E-commerce has got a special mention in the central bank’s latest annual report. The report concludes that the sector has a promising future if certain regulatory and infrastructural hurdles are removed. The sector has witnessed rapid growth in recent years thanks to increased digital connectivity and the ease of transacting that it provides consumers.
The State Bank of Pakistan puts the size of the e-commerce market in Pakistan at Rs99.3 billion in FY18 (FY17: Rs51.8 billion) with a year-on-year growth of 92 percent. But the untapped potential is huge with e-commerce still being less than one percent of all retail shopping done in the country.
This enormous untapped potential has recently attracted global e-commerce giants including Alibaba, which has acquired Daraz.pk; and Ant Financial that acquired a 45 percent stake in Telenor’s Tameer Microfinance Bank. (Read: “Alibaba unlocks Daraz” published May 09, 2018 and “Alipay in Pakistan?” published March 15, 2018).
As there is a lack of availability of data for cash-on-delivery (COD), which roughly makes 90 percent of total transaction volume and about 60 percent of e-commerce transactions, the SBP has provided data for total digital payments (includes credit/debit cards, interbank funds transfer (IBFT), prepaid cards and mobile wallets), which have grown by an impressive 93.7 percent in FY18 to reach Rs40.1 billion as compared to Rs20.7 billion in FY17. The bank expects this to grow at 25 percent for the next two years.
At least in the first phase of transition to e-commerce, there is no harm in relying on higher COD volume as was the case in India and China even a few years back. But in order for the sector to really take-off eventually digital payments need to rise given that these are the main charm of using e-commerce.
Digital payment infrastructure is improving but there is still work to be done. Even though the SBP’s Payment Systems Review FY18 puts the total number of e-commerce merchants utilising the e-payment gateway of banks at 1093 with a growth rate of 91.6 percent as compared to the previous year; this number is still extremely low given the huge quantum of retail spending in Pakistan.
The central bank’s data also shows that e-banking channels’ share in overall retail payments is stagnant for the past five years at 24 percent. Lack of financial inclusion is to blame here as only 21 percent of Pakistan’s adult population has a bank account. This results in COD being the transaction medium-of-choice. Therefore, working to reduce financial exclusion will automatically see a rise in adoption of alternative payment mechanisms.
Another factor is digital connectivity. Without meaning to belittle already achieved progress on this front, Pakistan’s mobile broadband penetration is roughly 25 percent of the overall population and this is PTA’s more optimistic figure. Some global indices believe it to be even below 20 percent. These are the kind of statistics that have led Pakistan to continue to perform poorly in UNCTAD’s B2C E-commerce Readiness Index (2017), a fact that the central bank has also highlighted in its report.
Therefore, working to promote financial inclusion and improving digital connectivity still has a long way to go if Pakistan is to catch up with its neighbours even.
Increasing financial inclusion will require more people to utilize formal banking channels while broadband penetration can increase if digital literacy is improved. There is also a need to enhance consumer awareness and promote consumer protection in order to boost e-commerce in Pakistan. More on this in the coming weeks…