The State Bank of Pakistan has recently released a National Payment System (NPS) Strategy. The framework is a much-needed attempt to bring together various payment modes that are currently fragmented under channels like conventional, mobile, Internet and branchless banking. However, to implement the several dozen NPS recommendations, an actionable plan with strict timelines is in order.
A central bank has to master a tough balancing act in the digital age. On one end, the safety, integrity and efficiency of the financial system have to be guarded by the banking regulator without fail. But on the other end, it is also true that disruptive innovation requires loosening the regulatory regime a bit and encouraging competition between conventional incumbents and Fintech upstarts.
With those competing forces in mind, one is tempted to give more time to the SBP’s cautious approach, which seemingly targets incremental innovation in the payments domain, to show tangible results. Case in point is the recent regulatory guidelines for Electronic Money Institutions (EMIs). The capital requirements and transaction limits for EMIs look strict, but at least two non-banking EMIs have been granted in-principle approvals.
Having said that, there are some areas where the regulator can enforce some sort of behavior change on the supply-side without causing any major disruption. For instance, achieving “interoperability” for digital payments has remained a pipedream, in part because the market (composed of banks and telco’s) was encouraged to enter into voluntary, exclusive agreements to share their networks. This has resulted in service providers, such as those in the branchless banking segment, to operate within their own silos.
“In the absence of interoperability amongst m-Wallets, agents are required to maintain separate m-Wallet accounts with each of the providers and, in some cases, must have separate mobile phones for different service providers. Agent-supported / over-the-counter transactions (OTC) constitute the dominant model for mobile money in Pakistan,” the NPS document notes.
As long as the BB service providers and others continued to live in their walled gardens, the digital payment ecosystem will not gain a critical mass. (Read: “Wanted: a common payment interface,” published June 28, 2019). The NPS has recommended forming an automated clearing house and a micro-payment gateway for retail transactions.
It is also problematic that telco’s don’t openly share their USSD networks with their banking rivals. This has resulted in issues of liquidity and inefficiency for banks and hassle for customers. To solve this issue, the NPS strategy has recommended establishing a common gateway and common national USSD code. That may provide a start, but will the operators sign up if it is voluntary?
Another low-hanging fruit to promote digital retail payments is in the form of the domestic payment scheme, PayPak, which is a low-cost and locally-settled alternative to compared to Visa and MasterCard schemes. The NPS document bemoans the low number of POS transactions and suggests that PayPak, despite its low merchant discount rate, couldn’t take off because of the low number of POS installations.
Perhaps the situation would have been different had the central bank pushed the banks a little more to issue PayPak debit cards. Banks, on their own, seem to be more interested in issuing cards that are linked with Visa and MasterCard schemes, mainly because of their marketing arrangements. Now, the NPS strategy contains a recommendation to prohibit “exclusivity agreements” with major card companies.
In the end, the broader issue is that people may be using electronic channels for transfer or withdrawal of funds but they are not using these channels as much to pay for goods or services. But this is most likely a consequence of the perennial shortcomings in the supply-side of the payment infrastructure. Digital payment alternatives will gain traction in everyday life when they are deemed superior to holding and counting cash, especially by retailers. (Read: “Can DFS get merchants on board?” published July 11, 2019).
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