Need for electronic payment gateways

It appears that the long wait for electronic payment gateways (EPGs) in Pakistan may be over soon. The State Bank of Pakistan has recently released draft concept paper and regulations for setting up EPGs. An EPG is essentially an intermediary that authorises payments for online businesses and consumers.
The SBP drafts central idea is to establish EPGs that will facilitate local transactions to be routed, processed and authorised, within Pakistan, while allowing the cross-border transactions to be routed only through the international payment schemes (e.g. VISA and MasterCard) for authorisation.
This is important, because rollout and adoption of local EPGs is expected to lead to a boom in electronic commerce in Pakistan. Citibank used to have an EPG in Pakistan, but it was disbanded later. Recently, UBL launched its Internet Merchant Acquiring service, but it is said to have limited uptake so far.
Monis Rahman, the Chairman and CEO of ROZEE.PK, told BR Research that the potential for e-commerce is huge in Pakistan, a country where about 1.2 million people have credit cards and where possibly up to 20 million debit/ATM cards are in circulation. The number of Internet users, who currently range between 25-30 million, is also rising.
"Banks are risk averse. Electronic payments are deemed risky by financial institutions as well as customers, and this perception will take some time to change. It would be great if these SBP regulations are able to persuade banks to open and implement electronic payment gateways, and make them widely available to online merchants," he stated.
Consumer financial skepticism towards online transactions doesn't seem to be an issue in Pakistan. During the Jan-Mar quarter this year, the value of internet banking transactions, as reported by SBP, was Rs126 billion, showing seven percent growth over previous quarter. Similarly, the value of mobile banking (excluding branchless banking) transactions grew by 31 percent in 3QFY13 to reach Rs7.35 billion.
This growing trust in online banking transactions is inspiring confidence in domestic online marketplace, too, but it is not being leveraged enough due to absence of electronic payment options. Shayaan Tahir, CEO of a prominent online shopping portal, homeshopping.pk, told BR Research that online shopping trend is growing in Pakistan, with online stores getting added on a daily basis.
"There are nearly 2,500 such online stores in Pakistan, out of which only 100 to 200 are prominent. In the absence of local EPGs, the industry has applied "cash on delivery" (COD) business model, wherein courier companies collect payments for online merchant at the time of product delivery. We have been waiting for local EPGs for a long time, and hope that the SBP will break through this time," he said.
Monis, who is also overseeing the online shopping portal, CHALO.PK, feels that online shopping will boom once branchless banking operators are also plugged into the future EPGs. He, however, thinks that the COD model is likely going to be more pervasive in Pakistan's online marketplace for the foreseeable future, due to cultural reasons.
"Today, people prefer to pay in cash, for a product that is real and they can touch. They are happy to shop online, but when it comes to payment, it is still largely based on a rider dropping off, handing the product and collecting the payment. About 90 percent of ecommerce in India (which has many EPGs) originates via COD model. Similarly, COD generates about 85 percent of online shopping in Middle East," he said.
Shayaan agrees that the rising interest in online shopping in Pakistan owes itself to the COD model. But he is confident that costs will go down and volumes will go up if customers are able to pay directly to online merchants. To facilitate its credit card customers, Homeshopping.pk has arrangement with a UK-based merchant, but he regards it expensive for customers due to transaction settlement in British Pounds.
There is clearly a need to establish local EPGs in Pakistan, to facilitate online businesses dominated by young entrepreneurs. After feedback, the SBPs EPG regulations will hopefully come into effect soon. While there is time, it is hoped that the stakeholders, especially the commercial banks and leading online merchants, will sit down together and find a common ground on creating an electronic payment ecosystem in Pakistan that is secure, efficient and reliable.