Aftab Anwar Baloch

Cash has traditionally been the dominant form of payment in Pakistan. However, with the rapid advancement of digital technologies and increasing financial inclusion, the payment landscape is undergoing a transformation. This article provides an analysis of the present state of cash usage in Pakistan, explores the factors influencing cash demand, and assesses potential future scenarios.

As technology advances, so do the opportunities for new innovations that can transform our daily lives. The journey of digital payments began several decades ago with the advent of credit/debit cards. These innovations significantly reduced reliance on cash and offered consumers greater flexibility in managing their finances.

Digital payments offer unparalleled convenience. With just a few taps on a smartphone or clicks on a computer, transactions can be completed instantly, irrespective of geographical boundaries.Compared to carrying cash, digital payments provide a higher level of security. Encryption and tokenization protect sensitive financial information, reducing the risk of fraud and theft.

While digital payment methods are gaining traction in Pakistan, cash continues to hold a significant position in the country’s economy.Until now, most of the people in Pakistan rely on cash payments referring to it as more convenient and safer than any other medium available.With respect to the choice of payments, customers usually adopt a specific payment option based on a number of determinants they consider to be in their favour. Hence determinants such as; customer’s education level, income/wealth, different risk factors like security and safety can impact digital Payments system in Pakistan. This has also much to do with the fact that digital payments and online transactions are viewed with great suspicion by the general populace owing to rumour mills, some troublesome experiences or lack of understanding of the system. Further, Cash is widely used as a traditional gift-giving method in social and cultural contexts. Cash serves as a domestic store of value for many individuals in Pakistan. The presence of high-denomination banknotes, such as Rs. 1,000 and Rs. 5,000, has implications for the shadow economy.

Moreover, cash provides anonymity and prevents traceability. While there are those that would prefer their transactions remain outside the purview of regulators and governments, for a vast majority of Pakistanis, transparency could allow for more effective subsidy pay-outs.

Today digital payments only account for 0.2% of Pakistan’s 100 billion transactions annually, whereas the share of digital transactions in peer countries i.e. India, China, Thailand & South Korea ranges from 1.5% to 7%. This can be primarily attributed to the challenges within the payment ecosystem. Here are some of the potential causes for the limited success of digital payment systems in Pakistan:

  1. Limited Internet Penetration: A significant portion of the Pakistani population does not have access to the internet or has limited access, thereby curtailing their ability to use online payment systems. As such, the issue emanates from a lack of basic infrastructure including availability of internet services across the country that would foster online banking.
  2. Lack of Digital Literacy: Many people in Pakistan especially in the rural areas are not digitally literate, which means they are not familiar with how to use e-payment systems and are more comfortable with traditional cash transactions. However, there has also been an uptake in use of platforms such as Easypaisa, JazzCash etc. which could serve to be the stepping stones for future digital payment innovations and systems. As an added measure, their role has been enhanced by inclusion in various government related bills/challan payments thereby further promoting their usage.
  3. Security Concerns: Concerns about online security and the risk of cybercrime makes people hesitant to use e-payment systems. The fear of financial fraud and data breaches deters many potential users. Due to a spur of rumours, online transactions are viewed with suspicion and as such, customers are more inclined towards cash based payments which they view as more secure and non-fungible.
  1. Cost of Digital Payments to the End User: End users are charged fees for transferring money digitally and ATM withdrawals, making digital payments unfeasible for a major portion of the population who would rather conduct their transactions in cash in order to cut corners by avoiding the transaction fees and taxes.
  2. Limited Acceptance: Not all merchants and businesses in Pakistan accept electronic payments, which made it inconvenient for users who prefer digital transactions.
  3. Informal Economy: A significant portion of Pakistan’s economy operates in the informal sector, where cash transactions are more prevalent. This informal economy makes it challenging for e-payment systems to gain traction.
  1. Emergency Preparedness: Cash provides a sense of security during emergencies or situations where electronic payment systems may be unavailable or unreliable. It enables individuals to meet immediate needs such as food, shelter, and transportation, ensuring their well-being during unforeseen circumstances.
  2. Lack of Incentives: There may not have been sufficient incentives or rewards for users to switch from cash to electronic payments.

ATM cards, smart cards and online payments are very suitable to meet the challenges of ordinary payments and it will lead for business growth in Pakistan. In 2009, an opportunity seized by companies like Telenor and Tameer Bank, fuelled by the State Bank of Pakistan and the Branchless Banking license, leading to the creation of Easypaisa – to get people to start doing banking on their mobile phones, which led to another 8 such services including Jazzcash jumping in to the market.It is a general observation that Easypaisa and Jazzcash are very common in rural areas therefore indicating some level of acceptance and usage.

For a cash centric economy like Pakistan, population prioritises cash. However, to enhance the digital payments landscape of Pakistan, followingefforts have been made by the SBP for the benefit of the people of Pakistan.

  1. RAAST: In January 2021, State Bank of Pakistan introduced Raast; a system fully owned and operated by State Bank of Pakistan.Raast is Pakistan’s first micropayment gateway that will enable end-to-end instant digital payments among individuals, businesses and government entities instantaneously.

Raast provides the Pakistani masses an opportunity to integrate digital financial services into their daily lives. It covers everyday use cases such as merchant payments and domestic remittances, which are high volume but low value transactions. At present, digital financial services tools are few and are far between in Pakistan. The instant payment system will allow start-ups to get on an equal footing with the banks, in terms of infrastructure, and compete for the same customer base.

  1. Micro Payments Gateway (MPG): The project is an on-going collaboration between Karandaaz and the State Bank of Pakistan (SBP). The project aims to improve payment infrastructure, with the objectives of further developing digital financial services, reducing reliance on cash, and driving financial inclusion in Pakistan. MPG will become a core component of Pakistan’s payment infrastructure that will enable individuals, businesses, and government entities to make any payment digitally in a simple, fast, low-cost, and secure manner. This micropayment gateway is the initial phase of an initiative which has the potential to evolve into something like PayTM (India).
  2. Modular Banknote Processing Systems: SBP has installed high end Banknote Processing and Authentication machines which are capable of banknotes authentication, sorting and destruction.

Moreover, the SBP is making efforts to improve the quality of banknotes in circulation through various initiatives such as:

  1. Clean note policy
  2. Currency Management strategy

As such, it is being made sure that proper mechanised sorting of banknotes is carried out by banks & SBP BSC offices and only good quality cash is allowed to enter the market.

Given the current infrastructure especially electricity, financial literacy of masses and existence of parallel black economy, dependence on cash seems highly likely for the foreseeable future. However, to effectively manage the future of cashand adoption of e-payment systems in Pakistan following strategies can help:

  • Government initiatives, regulatory changes, improvements in digital infrastructure, and increased awareness and education
  • Policymakers should focus on promoting financial literacy, and addressing the costs and risks associated with cash usage
  • Creating conducive environment for FinTechs to innovate and operate in Pakistan
  • Promoting financial literacy among the masses and educating them about the online channels as well as alleviating their fear and apprehensions concerning online payment systems.
  • All types of electronic payment systems rely on the large availability of an effective ICT infrastructure. Stake holders in the communication sector and government should foster the expenditures for using new technology
  • Timely identification of fraud instances, compensation of victims and strict action against perpetrators to foster confidence of the public.

By striking the right balance between digital payment alternatives and cash accessibility, Pakistan can achieve an efficient, inclusive, and secure payment ecosystem that caters to the diverse needs and preferences of its population.

The writer is Customs, Tariff and Trade Expert

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