ALI SARFRAZ, CEO, Karandaaz Pakistan
It was nearly a decade ago that Pakistan was labelled as the "Laboratory for Innovation" by the Consultative Group to Assist the Poor (CGAP) based on its fast growing market of branchless banking and a very willing and constructive regulator. Yet, up until 2014, Pakistan's financial inclusion metric - percentage of adults with transaction accounts was the second lowest in the South Asia at 13%, marginally ahead of Afghanistan at 10%. As of 2017, it was still the second lowest at 21%. Its closest peer ahead was Nepal at 45%. Splitting the numbers by sex reveals an equally discouraging story that is characterised by low inclusion for women (7%) and a big gender gap - men are roughly five times more likely than women to have an account.
When data collection on financial inclusion gained traction by mid 2010s, countries around the world began formulating their country level strategies. These strategies were contained in a public document presenting a framework of priority areas, current state, goals and action points assigned to a varied stakeholders consisting of financial institutions, donors, government agencies and regulators. Pakistan formulated its own National Financial Inclusion Strategy (NFIS) in 2015, (as of 2017) becoming one of forty seven countries to have a measurable set of goals. The first and foremost pillar of this strategy is Payments and Digital Transaction Services. It is also the focus area of the current government's 100-day agenda. This agenda aims for 65 million active digital accounts active digital accounts out of which 20 million are held by women by the year 2023.
There is a healthy debate on the pros and cons of a cashless economy with the detractors pointing towards a compromise of customer privacy due to a digital footprint left by cashless transactions. Another reservation is the exclusion of customers who cannot transact digitally e.g. due to a lack of credit/debit card or a phone. Moreover, creating such a system can potentially require a significant financial outlay and a behavioural shift on the part of both businesses and individuals. It is this barrier that Raast Paisa a state of the art real time payments system aims to dismantle. Raast Paisa is the result of a four-year collaboration between State Bank of Pakistan (SBP) and Bill and Melinda Gates Foundation (foundation). To support this payment system, the foundation has contributed financial assistance and technical support through Karandaaz, an entity capitalised by Foreign & Commonwealth Development Office (FCDO) and the foundation. As the foundation's primary delivery partner s in Pakistan, Karandaaz engaged consulting firms, payment experts on system design and hardware and software technology vendors in collaboration with SBP to deliver the payment system.
Some of the key features of the system are interoperability, open API based connectivity, real time settlements, directory function and high throughput. All these aspects will ensure that the cost of transactions remain low thus allowing low value transactions. The leap that Pakistan is poised to take through Raast Paisa will be made possible through a solid platform whose foundations consist of a high cell phone penetration (80%), high broad band usage (41%) and a regulator driven system. The participants of the platform - government entities, merchants, SMEs and consumers will be able to make digital payments in a simple, fast, low-cost and secure manner. To bridge the digital divide, Raast will focus on high volume, low value use cases.
As such, the ground that this system will have to cover also points towards its rich value proposition. Compared to its peers in 2019, Pakistan only had 1.3 electronic transactions per capita compared to 16.0 in Indonesia and 21.3 in India. Further, share of e-banking channels is a meagre 8%, only 16% of government payments and receipts are digitized and a massive 2.6 million remittance transactions worth Rs. 14.8 billion are cash based. There are several initiatives on Raast's radar. It will initially support bulk (one to many e.g. G2P) as well as P2P payments that will later be expanded to include merchant payments (many-to-one). In the first use case of bulk payments, Raast will route all dividend payments made by the Central Depositary Company (CDC), the sole entity responsible for handling the electronic settlement of transactions carried at the Pakistan Stock Exchange. In the upcoming stages of its deployment, the plans are to route social payments of Ehsaas, public sector salaries and profits on national saving account through the system. The adoption of these use cases will require substantial effort and collaboration besides financial resources that have already been provided to Karandaaz by the foundation.
There is ample global evidence that going cashless improves the size of the formal economy. As more data of digital transactions becomes available it allows innovative fintechs and digital financial services providers to provide credit and sophisticated financial services using artificial intelligence led data analytics. There is a palpable excitement among all the stakeholders to drive the uptake and adoption of this system given the incentives at stake- it is estimated that the achievement of NFIS goals will add $5.5 billion to the GDP and create 3 million new jobs out of 1 million will be through digitization alone. As Pakistan becomes one of the few countries in world to create a real time payments system, it has the potential to become a "Laboratory of Innovation" once again.
Copyright Business Recorder, 2021