Payments: Future in Pakistan, the Action Plan and the Role of SBP

Current Status and Future of Payments in Pakistan

The traditional payment methods are being phased out very rapidly with the advent of more sophisticated, secure and flexible payment methods. In total, we have multiple options to send / receive payments. Let’s list down some of them:

1. Debit / credit cards

2. Bank transfers

3. Branchless banking / mobile banking

4. Ewallets

i) 2CheckOut

ii) Stripe

iii) ACH Payments

iv) WePay

v) Apple Pay

vi) Authorize.Net

vii) Dwolla

viii) Amazon Payments

ix) PayPal

x) Google Wallet

xi) Payoneer

xii) Blockchain

xiii) Keenu

The above list may not be considered as comprehensive, plus, some of the means above allow the user more than merely sending or receiving payments. Amongst the modern payment methods being phased in include the ‘ewallets’. For understanding what ewallet does, just have a glance at a list above numbered in Roman. Obviously, the most popular ewallet that exists is PayPal known to everyone. Ewallets have started dominating and will surely dominate in future as flexible, convenient and secure payment methods.

If we carefully categorize the list above, then we come to know first two methods seem to be traditional ones, while the rest of the list indicates the modern, dominating methods of payment today. This is not only true in Pakistan but globally true as well.

Let’s now discuss briefly how our payment system is being changed and will continue changing due to the advent of the modern methods of payment i.e. ewallets.

Starting with traditional methods, when you look at the most popular global payment methods today (particularly in e-commerce), credit cards are at the top. A pull-payment method, credit cards are excellent for recurring payments for two reasons. First, payments made against a credit card are guaranteed up front, eliminating settlement issues. Second, once a customer agrees to have you use their credit card numbers, you can keep pulling from that card on a recurring basis.

There are a couple of downsides however, such as fees, fraud and charge-backs, but these are relatively minor given the convenience to customers and the benefits listed earlier.

Bank transfers are another popular recurring pull-payment method where the customer gives you their bank account information, and you’re able to pull money directly from their accounts through a secure network connection. Most of these direct-debit methods allow you to pull payments on a recurring basis. The key benefits of bank transfers are lower fees and the popularity of this type of payment method around the globe.

Branchless banking has gained much credence in Pakistan. Many players have entered the market and provided solutions for sending/receiving money and carrying out other financial transactions through cell phone connections.

A significant number of Pakistanis have been availing benefits for quite some time, but it seems now a concerted effort has been launched to multiply this number. Resultantly, new partnerships are emerging every other day and adding to diversify further the financial services already available.

So, if one looks at the portfolio of this segment, one finds EasyPaisa and Omni offering branchless banking services i.e. money transfer being in the widest use by the majority population. Then, there is MobiCash launched by Mobilink that has entered into a partnership with NADRA, and collects fees from applicants.

Meezan Bank, in collaboration with U-Paisa (a branchless banking service by Ufone) has recently started an Islamic branchless banking service for the first time under the name of “Meezan U-Paisa”. Now the customers in Pakistan will be able to send and receive money, pay utility bills and do mobile top ups through Islamic branchless banking in more than 100 cities across Pakistan. Moreover, the punch line is that their money will go directly to the recipient without staying in the service provider’s account for any interest-generating activity.

Talking about ewallet, it is a third-party payment method funded by a variety of means. There’s always another payment method that sits behind it (such as a credit card or a bank transfer), but the company providing the ewallet handles all the complexity, security and process of the payment transaction.

PayPal is by far the most popular global ewallet today. While its ecommerce reach rarely exceeds 20% of any given local market, it’s essentially in every country and has a proven track record. As of April 2015, PayPal has over 137 million active accounts in 193 markets and 26 currencies around the world, which makes it easy to transfer and request payments.

Google Wallet is essentially Google’s version of PayPal, complete with money transfers and a Google Wallet Card! Since we’re all addicted to the Big G, it shouldn’t be all that difficult to spend and receive money. Google also announced last month that it will be releasing a physical card connected to users’ accounts so they can utilize Google Wallet at retail businesses. For convenience, and the number of users, Google Wallet tops our list of the top 10 online payment solutions.

