Fintech, or financial technology, is revolutionizing Sri Lanka's financial sector by integrating innovative technologies with traditional services. Driven by growing internet access, smartphone usage, and digital adoption, fintech solutions like mobile payments, e-wallets, and digital banking simplify transactions and promote financial inclusion. These solutions provide underserved populations access to peer-to-peer lending, crowdfunding, and microfinance platforms, addressing diverse financial needs.
The Fintech Forum unites fintech startups, financial institutions, tech companies, and regulators to foster innovation, collaboration, and a sustainable digital economy. Its mission includes promoting fintech adoption, enhancing regulatory frameworks, and creating a connected financial ecosystem. By enabling businesses and consumers to access digital financial services, the forum plays a crucial role in driving growth and financial inclusion across Sri Lanka.
To get a deeper look at where things are and what to expect, we spoke CEO of Lanka Pay and the Head of the Fintech Forum, Sri Lanka, Mr. Channa De Silva.
Fintech is quite the buzzword in Sri Lanka lately. But in terms of real action, where do you think we currently stand?
The global fintech industry is rapidly growing, but profitability remains a challenge. Many fintech companies, particularly independent ones, struggle to find sustainable business models. While transaction-based revenue was initially a common approach, the increasing competition and shrinking margins have made this model less viable. For long-term success, fintech companies must diversify and offer value-added services. A notable example is PickMe in Sri Lanka, which earns revenue through commission fees rather than financial transactions.
Standalone fintech platforms face difficulties in maintaining profitability in a competitive environment, especially with falling transaction margins. In contrast, banks and financial institutions in Sri Lanka, like LOLC, benefit from existing infrastructure and financial resources, making their business models more stable and sustainable. These bank-backed Fintech players can offer broader services, such as lending, which strengthens their model. Independent fintechs must partner with licensed banks for regulatory reasons, leading to revenue-sharing models that limit their control.
Independent platforms and players may find it difficult to scale due to reliance on partnerships with banks for additional services. However, success depends on identifying market gaps and creating solutions that meet consumer needs while generating revenue. A strong example of scaling is the Helakuru app in Sri Lanka, initially a Sinhala typing tool, which has transitioned into offering payment facilitation services thanks to its large user base.
Similarly, platforms like WhatsApp, with existing user ecosystems, are entering the fintech space, offering payments without needing significant customer acquisition investments. As the industry evolves, fintech companies must innovate to create sustainable revenue models. The fintech sector, particularly in emerging markets like Sri Lanka, has significant growth potential, and businesses that adapt and diversify will thrive.
So, we've heard a lot about the Fintech Forum. Can you tell us a little bit more about that and what's the main idea driving this initiative?
Initially, the primary objective behind establishing a fintech ecosystem in Sri Lanka was to address several key challenges faced by the sector. One of the main issues was the lack of a regulatory framework for standalone fintech companies. These entities, unlike banks or finance companies, are not regulated by the Central Bank, which means they cannot access the support structures available to more traditional financial institutions. This regulatory gap has limited the growth and success of fintech players in Sri Lanka, especially when compared to countries like Singapore and India, where fintechs are supported by a strong regulatory environment.
Due to the lack of a payment system operator license, Sri Lankan fintechs must rely on partnerships with licensed banks or finance companies. This dependency makes it difficult for them to operate independently and limits their potential to gain the resources and visibility needed for growth.
A key objective of establishing the fintech ecosystem was to highlight the value of partnerships between banks and fintech players. Fintechs complement banks by offering technology and innovation, which banks often lack. This collaboration can create a more sustainable ecosystem, where both sectors contribute their strengths to develop better financial products and services.
Creating a unified voice for fintechs through a lobby group is also essential. This group can advocate for better regulations and ensure fintechs are recognized and adequately supported. It will bridge the gap between the fintech community and regulators, making sure the players are well-represented in policy discussions.
Attracting foreign investment is another critical goal. Many fintech players in Sri Lanka are small startups with limited resources. By creating a centralized ecosystem, Sri Lanka can position itself as an attractive destination for foreign investors. Success stories like Helapay can showcase the potential of local fintech startups and attract international interest.
Collaboration with other fintech players in other eco systems in Asia is a strategic approach. There are over 40 forums / eco-systems in the region, and Sri Lanka can benefit from sharing resources and expanding its presence. For example, PickMe, though not a company in our Fintech forum, partnered with an eco-system in Nepal, demonstrating cross-border potential that can strengthen Sri Lanka's ecosystem.
The ultimate goal is to create a vibrant and sustainable fintech ecosystem in Sri Lanka. This will require a supportive regulatory environment, strategic partnerships, and foreign investment to foster growth and innovation. With these efforts, Sri Lanka can become a hub for fintechs in Asia.
In your opinion, what needs to be done to drive, a greater adoption of Fintech in Sri Lanka?
To build a successful fintech ecosystem, two crucial components must be prioritized: government support and the right business models that address genuine market needs.
