Pakistan has a huge cash-based transaction market; transforming which into digital channels has immense advantages in terms of lowering the transaction costs, improving the liquidity in the banking system, broadening the taxation and overall documentation, and increasing formal lending penetration.
The overall digital ecosystem needs to be vibrant. One area to focus is on enhancing the penetration of POS (point of sales) machines. Currently, 30,000 out of 2.5 million retailers have POS machines installed. The potential to grow is huge. For this to happen, strong regulatory push – both from SBP and federal and provincial tax authorities - is required.
The incentives for all the players – consumers, retailers, acquirer, issuer, and switch, should be aligned to increase POS penetration. POS machines per 100k people in Pakistan are merely 40 while in India it's over 300. The POS penetration stagnated between 2008 to2019, at around 50,000.
The MDR was squeezed towards the card issuer while the POS acquirer was making losses. SBP has recognized the problem and in 2020, changed the MDR (Merchant Discount Rate) regime where the portion of acquirer has increased for debit cards. As margins of acquirer become green,they pushed POS machines to retailers. The number doubled in two years to over 95,000.
There was also a push from the tax authority in Punjab where in FY21 the GST on retail transactions for certain segments was reduced from 16 percent to 5 percent for payments made on cards. That has generated demand for POS machines in Punjab. Overall merchants having POS machine, after these two incentives, by SBP and PRA, have increased by 50 percent to 30,000.
Still, the number is shy compared to regional peers. The need is to do more.There are 30 million debit cards as compared to mere 1.7 million credit cards. Yet 40 percent of transactions are on credit card. The potential is underutilized on debit cards as POS network is limited. The margin of acquirer is low on credit card. Increase in debit card transactions would improve the incentive for acquirer to grow. The cost of switch has increased due to currency depreciation. The MDR margins need to be revisited by SBP.
A strong push is required for increasing retailers’ acceptance of POS machines. Pakistan needs to learn from countries such as Iran and Saudi Arabia where there are mandatory requirements of POS machines for certain TEIRs of retailers. And there are certain rebates for digital transactions. Other provincial taxation authorities should learn from Punjab. FBR should revisit the FED on card transactions. It has placed digital transaction at a disadvantage to cash. Government is the largest consumer of banking. It should take the lead and present a vision to convert all transactions by digital means. Acceptance – by customers and retailers, is the core backbone for digitization.
Recently, non-banking players have entered the market- such as Opay and Paymob. That is encouraging. A better and inclusive regulatory regime would open value added avenues. There is a potential of shift to transactions from ATM to POS and other digital means. The ATM transactions are of Rs9 trillion while POS process only Rs700 billion.
Here, nonbank players can be instrumental. A POS machine can effectively become a small bank branch where cash in and cash out can take place. Mobile top ups and utility payments can transact through. Small cash loans could be generated. These value-added sectors are enticing more new players to come. This can help in crack the growing cash economy. The cash to banking deposits is double of India and other similar economies. Some nudges from the government and SBP can do the wonders.
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