Amazon Payments is a safe, easy and convenient method for users to receive money by using Amazon’s API. Users can also send money via ACH (Automated Clearing House). Since almost everyone has an Amazon account, all your important information has already been stored.

Blockchain’s Bitcoin is doing well here. One of the difficulties involved with receiving bitcoin payments is the need to generate a unique address for each new user or invoice. These addresses need to be monitored and stored securely. The blockchain receive payments API takes care of the generation and monitoring of addresses. Server is notified using a simple callback whenever a payment is received.

KEENU, for the first time in the country, introduced NFC payment acceptance. The service, again, will be the first in the country, to allow users to make digital payments directly from their bank accounts, hence eradicating the need to carry paper-money. Amid other offerings, Keenu allows buyers to make in-store payments, and offers loyalty programs for merchants, tailored to their own likings, with customers benefiting, thanks to the rewards.

It is unfortunate that not all ewallets operate and accept payments in Pakistan. But soon their entry in Pakistan is sure-shot given the huge potential in Pakistan’s economy recently owing to the CPEC (China-Pakistan Economic Corridor). Also, the fact that Pakistan’s banking sector is amongst the most stable banking sectors in the world, so the day is not far when all such payment solution companies shall have their inroads in Pakistan.

Readers may find details of other listed payment methods on Google, but what does the advent of all such methods reveal? How our lives are going to change? What our entire financial system will look like? These are some of the questions that financial practitioners, economists, etc. in Pakistan have to consider for the complete financial inclusion and better financial policies.

The Action Plan and the Role of State Bank of Pakistan

The ability to pay using a mobile account, with digital money or loyalty points, at all category retail and online stores. But the big push to mobile transactions can become possible if government gets in on the act. How about paying school teachers through mobile accounts? What if all small payments made by government were steadily migrated onto digital pathways? This would open up an economic space of almost Rs 900 Billion, thereby pulling enormous quantities of money out of the cash economy into digital payments.

Payments are the easiest way to get people onto formal financial services. In the absence of acceptance of mobile banking by large retail networks, mobile accounts will continue to remain dormant, and their full potential unrealized. To achieve this network effect, a large acceptance infrastructure is critical, as is its growth proportionate to the geographic density of accounts. By some estimates, a merchant network of more than 500,000 will be required to make mobile payments part of our economic mainstream, and this process can be accelerated if government were to migrate its small payments onto mobile accounts.

In due course this could expand to include other payments made by and to government. Imagine paying traffic fines and road tolls with your mobile phone. Imagine National Saving Schemes paying their returns into mobile accounts, or paying vehicle registration fees from mobile accounts. The field is limitless once it begins to open up, and can serve as a significant catalyst to the wider acceptance of mobile payments in our economy.

The budget provides an opportunity to open this door. Specifically, the framers of the budget can consider the following. First, the removal of the requirement of payments to be collected only at a government-owned institution. Second, an electronic prize bond and a micro T-bill can be created. Third, all government salaries can be paid through a mobile account. Fourth, withholding tax on over the counter transactions can be eliminated.

All four of these steps would be easy to legislate into being, and the infrastructure to process the mobile payments is already in place. The resultant boost given to the mobile banking industry would not only help drive a game changing innovation in our economy, it would bring the benefits of modern financial services to the unbanked, and help drain the swamp of a vast cash economy that provides the oxygen for the undocumented sector. The benefits of documentation would then yield their second-round effects through greater visibility of the transactions that make up our economy, and create the possibility of fine tuning the fiscal architecture to avail the benefits of this visibility.

The issue at the moment is also to change the behavior of people and create an ecosystem based on trust, credibility, quality of service and customer confidence. But the possibilities are now within our reach. All we need is one push to kick the ball rolling. The forthcoming budget could provide that push.

The State Bank of Pakistan (SBP) under NFIS (National Financial Inclusion Strategy) has to set the target of opening mobile wallets, encourage and support ewallet companies to enter the Pakistani market. Mobile payments, digital payments and the like are a huge enabler of driving financial inclusion. With the advent of new technology and increased awareness levels around it, Pakistan is supremely positioned to capitalize on this front. It will take not more than a few years to fully observe widespread use of digital payments if optimal efforts are exerted.

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