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SBP sees cash still king despite digital push

Our Correspondent
Thursday, Sep 28, 2023

KARACHI: The State Bank of Pakistan (SBP) said on Wednesday that the country's digital payments landscape has made significant progress, but cash remains the dominant mode of transactions amid a large informal economy.

The SBP said in its Annual Payment Systems Review that the high currency in circulation (CiC) ratio, which measures the amount of cash held by the public relative to the size of the economy, reflects the preference for cash-based transactions and the ongoing influence of the informal economy in the country.

The annual review for the fiscal year 2022–2023 showed that banks and microfinance lenders handled 2,073.3 million e-banking transactions worth Rs167.4 trillion during FY2023, representing a year-on-year (YoY) growth of 21.4 percent in value and 28.6 percent in volume.

In FY2023, e-banking transactions made up 85 percent of all payments processed by banks and microfinance banks; paper-based transactions accounted for the remaining 15 percent.

In FY2022, this figure was 20 percent for paper-based transactions and 80 percent for electronic banking, showing that clients are gradually embracing digital channels. This tendency may also be a direct result of the post-COVID era, when many consumers adapted to using digital channels to meet their daily financial needs.

The value of paper-based transactions increased by 20.1 percent to Rs228.7 trillion during last year, up from Rs 190.4 trillion in the previous year. The number of paper-based transactions, however, declined by 4.5 percent YoY to 374.3 million.

"This shows that the customers are choosing e-banking channels for their smaller payments and prefer paper-based instruments for higher value transactions," said the SBP's review.

With the help of enabling policies and market players who are tech-savvy, Pakistan's digital payments ecosystem has significantly changed over the past ten years. These developments have allowed customers to make digital payments conveniently, securely, and effectively.

In addition to banks and microfinance banks, fintechs, electronic money institutions (EMIs), payment service providers (PSPs), and payment system operators (PSOs) are at the forefront of the digital payments infrastructure, according to the SBP.

"However, it is still a formidable challenge in overcoming the ingrained preference for cash-based transactions as evident from high Currency in Circulation (CiC) and the persistent influence of the informal economy, both of which continue to play a regressive role in the broader promotion of digital payments."

By the end of FY2023, the number of payment cards in use had increased by 24 percent compared to the previous year, reaching 58.1 million cards. Similarly, the number of people using online banking increased by 15.1 percent to 9.6 million, while the number of people using mobile banking surged by 30.2 percent to 16.1 million. In addition, branchless banking mobile app users increased significantly by 42 percent, from 40.8 million in FY2022 to 57.8 million in FY2023.

EMIs began their commercial journey in FY22 in the digital payment and showed steady growth by opening more than 2.0 million e-wallets and processed 86.8 million transactions worth PKR 234 billion as of June 2023. EMIs also on-boarded 4,956 micro-retail merchants and opened approximately 47,000 freelancer e-wallets. "This resilience and growth in Pakistan's payments market infrastructure can be attributed to the proactive steps taken by the SBP."

"These initiatives include revised regulations for EMIs, setting boundaries for unauthorized digital lending platforms, laid out guidelines for reliability of services of digital channels and enhancing the payment card infrastructure in Pakistan," it added.

Additionally, Raast (free and instant retail payment system) is encouraging the use of bulk and person-to-person payments in order to encourage account-to-account based payments and to improve financial inclusion. In FY2023, Raast carried out 155 million transactions totaling Rs3.169 trillion.