Payments system in Pakistan - prospects & challenges
Director Payment Systems Department, State Bank of Pakistan
The technology has become the key driver for strategic business decision making. Communication Technology is propelling the world towards integration and its convergence into a global village, while Information Technology is compelling the business leaders to change their management policies and practices.
Safe and efficient payment systems are critical to the effective functioning of the financial systems. Payment systems are the means by which funds are transferred between banks, banks and consumers, business to business, business to consumers, consumers to government.
While the high value payment systems are vital for financial stability and efficient monetary management; retail payment systems are important for efficiency, real-time payment processing and cost effectiveness.
Payment and securities settlement systems have evolved rapidly in the last few years, becoming a critical issue for financial policymakers and practitioners in both developed and developing countries.
Technology and innovation have dramatically changed the capacity and the context in which these systems operate, making the reforms of National Payment Systems more important than ever.
BIS (Bank for International Settlement) has been actively working on developing guidelines for Systemically Important Payment Systems, Retail Payment Systems, Security Settlement Systems and harmonisation of best practices on Payment Systems whereas World Bank and IMF have made it an important part of reforms of financial systems in developing countries Central Banks of both developed and developing countries are stepping forward to reform payment systems to make it efficient, sound and secured.
Efficient Payment Systems eventually have their impact on financial stability, economy, investment climate and employment.
State Bank of Pakistan has taken many initiatives to reform the Payment Systems in Pakistan. While implementing the automation of high value payments between the banks it is pro-actively facilitating banks and private organisation to adapt new technologies to provide customers with the benefits of e-banking products and services.
The concept of money has been transforming from cash into plastic money, virtual money and e-money. A number of e-banking products / services using various delivery channels are available in the world market and many of these are now offered in Pakistan.
The products such as Direct Debit and Credit Transfers, Automated Teller Machines. Payment Cards, Credit Cards, Debit Cards, Charge Cards, Corporate Cards and Stored Value Cards, Electronic Banking / Fund Transfer, Internet Banking, Mobile Banking, Electronic Bill Presentment and Payment, Postal Remittance Services, SWIFT, Electronic Clearing, E-Cash and E-Cheques, E-Wallets and E-Purse etc.
E-BANKING INFRASTRUCTURE IN PAKISTAN:
SWITCH NETWORKS: There are two EFT SWITCH Networks namely M Net and 1Link, are providing the e-Banking and Electronic Fund Transfer services in Pakistan. State Bank of Pakistan mandated banks to connect online to either of the two Switches in August, 2002 and facilitated the two switches to interconnect with each other.
Effectively from March, 2004 Cardholders of any bank can use ATM facility issued by any bank.
ONLINE BRANCHES AND ATMs: The number of Online branches have reached 2348 at the end of September, 2004 out of the total branch network of 6879. With the development of telecommunication infrastructure complete branch network would be connected online within next two years.
The increase in the online branches are considered ground work for the expansion of ATMs Network which has reached to the level of 723. The growth in ATMs is tracking well with the availability of online branches.
On average the ATMs have posted a phenomenal growth. A number of banks are now planning to install ATMs at offsite which will boost the e-banking services.
NUMBER AND VALUE OF TRANSACTIONS: ATM transactions both in number and value progressing with an average growth rate of 58 and 72 percent since 2000. The prominent point in the pace of transactions is its continuous increase with acceleration in recent period.
The figure of 2004 consists on three quarters but still higher than the full year data of 2003. It is expected that transactions both in number and value will continue an accelerating trend.
Another encouraging factor in the promotion of E-banking is the consistent increase in the number of cardholders. On average the credit cardholders have shown a growth rate of 13 percent while the debit card recorded an increase of 17 percent during the quarters of 2003-04.
Similarly the number of ATM card users expanded with an average rate of 13 percent during the same period. The massive increase in the debit card users is due to the availability of POS terminals which recorded a handsome number 8616 counted in the census conducted during 2003.
In view of tremendous growth opportunities a number of entrepreneurs are investing in installation of state-of-the art POS terminals at many retail stores.
COMPARISON OF PAPER BASED WITH ELECTRONIC TRANSACTION: The electronic transaction replacing the paper based instruments. The graph shows that electronic transactions have reached 15% of the total transactions and the use of electronic products is gaining momentum.