Government and Regulatory Support:
Government backing is essential for fintech growth. In countries like India, initiatives like demonetization led to increased adoption of digital payments. However, Sri Lanka lacks such government-backed initiatives, and the regulatory framework does not sufficiently support fintech companies, many of which are not regulated by the Central Bank. The government must act as a facilitator, creating policies that encourage innovation and supporting a thriving fintech ecosystem. Without this, the sector's long-term growth and competitiveness are at risk.
Business Models and Market Needs:
To ensure sustainability, fintechs must address real market needs with the right business models. Many fintech startups fail because they merely replicate successful models without adding innovation or solving significant problems. A key example is ride-sharing companies, many of which couldn't sustain themselves. Similarly, fintechs must focus on solving real problems, as seen with PickMe in Sri Lanka. Furthermore, considering Sri Lanka's small market, fintechs should aim for scalability and explore opportunities outside the country. Successful fintechs solve significant problems while creating monetizable, scalable models.
For instance, Sri Lanka’s e-commerce sector faces the challenge of cash on delivery payments. Introducing a payment link through an app can streamline the process and address consumer concerns, improving the payment experience. This highlights the importance of creating solutions that are both innovative and responsive to market demands.
To thrive, fintechs must focus on solving real problems, not just creating solutions in search of a problem. Identifying a market gap and building a scalable solution is essential for sustainability. If fintechs can focus on the right use cases and business models, they will succeed in building a robust and growing ecosystem.
Creating a thriving fintech ecosystem in Sri Lanka requires government support, clear regulations, and business models that address significant market needs. By focusing on scalable, monetizable solutions, fintechs can build a sustainable future.
What would you say are the key challenges or as soon as the points we need to address in order to fast track that Fintech adoption?
To effectively support the fintech ecosystem, a comprehensive framework is needed to address challenges faced by companies, particularly in Sri Lanka, where many fintech businesses struggle due to economic instability. These companies need substantial funding, but attracting investors remains a hurdle. Platforms like events organized by the Sri Lankan High Commission in Singapore, which connect investors and fintech startups, can help bridge this gap. Encouraging fintechs to explore international markets can also mitigate the limitations of a small domestic market.
Progressive regulation is crucial to ensure the growth and stability of fintech. Without regulation, illegal activities such as money laundering can damage the reputation of the sector. A balanced regulatory approach will help fintechs thrive while ensuring accountability and transparency. In India, for example, government efforts to reduce the cost of QR-based transactions have been beneficial for consumers, governments, and businesses. Sri Lanka could consider similar strategies to support fintech growth.
To foster trust and stability in the sector, a solid governance structure, including clear ethical standards and consumer protection mechanisms, is essential. This ensures that companies handle funds responsibly, and that consumers can seek recourse in case of failures. Furthermore, data protection regulations must be enforced to safeguard personal and financial data, maintaining the credibility of the industry. Sri Lanka’s previous issues with money laundering have already affected its ability to attract foreign investment, making it even more crucial to implement progressive regulations.
Governments should also mandate electronic payments for all public services to create a digital marketplace for fintech solutions. This would improve efficiency, help track transactions, reduce corruption, and boost revenue collection.
Lastly, by creating an ecosystem that encourages investment, enables international expansion, and provides regulatory support, Sri Lanka can build a thriving fintech sector that contributes to economic growth, public trust, and reduced corruption.
What about the role of banks? Do you think they're doing enough to support the fintech industry in the country as of now?
Currently, banks' approaches to fintech companies vary. Smaller, more innovative banks recognize the value of collaborating with fintechs, while larger, established banks tend to operate independently. While these larger banks have the resources to manage operations, they struggle to reach underserved communities and are slower to adopt new technologies. Instead of going it alone, banks could greatly benefit from collaborating with fintechs to create a more diverse and effective ecosystem.
Partnership between banks and fintechs is far more effective than competition. Banks offer infrastructure and trust, while fintechs bring innovation and flexibility. When banks invest in fintechs, they help support their growth in a mutually beneficial way. This creates a sustainable and balanced model, unlike banks trying to dominate the fintech space on their own. It's unlikely that fintechs will completely replace banks, as banks hold significant advantages, including financial capital and regulatory backing. Fintechs excel in technology and digital solutions, and their integration into the banking ecosystem can benefit both sectors.
Some smaller banks are already collaborating with fintechs, recognizing the importance of fintech innovation while providing the necessary infrastructure. The most successful models will likely involve both banks and fintechs working together, though cases where one entity manages both banking and fintech operations are still rare.
Examples of successful fintech and banking integration include India, where companies like Paytm have received banking licenses. However, digital-only banks, which lack physical branches, face challenges. Their lack of traditional revenue models and profitability concerns have made the sustainability of such banks uncertain. On the other hand, banks like DBS, which combine traditional banking with digital solutions, have seen greater success with a balanced approach.
