Thursday, December 7, 2023

Exploring Pakistan’s Digital Shift from Cash to Click

Overall, mobile and internet banking transactions witnessed an annual growth of 57% by volume and 81% by value. Further, e-Banking transactions through Banks and Microfinance Banks (MFBs) grew by 29% while value increased by 21% during the year. Similar growth pattern was also observed in Branchless Banking (BBs) transactions with number of transactions increasing by 28% and value by 45% during FY23. As of June 30, 2023, there were 58.1 million payment cards in circulation of which 44.5 million were issued by banks and MFBs, 10.8 million by branchless banks, and 2.8 million by EMIs.

(Annual Payment Systems Review for the fiscal year 2022-23 by SBP)

The past decade in Pakistan has seen substantial structural transformation in the payment ecosystem, providing a robust foundation for the promising digital payments landscape. The State Bank of Pakistan has played a vital role by implementing essential reforms and taking encouraging steps to promote financial inclusion. This transformation is further bolstered by the growing ubiquity of smartphones and the internet, development of new digital payment tools, changing consumer preferences and infrastructure throughout the country. Digital is no longer for privilege, it’s for everyone.

The journey of digital payments in Pakistan began in the early 2000s with the introduction of online banking services. Bank-fintech collaborations, coupled with the rise of wallets and aggregators, have established streamlined digital payments platform. Pakistan is home to a significant number of populations that goes unbanked. Mobile wallets, particularly, have been instrumental in integrating the unbanked population into the formal financial system. RAAST, Pakistan’s inaugural fast payment system, ensures complete interoperability, facilitating seamless digital transactions among individuals, businesses, and government entities in nearly real-time.

Although there have been advancements in transitioning from paper-based to digital payment methods, Pakistan still falls behind its counterparts in terms of the per-person volume and value of digital payments. The country, with a population of approximately 220 million, where over 60% are under 30 years old, is at the cusp of a digital transformation, further accelerated by the changing payment landscape influenced by the COVID-19 pandemic. The present low digital transaction volume in the country can be ascribed to various factors such as low banking penetration, widespread cash transactions, limited trust, awareness of digital payment methods, restricted interoperability, challenging accessibility, and high transaction costs and taxation.

Despite being tech-savvy, our people lack awareness in recognizing fraud, leading to some falling victim to deceptive tactics. Unfortunately, there hasn’t been sufficient investment in creating awareness. This is an area where market leaders and the State Bank of Pakistan should prioritize attention.

Addressing the gender gap in financial inclusion involves crucial initiatives such as promoting gender diversity, developing women-centric products, and enhancing data collection. Despite progress, challenges persist in rural areas, including limited access, low financial literacy, and cultural barriers for women. Further practical efforts are essential to ensure comprehensive female participation in the financial ecosystem.

Digitizing government-to-person (G2P) and person-to-government (P2G) payments can enhance digital inclusion in Pakistan, stimulating demand and supply for digital liquidity. Leveraging the expertise of the private sector through the implementation of private-public partnerships is a crucial step in advancing digital payments.

Pakistan’s MSMEs, constituting 90% of enterprises and nearly half of the GDP, face persistent growth challenges due to their reliance on cash. Digitization is hindered by the perception that it will lead to business documentation and taxation, a significant obstacle to payment system digitization. Merchants resist digital payments, fearing the complexities of tax filing, high tax rates, and exploitation by lower-level tax officials, as it diminishes financial opacity protecting their margins.

Promising Future Outlook:

“State bank of Pakistan expects migration to electronic means will boost Pakistan’s GDP by 7%, create four million jobs, and result in new deposits of $263 billion and represent a potential market of $36 billion by 2025.” 

To establish an efficient digital payment ecosystem, it’s vital to enact key measures: Enhance engagement, , back women-led enterprises, foster trust in digital payments, minimize taxes, eliminate hidden charges, and ensure affordability for MSMEs.

As the government, financial institutions, and fintech companies work together to address challenges and promote financial inclusion, the future of digital payments in Pakistan is poised for continued growth and transformation. With the right policies and investments, Pakistan can look forward to a more inclusive and digitally connected financial future.

Writer name : Ramla Rehman

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