Farzal Dojki looks at Electronic Payments in Pakistan

This article is first in a four part series covering electronic payments in Pakistan. The analysis will be useful for Bankers, CIOs, Telcos, ATM, POS and Call center vendors; even the State Bank.

In this part we set the stage – defining consumer electronic payments and the different channels it is conducted through. All data comes from comprehensive payment reports, published quarterly by the SBP Payments Department. The latest numbers are for Q4 FY07-08.

Why electronic?

From the point of view of society – consumers, businesses & government – cash is undesired as a form of payment. Why?

Because, once damaged or lost, it is not recoverable and the loss is 100%. It is easy to run out of it and be left stranded. It is not easy to make cash payment unless you literally at a hands distance from recipient – hence no remote payments. When it is in your home or wallet, it has a negative rate of return (negative 30% in Pakistan).

From society’s point of view – it costs a few cents to print every bundle of note. Cash is untraceable so it gives rise to underground and black economy. Cash is used in almost all illegal activities, from bribery to ransom. And in some rare cases, since currency is cotton based, it can carry diseases.

Consumer Electronic Payments

World-wide

The world moved to using electronic payments for consumers and businesses a long time. One example really stands out: Some years ago, 1 bank in 1 US state had more credit cards and more merchants than all of Pakistan has today. The bank was Bank of America, the state was California, and the year was 1959!

More recently, E-Commerce is now a multi-hundred Billion dollar industry. Just one e-tailer, Amazon.com, is projecting USD 19 Billion in sales during this year, most of which is consumer purchases.

Pakistan

Electronic payments constitute just over 9% of Pakistan’s overall payments of PKR 44 Trillion last quarter. A bulk of these payments is between the financial institutions (RTOB) which is interbank fund transfer. Non-RTOB payments were PKR 164 Billion or just 0.37% of total payments.

By author’s definition, cash withdrawn from ATM is not really an electronic transaction. It only substitutes going to a bank teller with cash cheque – cash then used for non-electronic payments. Taking away cash withdrawals from electronic payments reduces it to PKR 160 Billion or USD 2 Billion annually, a mere 0.1% of total payments.

So last year, Pakistanis spent more cash scratching prepaid Telco cards than they did on electronic payments! This is extremely poor digitization of the economy, a serious issue that the Banking industry and SBP should deeply introspect.

Consumer Electronic Payment Channels

ATMs

In Pakistan, 99% ATM transactions are cash withdrawals. However, new uses are being encouraged, such as EFT, bill payments and deposits. But the uptake is extremely disappointing – for example, only 6,300 bills were paid through more than 3000 ATMS, in the whole quarter! That is 2 bills per ATM per 91 days.

Nearly 850 ATMs have been added in the last 4 quarters, although the pace has slowed down and last quarter saw addition of only 100 boxes. That brought the total to 3,121 ATMs all over Pakistan. This compares to more than 18,500 ATMs just one US Bank – Bank of America has.

In Pakistan, we have one ATM for every 50,000 people. In the West, they have 1 per 1,000 people. This low density combined with lack of electronic payments results in high amount of cash being kept outside of the banking system.

Plastic @ POS

Both debit and credit card growth in the country have stalled. Though a million cards have been added in last 12 months, last six months have seen zero growth. Transactions per card have also stalled.

On the POS side, there are 55,853 POS machines in the country deployed at nearly 17,000 merchants. Over 9,500 POS machines have been added in the last 4 quarters. Here too the pace has slowed down with 1,382 additions last quarter. Most of these are installed as a 3^rd or 4^th POS at the same retailer, so merchant base growth is negligible.

Multiple POS machines from different banks at a single merchant are causing price pressure on merchant fee, reducing bank revenue. With volume of transactions not growing and the devices costing 30% more due to currency effect, the ROI on these devices will go down in coming days. The focus should be on increasing merchant base and usage base, not stacking up these devices at the same merchant. Just 1 store, Imtiaz in Karachi, has over 20 of these machines, 3 at each checkout counter.

Internet Banking

Internet Banking is currently offered by 70 percent of banks in Pakistan. The average transaction size of PKR 33,000 suggests that most of the 4,000 daily transactions are business payments and not consumer.

We expect huge growth in this segment for both consumers and businesses, and next part of the series will discuss this in detail.

Call Center

Like ATMs, call centers are very expensive, both from CAPEX and OPEX perspective. Like ATMs, these are being marketed aggressively even with negative ROI. Customer uptake has stalled, and last 12 months actually saw reduction in value of call centre based financial transactions even through all banks have now started offering them.

Next month we discuss this ADC in detail along with Internet Banking and ATMs.

Mobile

For informational banking, mobiles are growing at a faster pace than ATM, Internet and Call centers. However, for financial transactions its use is currently in its infancy and a few dozen transactions taking place daily of very small value (PKR 267 per transaction average).

There are a lot of players in the market working on various mobile banking, mobile commerce and branchless banking implementations – some of them are: Orion from UBL, amaana for Branchless Banking, Fundamo for M-Commerce, Genie by Mobilink, MobEx by JS, Epay, PayBox and Mobilink Infinity

This suggests an interesting 2009 for mobile payments, given appropriate support by SBP and PTA.

Next Month

In the next part, we focus on ATM, Call centers and Internet Banking – the so called ADC of Banking. In the third part, we look at the plastic industry – the cards and associated POS. Finally, in the fourth part, we focus on branchless banking through mobile phones, allowing for banking through retail outlets.

About the Author

Farzal is passionate about delivery channels – from mobile multimedia and social networking to 24×7 direct insurance and Branchless Banking. He has worked at 4 start-ups in addition to Merrill Lynch and BearingPoint. He is a Director at amaana, teaches E-Commerce at IBA, consults professionally and lives at farzal@ciopakistan.com