Are banks really rooting for PayPak?

How has PayPak fared in its first six months? Pakistan’s first domestic payment scheme, PayPak was launched in April 2016 by 1Link, the national payment network. The idea was to provide a cost-effective and secure alternative, for domestic payments, to international payment-technology majors such as VISA, Master Card, and Union Pay. So, how is it going?
First up, let’s break down the meaning of PayPak for an interested layperson. Using, let’s say a VISA-enabled card for retail purchases or online shopping within Pakistan is not much different than two people talking within Pakistan but their phone call being routed from outside Pakistan. Domestic transactions don’t necessarily have to be settled by or routed via a foreign payment-processor: that will only increase cost of transaction and complexity of operations. A local payment scheme, like PayPak, can do just fine. Saeed Ahmed, Deputy Governor SBP put this into perspective for BR Research in a recent interview: “Since the PayPak scheme is Pakistan-based, the issuers and acquirers will not have to pay hefty fees like they do in the case of international schemes. So it will be cheaper for them to offer low-cost acquiring services to their merchants. This will not only bring down the overall merchant discount rate (MDR) but will increase acceptance points as well.”
Granted, six months is not a long enough time to evaluate. BR Research still felt that it was necessary to gauge the initial uptake of an initiative that has been a long time coming.
Asif K. Durrani, Head of Business Development and Marketing at 1Link told BR Research that PayPak had been accepted in the payment industry at a very fast pace.
“Two commercial banks i.e. Askari Commercial Bank Limited and Allied Bank Limited have already issued PayPak Cards. Moreover, a number of other major commercial banks have also signed the agreement and are working to roll out the cards in the market. On the acquiring front, we have all major acquiring banks signed up for PayPak. We hope that it (PayPak) will add tremendous value towards the National Financial Inclusion Strategy (NFIS) and SBP Vision 2020 initiatives in the foreseeable future,” Asif said, emphasizing a favourable outlook.
Payment schemes like PayPak need to take off to reduce reliance on paper-based transactions. As per SBP data, as of March 2016, Pakistan had 33.7 million plastic cards (27.4 mn debit cards, 4.8 mn ATM-only cards, & 1.4 mn credit cards), 52,500 POS machines and 11,100 ATMs. Experts note that this payment infrastructure is way lower on a per capita basis when contrasted with comparable markets such as India, Iran and Turkey. These countries have their own, domestic payment schemes – there is RuPay in India, Shetab in Iran, and Troy in Turkey.
Onus is on commercial banks to make use of the PayPak platform, which can increase the plastic card population on the demand side and expand POS-machine infrastructure on the supply side. There is a concern, however, that commercial banks are not acting fast enough on PayPak, something that can be gauged from continuing absence of a mass awareness campaign for PayPak even after a half year of its launch . “Big banks are in their comfort zone. They view PayPak as an obligation. Medium-sized banks are waiting for critical marketing mass, which cannot happen without big banks. International franchises view PayPak as upcoming competition and threat. They are using their marketing dollars as incentives to sway executives at banks to position PayPak as a card only for the under-privileged,” S.M. Arif, a leading payments expert, told BR Research.
Arif warned that if banks viewed PayPak as an inferior product, it will become a low-business priority, thereby ignoring large-volume, domestic-spend potential as against small overseas spend. “Banks need to offer PayPak as a default card. They can create a mass awareness campaign without associating PayPak with low-income categories. I feel that SBP must encourage banks to provide a level-playing field to PayPak.”
Arif maintains that technical issues are not the reason behind what he calls bankers’ reluctance. “PayPak for ATM is relatively very simple and immediate in nature, since it is already 1Link-enabled and can go live without any legal or technical issues. For POS usage, banks holding their own Card Bin series can also do it in one shot; other will have to do a quick workaround,” he said.
If mechanics are not the problem, is it the mathematics, then? But Arif suggests that using PayPak provides a commercial advantage for banks. “PayPak’s low MDR will help increase transaction volume, grow the plastic card circulation, and save significant foreign exchange royalties and fee that have been constantly flowing abroad even on account of domestic usage to international franchises, with no real advantage. Besides, it will eliminate or reduce cross-border exposure and fraud on domestic-only cards.”

But not everyone outside of 1Link agrees with the suggestion that banks are not taking adequate interest in promoting PayPak. According to a doyen of the domestic payments scene, who has been directly involved with PayPak’s development and launch and who requested anonymity to speak candidly, it would take some time for PayPak infrastructure to build, just as in the case of other prominent international majors.
“Large banks have no other choice but to use PayPak to reach the lower-income segments, which tend to keep low account balances. In the long run, Pakistan needs a viable domestic payment scheme because this is a country of 200 million people. The scale is huge and not just the banks, I feel that microfinance banks and branchless banks must also partake,” he told BR Research.
Bankers are instinctively loath to see funds depart from their customers’ accounts. Already, bulk of debit cards in circulation cannot be used on POS machines or online, according to another payment expert. It may well be early to judge the banking sector’s collective intent for PayPak – they get the benefit of the doubt, for now. In the interest of increasing cashless transactions and promoting financial inclusion, perhaps the central bank should provide more assertive guidelines that help increase PayPak’s uptake.