AUTOMATION OF CLEARING OF PAPER BASED INSTRUMENTS: Following the policy of encouraging private sector investment, State Bank of Pakistan outsourced one of its main activities of clearing to a private organisation NIFT (National Institutional Facilitation Technologies Pvt Limited). This institution is providing intra-city and inter-city clearing services in all the commercial centers of Pakistan. NIFT is using the image based cheque processing in clearing activity.
The institution is now planning to expand this service to offer cheque truncation to banks ie to converge paper instrument into electronic image and its transmission through electronic media. This would eventually result in cost and time efficiency. NIFT has also taken initiative to offer digital certification for electronic transactions.
LEGAL INFRASTRUCTURE FOR E-BANKING / COMMERCE: Complying with the BIS Core Principles State Bank of Pakistan is actively working to draft a comprehensive Payment Systems Law and to propose amendment in various Laws such as Negotiable Instruments Act 1881, ETO 2002, Qanon-e-Shahadat 1984, Pakistan Penal Code, Contract Act 1872, Telegraph Act 1885, Bankers Books Evidence Act 1891 and General Clause Act 1897.
At the same time SBP is also actively working with other regulators / stakeholders to provide framework for e-banking / commerce in the country. The stockholders are playing their due role in the promotion of e-banking/commerce in Pakistan.
Ministry of IT, Government of Pakistan has taken initiatives by promulgating ETO 2002 to recognise the electronic transaction while cyber crime bill is in its final phase. Recently council has been constituted to oversee and develop digital signature and PKI (Public Key Infrastructure) in Pakistan.
IMPACT OF E-BANKING / E-COMMERCE ON INVESTMENT, EMPLOYMENT & EXPORTS: These initiatives coupled with phenomenal improvement in telecommunication infrastructure will provide impetus for immense growth opportunities. Pakistan is emerging very fast on the e-commerce canvass of the world.
Financial Industry and technopreneurs are capitalising the skilled human resource base and are planning to offer new e-products and services. New initiatives are going to have significance impact on the cost efficiency, quality of service and provide real-time service. Among these are Cheque Truncation, Development of Payment Gateways for Internet Banking, Smart Cards and Mobile Banking.
INVESTMENT: The size of the economy of Pakistan and highest ROI e-product/services offers tremendous investment opportunities not only for local as well as international IT companies. A number of overseas Pakistani technoprenurs are developing a new industry of TSPs (Technology Services Providers) and ASPs, (Application Service Providers).
The increasing volume provides potential investors to invest in hardware industry, maintenance of hardware/software, Telecommunication Product Manufacturing, Software Development, Plastic Card Industry and Venture Capital. The new industry can also tap the market of other neighbouring under developing countries of Central Asia and Middle East.
EMPLOYMENT: Poverty and Employment are one of the key issues confronted by many developing countries. IT industry offers the tremendous potential to help solve this problem. The strategic direction set by the Government has resulted in availability of a high number of skilled human capitals which is a vital component of IT service industry.
Investment by local as well as international companies in this sector will raise the quality of life of skilled labour and expose them to world IT market.
EXPORT AND REMITTANCES: Reduction of cost of doing business through application of IT and Telecommunication Technologies will act as catalyst to boost Pakistan exports. Provision of real-time online transfer of money will help double workers remittances in a very short time.
Currently only Pakistan Post Office offers remittances to overseas Pakistanis. The developed countries such as China, India, Malaysia and Singapore have successfully captured a big slice of off shoring/outsourcing of Financial Services. Pakistan has all the required resources to become one of the major suppliers and double its exports within next few years.
ECONOMY: E-Commerce/E-Banking will have significant impact on the economy. While collection of taxes online, on one hand, will help manage financial resources of Pakistan in a better way and on the other hand, its integration with global financial market will boost FDI and investment of Foreign Currency deposits/reserves to earn high returns.
New knowledge industry will widen the tax base and expand consumer market through creation of new wealth.
RESEARCH & DEVELOPMENT: Once Pakistan achieves the status of a major player in knowledge industry a portion of revenue could be reserved for research and development of new products/services and next generation business models.
CHALLENGES: While the scenario depicts a very positive picture there are a number of challenges ahead. Skill and knowledge enhancement is the key to remain competitive in the global market place.
Development of New Business Models is replacing the low value IT services such as data capture, medical and legal transcriptions. At the same time, with out the world class telecommunication infrastructure at reasonable cost, the objectives can not be achieved.
Legal infrastructure, compatible with best practices of the world, is also a key factor for promotion of e-commerce/e-banking in the country.
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