In Sri Lanka, banks have not been as proactive in investing in fintechs as those in other countries. Sri Lanka’s fintech ecosystem is still in its early stages, and there is a need to encourage banks to invest in fintechs. One of the key challenges is that banks often require collateral for loans, which many fintech startups do not have, thus hindering the fintech sector's growth in Sri Lanka. The goal is to create a more sustainable model where banks support fintechs, resulting in mutual benefits
Now looking over to the government's role, how can national services be leveraged to help accelerate Fintech adoption?
The government plays a crucial role in advancing technology within a country, particularly in the digitalization of public services, financial transactions, and documentation. Technology is not only for convenience but serves as a strategic driver of economic growth, efficiency, and transparency. Key areas of government involvement include digital government services, revenue collection, and reducing the cost of cash.
Digitizing public services can make them accessible to citizens from anywhere and at any time, reducing wait times, and saving on infrastructure costs. This approach is especially beneficial for underserved and remote populations. Additionally, moving to digital platforms improves efficiency, speeding up service delivery and cutting down on expenses tied to maintaining physical offices and labor.
The digitization of financial transactions is also critical, especially in countries with large informal sectors where cash is prevalent. Shifting from cash to digital payments helps the government track financial transactions more accurately, collect taxes more effectively, and circulate money within the formal banking system, benefiting the economy. Furthermore, transitioning to digital payments can save a significant portion of a country's GDP by reducing the costs of managing cash, which include printing, distribution, and security expenses.
The informal economy, especially small and medium-sized businesses, often operates in cash, preventing tax contributions and limiting economic growth. For instance, in Sri Lanka, 76% of the 1.2 trillion rupees in circulation remains outside the banking system. Encouraging the public to bring this cash into the banking system via digital means could unlock substantial economic potential.
Government policy is essential to making this shift happen. Adopting digital signatures for documentation ensures security and authenticity, reducing bureaucracy and corruption. Digitizing government services fosters a digital ecosystem that drives innovation, job creation, and competition, while also making the country more integrated into the global economy.
India’s example shows how government-led digitization can create a thriving digital economy, expanding tax bases and ensuring greater equity. The government’s role isn’t just in developing digital infrastructure but also in creating a regulatory framework that ensures both the public and private sectors thrive together.
In conclusion, the government has a vital role in promoting digital transformation. Digitizing services and payments enhances efficiency and transparency while unlocking economic benefits. The shift from a cash-based to a digital economy can foster a thriving ecosystem benefiting businesses, citizens, and the government.
How can the business sector collaborate with the Fintech Forum, Sri Lanka to drive the agenda forward?
We’ve created a comprehensive ecosystem involving key players in the financial and technology sectors, including fintech companies, startups, banks, and finance companies. Our goal is to foster collaboration across sectors to improve services for consumers and businesses. We've introduced an associate membership category, inviting tech companies like Visa, MasterCard, Google, and Microsoft to participate. Their involvement is crucial to the ecosystem's success, and with all players contributing their expertise, we aim to create an interconnected financial ecosystem.
Initially, the primary objective behind establishing a fintech ecosystem in Sri Lanka was to address several key challenges faced by the sector. One of the main issues was the lack of a regulatory framework for standalone fintech companies. These entities, unlike banks or finance companies, are not regulated by the Central Bank, which means they cannot access the support structures available to more traditional financial institutions.
We are also engaging central banks for regulatory oversight to ensure stability and consumer confidence, and inviting the insurance sector to join. Collaboration with these sectors will foster a diverse, thriving ecosystem. The private sector, particularly fintech companies, can introduce innovative solutions to transform how businesses and individuals manage money. We encourage businesses to adopt these services to boost efficiency, reduce costs, and increase productivity.
Support is key for this initiative’s success, which is why the Fintech Forum has taken the lead. We are committed to building a platform that unites all stakeholders and delivers benefits to consumers and businesses.
Take, for example, the Helakuru app in Sri Lanka, initially designed to facilitate typing in Sinhala. The app now boasts over 10 million downloads and 4 million active users. This extensive user base has allowed Helakuru to successfully transition into offering fintech services, such as payment facilitation. The app's ability to leverage its already established user base demonstrates how such platforms can scale by providing additional services that align with the needs of their users.
Sri Lanka’s financial ecosystem is smaller compared to countries like India or Malaysia. In 2023, Sri Lanka's GDP was approximately 27.3 trillion rupees ($85 billion). However, despite its smaller size, there are signs of growth. Last year, through our system alone, we processed 29 trillion rupees, which exceeds the GDP of the entire country. This indicates that while Sri Lanka's financial ecosystem may still be growing, it is on the right track and showing signs of development. While we might not yet be at a tipping point, we are certainly in the early stages of a potential breakthrough. There is significant room for growth, and with the right support, we can push the ecosystem to the next level.
To move forward, continued support from the government, other agencies, and foreign direct investment (FDI) is crucial for infrastructure development and the long-term sustainability of the ecosystem.
(End of Exclusive Conversation with BusinessLounge.lK editorial team)
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