End of OTC?

As Pakistan struggles to meet FATF requirements, there is speculation that the branchless banking sector may be affected. Specifically, the over-the-counter (OTC) transactions – which are performed by BB agents for basic transaction such as personal fund transfer, bill payment and mobile top ups – may be affected, out of concern for illicit funds transfers being channeled through the system.

If the channel is suspended or if KYC requirements are made too stringent, it will have consequences. On the negative side, any move to close OTC will directly affect livelihoods of hundreds of thousands of retail agents that have come to rely on the fee-based income generated by OTC transactions. Recent data show customers used OTC channel for 57 million transactions valuing Rs210 billion in Oct-Dec 2018.

Such a move may also hurt user uptake. For un-banked individuals, especially those living in far-flung areas, OTC is about the only effective entry-point into modern financial system. On a user’s journey towards high-end financial services, OTC is the first ladder that offers convenience and speed in basic transactions. OTC also helps in gradually reducing informality and moving liquidity into the formal system.

On the flip side, if OTC is out of the picture, it may attract users towards opening mobile wallets. Already, the trend in BB transactions is of m-wallets dominating the OTC channel. That trend is viewed favourably by the regulator and the service providers, as mobile-based digital financial services (DFS) may have a better scope of retaining users and impacting their lives through formal finance.

But that potential upside – of having more users opting for m-wallets – is marred by the fact that the m-wallets already in the system suffer from a high degree of inactivity. SBP data puts BB accounts at 47 million as of December 2018. Yet, only 42 percent of those accounts were classified as active. (SBP defines “active” accounts as those that were opened or operated at least once in the previous 180 days).

While that lax definition is used for regulatory reporting, there is reason to believe that active users’ concentration is even less when a more meaningful activity threshold of 30 days is used. And even then, majority of registered users are on USSD channel, which offers a poor user experience. The trend toward mobile applications is in its infancy and limited by low penetration of smartphones and broadband.

For the existing users, a low degree of backend integration among service providers and a small number of merchants that have chosen to come on board seriously downgrades the viability of being part of the DFS ecosystem. Now, if the OTC channel were to also become out of sight, it will seriously impact the financial mainstreaming of the un-banked. Instead of compounding their challenge, the policymakers must reasonably beef up the KYC side of things and let OTC play its role at the bottom.