The Emerging Digital Payments Revolution
Latest data by the State Bank shows that democratized access to finance may soon become a reality for Pakistani households and small businesses.
The coronavirus pandemic has been a major accelerant when it comes to the proliferation and adoption of digital technologies. Pakistan has also experienced this acceleration, with the State Bank of Pakistan’s latest report on payments systems showing the following quarter-on-quarter changes in Q3 of Fiscal Year 2021:
Internet Banking Users increased by 30.5% to 4.98 million;
Mobile Phone Banking Users increased by 20.4% to 9.86 million;
E-Commerce Merchants increased by 61.8 percent to 2,523;
Internet banking transactions grew by 108% to touch Rs. 1,561.7 billion;
Mobile phone banking transactions grew by 177.6% to touch Rs. 1,297.9 billion; and
E-Commerce transactions grew by 63% to touch Rs. 33.1 billion.
These changes show that digital payments and commerce are becoming more ubiquitous in the country, which is a positive developments for a variety of factors, which I will touch upon in just a moment.
While the uptick in numbers is good news, there is still a long way to go. The data shared in the report shows that nearly 50% of transactions (by volume) in the e-banking category use ATMs. Internet, mobile phone, and e-commerce transactions combined represent just 27% of total e-banking transaction volume.
Measuring these e-banking transactions by value shows that only 13% of transactions fall under the internet or mobile phone banking category.
The report also shows that 64% of all payment cards are debit cards, with credit cards representing just 4% of the total. This again is a problem, since the growth of consumer credit products is an important way to expand access to credit, build household credit histories, and bridge the financial inclusion gap that continues to be a problem in the country.
This means that there is significant room for growth and it is important for both the State Bank and the broader financial services industry to build upon the momentum that has been generated in the last 12-18 months.
Why is all this important?
In my view, there are a few reasons why it is important to pay attention to this shift that is occurring in Pakistan:
Adoption of digital payments will help bridge the financial inclusion gap in Pakistan, leading to technology-led solutions that democratize access to modern finance.
Democratization will mean that modern financial services will be accessible to millions of households who have historically been ignored by traditional banks, which in turn will bring about an economic revolution that will empower millions of households.
As a result, a large number of fintech startups will enter the market to chase after an increasing digitized middle class. This competition will further turbo-charge the democratization of financial services, leading to economic growth that is powered by consumers who are shifting away from the informal, cash-based economy.
The shift away from informal, cash-based transactions will have a direct impact in terms of the state’s ability to better collect tax revenues, an issue that successive governments have failed to resolve through the proverbial danda. Modern financial services can incentivize consumers to shift away from cash-based transactions, thereby forcing even the smallest of businesses to accept digital payments, which by their very nature will solve the “documentation” problem in the economy.
Finally, as more households adopt digital payments and modern financial services, financial institutions will be better able to develop credit histories both for citizens and businesses. These credit profiles can reduce some of the friction in Pakistan’s banking sector, which prevents citizens and businesses (especially smaller ones) from accessing credit that can help them purchase homes, consumer durable products, and invest in expanding their businesses.
To achieve all of this, a lot more needs to be done. The data we are seeing now shows that things are improving, but the State Bank in particular will have to tend to these green shoots. The most important way to do that is for the central bank to fully operationalize and scale Raast, Pakistan’s digital payments interface. Doing so will be the shot in the arm that the industry needs, and if India’s success with UPI is any indication, Raast can bring about a financial revolution in Pakistan.
Following this, the central bank must continue to maintain a regulatory environment that allows fintech startups to grow and aggressively compete with traditional banks, while also changing policies that encourage conventional banks to both digitize and rapidly onboard unbanked citizens.
Finally, as this sector grows, it is also important for the bank to proactively work with the industry to improve financial and digital literacy, while also looking at regulatory gaps such as those related to personal data protection, to ensure that businesses do not run roughshod over consumer rights.
The latest set of data is encouraging and signals that a transformation is around the corner. To fully realize the benefits of this coming revolution, the central bank and the broader financial services industry must continue to work together and ensure that these innovations democratize access to modern finance. Anything short of that will be a missed opportunity for Pakistan.