State Bank of Pakistan in its latest annual report published a special section on the uptake of digital financial services due to the pandemic. However, despite the marginal uptick in relative terms, much more needs to be done. The previous decade started with noise of financial inclusion, and digital transactions, but that noise never got converted into signal as misaligned incentives, policy inaction, and regulatory overreach inadvertently promoted cash as a medium of transaction, while digital mediums struggled to gain traction.
Currency in circulation at its highest-ever level (at 15 percent of GDP) further testifies to that. Lately, the central bank in its annual report congratulated itself on the adoption of cashless transactions when the secular trend depicted otherwise. Even though spending through cashless mediums increased in absolute terms over the years, but so did the overall monetary base. As a proportion of GDP, the value of spending has remained range-bound during the last three years, as overall circulation of currency notes in the economy increased dramatically.
Transactions executed over Point of Sale (POS) terminals, and e-commerce remained rangebound between 0.9 to one percent of GDP during the last three years, despite an increase in payment cards by more than 48 percent during the same period. Even though more people had payment cards in their wallets, they were seemingly averse to using them.
During the last four years, average number of transactions through POS has been in the range of 2.5 to 2.7 payments per card per annum. This implies that on average, a payment card only gets used 2-3 times in a year – there may also be a significant skew here, where only the top five percent of cards make up most of the transactions.
As prevalence of cash increased in the economy, and as it became increasingly difficult, and cumbersome to do banking in the country, even those entities which used to accept payment cards as a mode of transaction transitioned away. Instead of progressing towards cashless, we actually regressed – such regression can be seen from number of POS machines which are at a five-year low at 49,067 as of FY-20, while POS transactions actually dropped by 2.8 percent on a year-on-year basis. A cursory review of various vendors in the retail space further illustrates that the turnaround time for acquiring a POS machine is more than one month, following an extensive documentation process which further discourages vendors from onboarding POS machines.
Despite growth in absolute terms (as a function of expansion in monetary base), spending through cashless modes remains stagnant, or may have even regressed according to certain metrics. To reduce the prevalence of cash in the economy, it is essential that policies, and incentives are aligned to make cashless transactions more convenient. The POS machine value chain needs to be streamlined, and retailers should be encouraged to accept cashless payments through the right set of incentives. Similarly, the existing 28.5 million payment cards should also be incentivized for more usage. The future is digital, cash will only be a drag – it is time that we see a little less conversation, and a little more action.