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Raast clearly has the potential to revolutionize banking in Pakistan. It is a backend plumbing that would allow different players (banks and non-banks) to come and transact on it. The key is easy and almost costless for consumers to use. Many countries in the world have done that and leaped forward into the 21st century digital banking.

The question industry players (mainly banks and existing switches) are raising is that this should have been done by the private sector, not the regulator. The other issues a few (mainly fin-techs) have that in the first phase, aggregators and fin-techs should be allowed to capitalize it. Rather, SBP is bringing the government on board to start with. Then clarity is warranted on the understanding of consumers- they say that IBFT (Inter Bank Fund Transfer) and wallets are already providing instant transactions (at their end); what value addition would Raast bring on top?

This article attempts to address these queries, keeping in view Pakistan’s historic perspective and international experiences. In the end, what is required by the government to incentivize digital banking in Pakistan is touched upon – from the spectrum issuance to other fiscal incentives.

The SBP is thinking on introducing a micropayment gateway (Raast) for many years. Gate Foundation was interested in it as well. They first asked 1Link (an existing switch) to chip in. But 1Link is formed by 11 banks and they didn’t allow a micro player to come on its board. The financial inclusion through a payment gateway cannot be achieved without bringing financially excluded into the equation. 1Link (mainly banks) was not receptive, and SBP decided to develop its own system.

The other problem with the existing switches (1Link and NIFT) is that they want to build a fee based model. They were charging higher amounts per transaction. Banks are happy in generating their own fee on online transactions. Then banks make hefty sums in lending to government and big corporate. Just like they are not keen on lending to SMEs and consumers, they don’t want small and broad-based payments to come into the foray. They don’t have any incentive to expand the pie.

In many other economies, the regulator’s lead initiative is being used to make payments interoperable. The key objectives are to make near real time settlements to ensure financial stability and open API (Application Programming Interface) based system for interoperability, security and simplification. These countries include but are not limited to Jordon, Mexico, Australia, UK, India and Far Eastern economies. In some places, the regulator built it herself (such as Unified Payment Interface, UPI by RBI in India). In other (such as Australia and Far East), private sector built the system based on central bank’s direction.

In Pakistan, SBP’s earlier intent was to follow the Australian model; but the private sector was happy to operate in silos. Despite these frictions, the digital payment system in Pakistan has accelerated in the past few years after the telcos’ lead wallets came into existence – Easypaisa and JazzCash. They focused on building the consumer base; but not the market. In early days, there were huge costs in transferring from one wallet to the other. The process is not yet easy.

The wallets were also introduced by banks, but the model didn’t really work. Telcos built the agent model based on existing agents across the country. The banks had to build from scratch, and they lagged behind – such as UBL Omni and HBL Konnect. Banks had the advantage of being banks, while telcos had an edge on having a wide customer base. Both parties were interested in capitalizing their own respective strengths. SBP wanted to have an interoperable system which is beneficial for consumers.

The private sector-led model worked well in China. WeChat in China is one player providing all the services. There is no interoperability issue with one big player having a monopoly. In Pakistan, there are already two big telco players. The model may not work here. Plus, China is a different economy with a unique governance structure. It’s very hard to implement such a system in Pakistan.

Raast is a social project. It’s not for making money. The hard infrastructure (switch) is built for innovators to come and make money. Existing switches are for money making. That is why there is little room for innovation in these. If these switches were enough, why couldn’t financial inclusion take place under them?

Then the true interoperability has to be there to develop a culture of digital payment amongst masses. Common man has a trust gap. The need is to bridge it. Research shows that payment system has to be uniform. It should be same for everyone. Low cost and one-simple system for all can build consumer confidence. In Raast, the directory function will be centralized. Consumer can use aliases – mobile number, email or anything, to connect and transact.

The question is why SBP is initiating Raast with the government. Well, it’s a push by the PM. SBP wants to keep the PM happy. The logic is that by having bulk payments, SBP can test the system. Once the institution has the confidence, it will start person to person (P2P) and request to pay to incorporate. Once that is done, the country may witness a sea change in payments.

SBP’s plan is to start P2P in Q3 2021 and have merchants on board by Q1 2022. The real challenge is the last mile acquisition. That has to be done by the private sector – not by banks, telcos or switches. Had those been innovative (or have the right incentive structure), SBP would not have built Raast. This will be done by fin-tech and aggregators – local or international.

Here, the example of India is useful. UPI (Indian equivalent of Raast) was launched in April 2016. The industry did not respond to it. In September 2018, Google Pay came and revolutionized payment system in India. In FY17, the market share (in value) of CTS cheque clearing (equivalent of NIFT) was 77 percent and IMPS (equivalent of IBFT in Pakistan) was 4 percent and UPI was zero. In FY21, 24 percent share is of UPI, 18 percent of IMPS and 33 percent of CTS cheque clearing.

The other way is to look at the volumes to gauge usage by consumers. In FY17, the share of ATMs was 44 percent and cheque clearing and automated clearing house combined was 43 percent. Of course, UPI was zero. Today, 57 percent of transactions in India are on UPI. ATM is down to 10 percent and cheque and automated clearing fell to 14 percent.

The good thing about Pakistan is the readiness of the private sector. Today, it is much better than what was in India in 2016. Wallets already exist. IBFT has attained some share. But these have reached their respective limits in silos. The growth is that of an S-curve. It needs a push to move forward. Raast is aimed to provide that push.

EMI (Electronic Money institutions) regulations are better in Pakistan. A few companies have that license – such as NayaPay, SadaPay, Finja etc. EMIs are not banks, but can store deposits. These are banks and telcos agnostic. Raast is giving them a playground to score sixes. One or more of these can become a household name. SBP is opening up an innovative office – new ideas can take lead.

But for these to grow, internet connectivity and smartphone penetration is imperative. The other option is the African way where feature phones are used. In India, China and many other countries, QR code is the game. In Pakistan, QR code is not successful so far. It needs data. Pakistan is predominately a prepaid market. Some players can come up with data free options for QR codes (just like Facebook free with limited options).

The overall internet connectivity needs to grow. In Pakistan, telcos have developed in certain areas. Jaaz is big in urban centers. Zong is a north player; while rural segment is specialized by Telenor. Some are focused on area coverage while others are on density. For QR codes, density is the key. For that new spectrums are to be issued. A cash-strapped government wants to earn revenues on it. Telcos want to get these at nominal cost and invest in developing infrastructure.

The government has to find a midway ground. The other issue is of smartphone penetration. The new policy is incentivizing local assembly of cheap phones. Factories are building. That is sorted. The spectrum problem needs to be solved for Raast to reach its potential.

Then the government can provide nudges by lowering the tax on digital transactions. The Punjab government did some innovation in the last budget by lowering GST on cards payment for restaurants and beauty parlors. That has resulted in higher demand of POS (point of sale) machines in urban Punjab. The federal government and other provinces should provide fiscal incentives for promoting digital transactions.

This all can help in solving the puzzle of documentation. The currency in circulation in Pakistan is amongst the highest in the world, and is growing. The platform of Raast is providing the opportunity to correct it. The need is to have all hands on the table. The dice is being rolled.

Copyright Business Recorder, 2021

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Ali Khizar

Ali Khizar is the Head of Research at Business Recorder. His Twitter handle is @AliKhizar

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