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Pakistan has a big retail supply chain market which is growing. Currently, majority of the supply chain transactions – from manufacturer to distributor to retailer to consumer, are in cash or paper-based instruments. By digitizing all transactions in real time (or by reducing the lag time), the cost component for all the players – in terms of paying float (or throughput) to banks and operational cost - can be thinned. This would generate significant liquidity in the market.

There are costs at corporate and retailing level which can be done away with. This will provide much needed additional liquidity in the value chain. This shall add transparency in the system and bring overall supply chain efficiencies to enhance productivity and rationalizing margins. There are end-to-end beneficiaries; better margins for businesses, and low product price for buyers as the benefit may be passed on to the end consumer. Not to mention the obvious macro benefits of documentation.

There are around 1.5 million retailers, 15,000 distributors (and sub-distributors), and 2,500 manufacturers and service providers operating in the country’s retail value chain. Most of these are currently served by closed-loop cash management solutions or non-documented cash transactions. The turn-around time (TAT) lag is 3-4 days in distribution to manufacturing leg, and 6-7 days in retailer to distribution leg. Digital onboarding will not only reduce the TAT lag and generate additional liquidity but also slash operational cost. In the process, banks may lose on easy moneymaking. But the excess banking liquidity can be diverted to supply chain financing.

The retail market in Pakistan is estimated at $125 billion. In the payment system this amount rolls over three times. From manufacturer (or importer) to distributors, from distributor to retailer, and from retailer to consumers. Retailer to consumer market is largely cash based and is adding to informality in the economy. Digital transactions are hindered by lack of digital payment solutions (cards, wallets etc) and higher cost for retailer. For details read “Digitizing retail transactions”. Here, the other two legs are discussed.

In modern retailing (hyper markets), the middle leg distributor is eliminated; but modern trade is not even 10 percent of the total retailing. At a national level, the annual payment flow from manufacturer to retailing is estimated at $225-250 billion. According to an expert calculation, complete digital onboarding within this segment can generate additional liquidity of $800mn - $1 billion.

In the first leg – manufacturer to distributor - the former wants money in advance. Companies want to ensure payments from distributors – mostly operating informally. Moreover, they want to ensure timely delivery to manage inventory at minimum. Usually, distributors book the order by paying advance or by maintaining a minimum cash balance with companies. Invoicing is post transaction while order booking is in advance. This is an inefficient model and distributors must be allowed higher margins to justify opportunity cost of paying in advance.

The transactions are mostly paper based – cheques or pay orders based. Distributor deposit instrument to manufacturer’s bank and it goes into clearing. If distributor’s bank is different, clearing takes 2-3 days. Distributors usually bank with local large banks due to extended branch network while MNCs prefer international banks such as Standard Chartered for global linkages. In case both distributor and manufacturers have the same bank, the bank tries to monopolize the payment conduit and charges on other services. In short, in any case, banks are milking the opportunity. Throughput of banks ranges from 0.01 to 0.08 percent in Pakistan, in addition to the daily float income that the banks make and do not pass on to the manufacturer.

In distributor to retailer leg, latter usually books order with a distributor twice a week. A single retailer deals with 3-10 distributors for various products. Retailers pay cash or get credit of 1-7 days (depending upon relation with the distributor) at zero cost. For payment, distributor takes risk on the cash or paying insurance premium (in case of insurance on cash), and cost of rider for collecting cash and depositing it into a bank.

There are costs in handling cash which can be substantially reduced by digital onboarding. Banks earn float on money movement as transactions are not happening in real time (in case of RTGS, banks charge Rs 500-600 per transaction). In case where distributor and manufacturer are dealing with the same bank, the bank charges throughput or other charges. Assuming throughput cost at 0.03 percent, the annual cost for $125 billion chain is $375 million.

Then there are operational costs such as rider salary cost for picking and delivering pay orders, fuel cost and back office cost of making cheques and maintain ledgers. There are bank charges on issuing pay orders or executing RTGS transactions. Internationally, per invoice payment cost is around $10-15. In Pakistan, it is estimated at Rs1,000 per invoice. If a digital payment provider is used, the maximum cost charged in Pakistan for any transaction is Rs250-300. There is a clear saving of Rs700 for each digitally onboarded transaction.

The digitization of transactions will reduce human traffic at bank branches and banks can live with fewer employees per branch. There will be fuel and paper savings at import level, as the solution is ecofriendly as well.

The other benefit is of quick cash availability for distributors and retailers. The per day cash stuck is around $350 million ($125bn divided by 365 days). Multiply this by two and add operational savings, $1 billion can be saved in the chain to make these supply chains efficient. The working capital needs would be effectively reduced both from formal and informal borrowing channels.

In short, there are macro and micro level savings due to supply chain transparency, quicker cash availability and rapid supply chain delivery issuance. Indirect benefits are in terms of better visibility for regulating agencies. This can help FBR in collecting taxes and bringing informal distributors and retailers on board – the benefit of tax evasion can be offset by savings generated from digitization. SECP, FBR and SBP can do better regulation by reducing the information asymmetry. With more liquidity in the system, businesses can expand the pie by using that liquidity (or financing) for expansion. This would have a positive spillover on LSM, agri-value add, retail and wholesale sector.

It makes sense for financial institutions to partner with supply chain focused Fintechs, as those who would adopt, attract higher number of customers in the value chain, and can save on banks’ own operation costs for serving supply chain payments. Furthermore, it allows financial institutions to deepen the deposit share in the supply chain (which is otherwise sitting in the informal bracket) instead of widening their income on the existing corporate customers.