Since the last decade or so, payment systems have been receiving substantial attention from governments and central banks around the world. From the point of view of governments, an efficient payment system facilitates industrial and economic development by effective implementation of economic policy and increasing the efficiency of revenue collection and expenditures of the government.
From the point of view of central banks, well functioning payment system reduces systemic and operational risks, lowers transaction costs, aids in the efficient use of financial resources, helps the financial markets to become more liquid and promotes stability in the financial system.
Overall, efficient payment system facilitates in swift and smooth conduct of monetary policy.
Globally, the latest developments in technology have enabled 24 hours a day 7 days a week Electronic Banking resulting in setting of new and more advanced standards of efficiency in payment systems.
Introduction of more efficient and cost effective payment instruments like debit, smart cards and E-money carry new challenges for the regulatory authorities.
The ultimate beneficiary is the public, not only in terms of economic development and consequent provision of employment and reduction in poverty, but also because a well-developed and efficient payment system results in more convenient and efficient payment and banking services to all.
Payment System in Pakistan is also going through a reform process. Although paper based payment instruments like cash and cheques still dominate the local banking system, the capacity of banks to provide electronic banking facilities, which are quicker, more convenient and highly cost effective, have been substantially enhanced over the last few years.
As can be seen in Figure 1, ATMs have more than doubled to 552 by end of 2003 from only 206 in December, 2000.
Banks, which are being connected to one of the two ATM switches, have increased to 30 recently.
And for the first time in the banking history in this country, the on-line bank branch network has crossed the milestone of One thousand five hundred branches in 2003 (1,576 by 31st December, 2003), which is almost five times its level in December, 2000 (322 branches).
On the cross border front, almost all banks in Pakistan have now obtained connectivity to SWIFT, which has made them part of the most credible international network, enabling quick and reliable transfer of funds possible to and from around the globe.
This huge investment in technology demonstrates a major shift in the strategic thrust of the banking sector of Pakistan to provide competitive services and to take full advantage of the technological opportunities.
The investment in electronic infrastructure is fully justified by increasing confidence of the clients on electronic transactions.
As a matter of fact, use of ATMs, credit and debit card is increasing at a more rapid pace as compared to the expansion of the infrastructure supporting them.
This growth is depicted in the statistics collected by the State Bank through its recently launched monitoring mechanism on E-banking.
The trend in credit card usage is graphically shown in Figure 2 where the average monthly transactions using credit cards have increased by 80% in the 3rd quarter of 2003 as compared to 2000.
In terms of volume the increase is almost 130% over the same period. The trend is steeper for ATM transactions as shown in Figure 3.
The average monthly transactions on ATMs increased by over 400 % in 2003 as compared to 2000.
In terms of volume the increase is even higher ie over 550 %. Further, the banks are trying to provide maximum services through electronic means.
In addition to issuing debit cards, some banks now enable their customers to do phone banking, electronic account management and even electronic funds transfer.
Looking at the broader picture, the government and the State Bank are both promoting adoption of technology and improvement in payment system from primarily an economic and developmental perspective.
In this context, the government has facilitated adoption of technology in Pakistan by strengthening the communication infrastructure and by making it available at lower prices.
Moreover, the government has also removed a major hurdle in the development of E-banking in Pakistan by the promulgation of Electronic Transaction Ordinance 2002.
This has created the enabling legal framework for the recognition of electronic transaction as acceptable evidence in the judicial system of Pakistan.
As a central bank, State Bank has been facilitating the improvement in payment system by encouraging the banks to adopt technology and facilitate the development of banking related IT infrastructure to support it.
Automating the clearing of checks in the nineties was one of the initial steps taken by the State Bank to improve the payment system when NIFT, a technology facilitation organisation, was mandated to provide automated cheque clearing services to the banks.
For many years NIFT provided automated clearing services only in Karachi. However, in line with the policy of SBP to expand automated cheque clearing to all the major cities, NIFT has recently expanded its automated clearing services to Lahore, Islamabad, Rawalpindi and Faisalabad enabling automated clearing of over 80% of cheques in the country.
Simultaneously, mandating of banks to join one of the two ATM switches by the State Bank in 2002 has accelerated the adoption to technology by the banks and enhanced provision of electronic banking in the country.
Right from the outset, State Bank has taken a participative approach to reform the existing payment systems.
Accordingly, joint consultative forums with banks, in ECH Task Force and Payment Systems Development Committee, were sponsored by SBP for developing common understanding and agreement on the need for adoption of technology for improving services and integrating effectively with the global financial world.
Internally, in order to institutionalise its focus on payment system stability & efficiency and develop the capacity to monitor and maintain payment system oversight, State Bank has established Payment Systems Department in 2002.
On the policy level, the Governor SBP has last year constituted Payment System Policy Group headed by a Deputy Governor.
These measures are timed to consolidate and further the gains made in electronic banking and improvement in the payment systems, and concomitantly to mitigate the additional risks, which are inherent in E-banking and IT based payment systems.
From the future perspective, the thrust of the reforms is expected in three broad areas. First, the concerned Ministries and State Bank are widely consulting to comprehensively review and upgrade existing legal infrastructure to provide sound legal foundation to all payment systems including the evolving electronic payment systems.
Second, the State Bank for laying the foundations for providing effective oversight to payment systems has recently launched a monitoring mechanism for paper based as well as electronic instruments.
Finally, developments in electronic banking are expected to get a major boost as State Bank has taken a major initiative to strengthen the robustness of financial system by deciding to automate the inter-bank settlement system at the State Bank through implementation of Real Time Gross Settlement System (RTGS).
Once implemented, RTGS will enable the electronic banking to take a quantum leap by making the inter-bank settlement process fully automated in real time.
This will remove the systemic risk from the current settlement process and contribute significantly to the stability of the banking system in Pakistan.
Thus, the implementation of RTGS will complete the automation of the inter-bank chain right from the origination of a banking transaction in one bank to its clearing at NIFT and final settlement in the accounts of banks maintained at the State Bank.
In conclusion, putting together the recent and future developments in E-banking and payment system reforms in Pakistan, ie the phenomenal growth in E-banking in terms of on-line branch and ATM networks, increasing confidence of consumers on electronic transactions, creation of enabling environment by the government and regulatory authorities, the expansion of automated clearing services, measures to provide effective oversight and implementation of RTGS by the State Bank, are expected to set the stage for Pakistan to be fully integrated in the global financial system, which is largely automated.
This financial integration can be conducive for international trade as well as to materialise the much needed Foreign Direct Investment (FDI) in the country, as it will obviously enhance the confidence of the international investors in the domestic financial system.
(Director Payment Systems Department State Bank of Pakistan)
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E-banking statistics
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Figure 1
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ATM/Online Bank Branches
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Period ending on 31-12-2000 31-12-2001 31-12-2002 31-12-2003*
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No of ATMs 206 259 399 552
No of online
bank branches 322 450 777 1576
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Figure 2
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Growth in Credit Card transactions
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2000 2001 2002 2003*
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No of transactions
(monthly avg.) 279227 352034 437305 502386
Amount of transactions
(monthly avg.) 707151 902793 1180076 1619895
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Figure 3
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Growth in ATM transactions
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2000 2001 2002 2003*
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No of transactions
(monthly avg.) 302039 495355 788252 1276828
Amount of transactions
(monthly avg.) 1042255 1850063 3208952 5752888
*Figures provisional
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