cooperating with fintech firms, it’s impossible to ensure security in mobile payments. Enrolling in a payments system with a stolen identity is a danger that requires banks to compare customers’ known data with those being supplied by a smartphone app. After initial registration, the danger of fraud declines.

DEATH OF CASH HAS LONG been predicted, and generally exaggerated. The spread of payment cards, credit and debit, dented the dominance of notes and coins, but has hardly eliminated them. Sri Lanka’s relatively high bank penetration – a 75% bank account-to-population ratio compared to 65-70% in most rich countries, 13 million debit cards and 1.3 million credit cards – haven’t dented widespread cash use. LankaClear, which is owned by commercial banks and the Central Bank, estimates that 95% of transactions in Sri Lanka use notes and coins, which are outside its system.

However, the demise of cash may be much closer at hand than it has ever been in the last few decades. Wide fintech use offers an opportunity for Sri Lanka to leapfrog to new forms of banking. In China, ordinary citizens obtain credit and invest their savings in money market mutual funds through fintech apps on their smartphones. Banks here, like most other places, have not been innovative enough to launch apps that consolidate payments, lending and investment. For banks, it’s regressive to view the challenge as being one with upstarts. Instead, it’s an opportunity to absorb fintech innovations. However, unless fintech firms are able to plug themselves into the financial plumbing either through a platform or a light touch banking license, there is no potential for this innovation to even begin.

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