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SBP has recently made some changes in the fee and cost structure of payments associated with cards (debit and credit) transactions on Point of Sales (POS) machines. The incentives which were earlier doled out to POS acquirers (machine providers) and card issuers are now being largely reversed.

Industry players are of the view that it has devastating consequences while SBP thinks that it would help the card accepting merchant base to grow and create value for the consumers. Moreover, SBP believes this would help in growing the pie to online and second tier cities.It appears SBP is being optimistic, as the view across the board in the industry – banks, fintechs, and international payment processors, is that the changes are likely to cause regression in the marketplace.

Prior to 2020, POS machines business had stagnated even as card issuance grew. At that time, SBP was actively pro-digitization and in consultation with market players, it had realigned the incentives to promote POS acquiring business. SBP noticed that the interchange reimbursement fee (IRF) was too high while merchant discount rate (MDR) was lower than cost, as a result of which acquirers were making gross loss. Thus, SBP made some changes where the MDR for POS acquiring was allowed in the range of 1.5-2.5 percent, while IRF for debit and pre-paid cards was capped for domestic POS machines at 0.5 percent. The IRF on credit card was not subject to any regulatory pricing.

That regulation changed the landscape. Even though acquirers were still making gross loss on credit card transactions, the margin on debit cards were enough to bring their bottomline in green. The acquiring businesses spurred, and POS machines almost doubled in the process and crossed the 100,000 mark. Fintech ventured in acquiring business (such as Keenu and Opay) as well as in issuing business (such as NayaPay and SadaPay). While conventional banks also started to enhance the card issuance business. It was a win-win for all.

However, lately two elements had raised concerns for the government and SBP. One is of banks charging higher MDR on petroleum sales - where lower limit was not applicable - and the other was the international payment schemes fee repatriation which likes any other forex outflow is a pain for regulator in days of severe balance of payment crisis. Since the card business was growing, the fees quantum was growing as well.

To counter these fears, SBP has recently removed the lower cap of MDR and has capped the IRF to 0.2 percent for debit card and 0.7 percent for credit card. Here the card issuing business are the first one to take the hit, as they used to charge around 1.5 percent on credit cards (even higher on platinum and other premium cards), and 0.5 percent on debit cards.

As a result, card issuance will become less lucrative, and the discounts being offered at merchants would be lower. Moreover, the fintech in issuing businesses will become uncompetitive or they would start charging higher annual and other hidden fees to compensate for lower IRF. Consumers would be at a disadvantage if they hold multiple cards, as banks would offer discounts and waive annual fees for only those consumers who have higher transactions with that bank.

The objective of SBP to lower IRF and remove the floor on MDR is to have more merchants on board. Fintechs are keen to reach out to new merchants. They are supposed to make money on Tier-1 to fund the expansion in lower tiers. However, now banks in acquiring business can lower the MDR enough in tier-1 segment to kill fintech business model. Banks can cross sell deposits and other products to get the acquiring business while fintech cannot. For example, a big bank can ask a big grocery retailer to lower the MDR provided the retailer maintains its checking account with that bank. The bank can make money on higher margins on current account deposits to cover the loss in acquiring business.

“SBP is not thinking it through” commented one banker who is big in both acquiring and issuing business. The banker believes that competition within banks will decline while one fintech acquirer thinks that his company business model will become unviable.

The real question is would this be able to generate demand from merchants in Tier 2 and Tier 3. According to an industry source, merchants have four issues in the following order. First, acquirers don’t come and sell. Second, merchants don’t want to be in the digital payment system to avoid documentation. Third, credit system is against religious beliefs and last issue is higher MDR. With lower margins, banks may not find the incentive to sell to new players while they would compete more in existing businesses. The push needed for acquirers to move to smaller cities and lower tier markets will remain missing.

The other objective of SBP is to develop the online digital market and develop digital payment market in smaller cities. Here, SBP wants banks and fintech to use Pakistan’s own payment scheme Pakpay. One reason for this is to lower the cost of international payment schemes (such as Visa and Master Card). These companies charge in cents and dollars and repatriate the fee outside Pakistan. With currency depreciation, fees in PKR are becoming high. SBP wants to lower the forex incidence. That is perhaps the hidden objective, as sources close to SBP say that annual outlay of fees is around $100 million while industry sources claim that the number is much lower.

It is unclear what SBP’s exact objective is. The feeling is that it might have been pushed by the government to do so, as folks in Islamabad were not happy with banks charging higher MDR on petrol pumps along with a desire to lower the transaction volumes through international payment system to save forex.

The short-term thinking is in direct conflict with long term goals. However, SBP is confident that no market player would be driven out of business as a consequence, and these steps will push acquirers to move in lower tier markets. Let’s see how the move unfolds.


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O Bhai Mar 28, 2023 10:42am
Can someone explain all this in English??
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Abdul Inam Mar 28, 2023 12:38pm
Can I purchase gold
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Hilarious Mar 28, 2023 12:53pm
@O Bhai, In plain terms, the regulatory bodies of the country are doing what they do best, roll out reasonable plans that maybe conducive to growth, only to backtrack from them within a short frame of time. And there in lies one of the biggest reasons why those begging to others for funds and investments never invest within their own country, because they know no policy can be implemented (poorly at that) for more than a few months.
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WarrenDesiBuffet Mar 29, 2023 02:58am
So this article (obviously sponsored by a fintech) is justifying protectionist high fees rather than open market competition that benefits consumers and more efficient banks? Talk about entitlement.
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Truthisbitter813 Mar 31, 2023 08:25am
Fintech is what spurs innovation in banking, a much better approach if SBP truly wanted to help merchants and consumers would be to lower the MDR on debit cards but increase it on Credit cards, but more than that it would be much more conducive to give growth targets based on tiers to fintech companies. Let their marketing teams do the heavy lifting, needless regulatory changes only confuse and confound the startups and their would-be target base.
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