The evolution of neo/challenger banks over the last 15 years can be viewed in three distinct waves, each shaped by its historical, regulatory and technological context. From proof-of-concept, to building rapid scale with powerful niche products, to building a full-stack digital banking ecosystem, these earlier waves offer many lessons for Pakistan, where a new generation of digital banking is now coming online. The three waves The first wave, epitomised by Fidor Bank in Germany, opened the doors to the ‘brave new world’ of digital banking. Established in the aftermath of the global financial crisis of 2007/8, Fidor was radical for its time, with no branches and an API-driven infrastructure. Although the bank successfully demonstrated that customers could be engaged digitally, its product offering was thin—current accounts, basic payments, and some minor financing. Unsurprisingly, Fidor closed its doors in 2023. I say unsurprisingly because we have seen this before—with Nokia and Blackberry losing the smartphone market to Apple, and MySpace to Facebook, among numerous similar examples of first movers. Nonetheless, Fidor did serve as the proof-of-concept for digital banking, and the 2nd wave followed in quick succession. 2012/13 brought players we are all now familiar with—Starling, Revolut, Monzo, Nu, WeBank, MyBank. These 2nd wave banks entered the market with a single, sharply defined product, solving a very real customer pain point. Nu launched with a simple and transparent, no-fee credit card; Monzo launched with a prepaid card and instant spending notifications; Revolut debuted with an international card offering better exchange rates than incumbent banks. This narrow focus enabled rapid customer acquisition while serving to ringfence the new entrants from deep-pocketed competitors—incumbents in the banking industry. Once these ‘new kids on the block’ established a foothold, new products were introduced in quick succession. Within 2-3 years of launch many of these players added conventional banking products—saving accounts and features, credit cards, and investment options. SME and business banking, in most cases, followed once scale was achieved with individual/consumer segments. Starling introduced business accounts in its fourth year, Monzo in the fifth, and Revolut, approximately two years after launch. The pattern was clear: win customers first, then leverage technology, data and brand trust to move into SME, where margins and stickiness are often higher. The 3rd wave of digital banks emerged in Asia in 2017/18, with fewer new entrants like Bunq in Europe. These banks (Kakao, SuperBank, Tyme, Bunq) varied from those in the 2nd wave primarily by offering a broad set of services (payments, deposits, lending, savings, investment); integrating into larger digital ecosystems such as messaging apps and e-commerce platforms; and reducing the gap between new product offers from years to mere months. The difference in strategy was driven by several factors, including a maturing customer base where customers already familiar with digital financial services expected a minimum viable product offering at the get go; an enabling regulatory environment where many central banks had introduced bespoke regulations accommodating digital banks; and intensifying competition as incumbents started digitalising in earnest! With this evolving strategy, banks like Kakao achieved exponential early growth, reaching 1 million clients in just 5 days, compared to the early stalwart Revolut, which hit the 1 million client mark one year after launching operations. Lessons for Pakistan For digital banks in Pakistan, the lessons are numerous. However, it is also necessary to filter these global lessons through local realities. Central themes for Pakistan are its large unbanked population, its fragmented digital connectivity despite the ubiquity of mobile phone ownership, and the economy’s chronic and deep dependency on cash. Within this context, the initial value proposition of any digital bank must revolve around simple, everyday use cases that replace cash. These include services such as low-friction accounts, QR-based payments and reliable cash-in and cash-out networks. The rapidly evolving payments landscape due to infrastructure like Raast, further reinforces payments as the entry point product. Thus, early and deep integration with Raast, aggressive QR adoption, and a strong focus on P2P, P2M, and bill payments will allow new digital banks to embed themselves quickly into the national payment fabric and achieve a degree of scale, while replacing cash in daily life. Another reality in Pakistan is the uneven 3G/4G penetration, even as the government prepares to grant 5G licenses and regularly celebrates cell phone penetration. Given this reality, digital banks that design for constraint, rather than abundance, will forge a competitive advantage vis a vis scale and rural penetration. Lightweight Android-first apps, offline-friendly features, low data usage, and even USSD support are not optional—they will be core to achieving scale, especially if rural Pakistan (home to 60% of the population) is on the cards. The 3rd wave’s emphasis on full digitalization must therefore be adapted to local infrastructure realities, ensuring inclusion rather than exclusion. Banks that assume high-end devices, constant connectivity, or unlimited data will cap their own growth prematurely. Finally, Pakistan is not a market where heavy customer acquisition costs or complex premium subscriptions (increasingly the case with the 2nd wave European banks) will scale sustainably. Digital banks in Pakistan must design for thin margins, focusing on low-cost acquisition, micro-savings, and small-ticket credit products introduced gradually and responsibly. SME financing, in particular, should emerge once transaction data and trust have been established—ideally within the first 12 to 24 months—rather than being bolted on years later. While data is a key constraint for enhanced lending to SMEs, waiting for high quality and comprehensive 3rd party data to emerge could mean endless delays given the quality of data currently being generated and the level of fragmentation. Here digital banks must play a proactive role because SMEs in Pakistan, numbering more than 5 million, need working capital, payments, and cash flow visibility, a need that has long gone unmet, with approximately 200,000 SMEs receiving formal financial credit. The earlier the digital banks start chipping at this problem, the earlier will they unlock long-term value (reduced churn, diversified revenue, and bigger margins). Pakistan’s digital banks now have the advantage of hindsight. The challenge—and opportunity—is to combine the courage and innovative spirit of the first wave, the focus and sequencing of the second, and the platform thinking of the third, while remaining deeply grounded in Pakistan’s economic, technological, and social realities. Those that do, will not merely digitize banking; they will redefine how money moves in everyday Pakistani life.