Raast clearly has the potential to revolutionize Pakistani banking. It is a plumbing backend that would allow various players (banks and non-banks) to come and make transactions on it. For customers, the secret is simple and almost cost-free to use. Many nations in the world have done so and have jumped ahead into digital banking in the 21st century.
The query that market players (mainly banks and current switches) are posing is that the private sector, not the regulator, should have done this. In the first step, aggregators and fin-techs should be able to capitalize on the other problems a few (mainly fin-techs) have. Instead, to begin with, SBP brings the government on board. They say that IBFT (Inter Bank Fund Transfer) and wallets are already providing immediate transfers (at their end); what value addition will Raast bring on top? Then clarification is warranted on the understanding of customers.
This article seeks to answer these questions, taking into account the historical context and foreign experiences of Pakistan. In the end, from spectrum issuance to other fiscal incentives, what is needed by the government to promote digital banking in Pakistan is discussed.
The SBP has been dreaming for several years about the implementation of a micropayment gateway (Raast). The Gate Foundation even took an interest in it. They first asked 1Link to chip in (an existing switch). But 1Link is made up of 11 banks, and they didn’t allow a micro player on their board to come in. It is not possible to achieve financial inclusion through a payment portal without getting financially excluded citizens into the equation. 1Link was not receptive (mainly banks), and SBP wanted to establish its own system.
With the existing switches (1Link and NIFT), the other issue is that they want to create a model based on fees. They had higher sums paid per transaction. Banks are pleased that online transactions produce their own fees. Then banks make hefty amounts of government and large corporate loans. Much as they are not keen on lending to small and medium-sized businesses and buyers, they do not want small and broad-based payments to come to the fore. They have no reason for the pie to be enlarged.
The lead initiative of the regulator is being utilized in many other economies to make payments interoperable. The main objectives are to make near real-time settlements to ensure financial stability and an open interoperability, protection and simplification framework based on the API (Application Programming Interface). These nations include, but are not limited to, the economies of Jordan, Mexico, Australia, the UK, India and the Far East. The regulator designed it herself in some locations (such as Unified Payment Interface, UPI by RBI in India). In others (such as Australia and the Far East), the structure was developed by the private sector based on the guidance of the central bank.
The earlier aim of SBP in Pakistan was to follow the Australian model, but the private sector was pleased to work in silos. Despite these frictions, Easypaisa and JazzCash have accelerated the digital payment system in Pakistan in the past few years since the lead wallets of the telcos came into being. They concentrated on building the customer base, but not the industry. In the early days, the cost of moving one wallet to another was immense. The method isn’t easy yet.
Banks also launched wallets, but the concept did not really work. Based on existing agents across the world, Telcos constructed the agent model. The banks, like UBL Omni and HBL Konnect, had to build from scratch and they lagged behind. Banks had the benefit of being banks, while telecoms had the advantage of having a strong customer base. In capitalizing on their own respective strengths, both parties were interested. SBP needed an interoperable system that would be useful for customers.
The model driven by the private sector has performed well in China. One player offering all the services is WeChat in China. With one large player getting a monopoly, there is no interoperability issue. There are already two major Telco players in Pakistan. Here, the model will not fit. Plus, with a special governance system, China is a different economy. In Pakistan, it’s very difficult to enforce such a scheme.
Raast is a project which is social. This isn’t about money making. For innovators to come and make cash, the hard infrastructure (switch) is constructed. For money making, current switches are. That is why there is little space in these areas for creativity. Why couldn’t financial inclusion take place under them if these switches were enough?
There must then be true interoperability to establish a culture of digital payment among the masses. There’s a confidence disparity with the average guy. The need is for it to be bridged. Research indicates that the payment system must be standardized. For everyone, it should be the same. Low costs and a one-simple system will generate customer trust for everyone. The directory feature will be centralized at Raast. Consumers may use aliases to communicate and transact: mobile number, email or whatever.
The question is why SBP and the government are launching Raast. SBP needs the PM to stay satisfied. The reasoning is that SBP can test the system by making bulk payments. Once the organization has the confidence, it will start person-to-person (P2P) and ask for pay to integrate. The country may experience a sea change in payments once that is completed.
The aim for SBP is to begin P2P in Q3 2021 and to have merchants on board by Q1 2022. The actual obstacle is the retrieval of the last mile. That has to be done not by banks, telecoms or switches, but by the private sector. Had they been imaginative (or had the right reward structure), Raast would not have been designed by SBP. Fin-technology and aggregators, local or foreign, can do this.
Here, India’s example is helpful. In April 2016, UPI (the Indian version of Raast) was released. It was not replied to by the industry. Google Pay came to India in September 2018 and revolutionized the payment system. In FY17, CTS cheque clearing (NIFT equivalent) had a market share (in value) of 77 percent and IMPS (IBFT equivalent in Pakistan) was 4 percent and UPI was zero. UPI accounts for 24 percent of FY21, 18 percent of IMPS and 33 percent of CTS cheque clearing.
The other approach is to look at the amounts to calculate use by customers. The share of ATMs was 44 percent in FY17 and the combined cheque clearing and automated clearing house was 43 percent. UPI was zero, of course. Today, 57 percent of India’s transactions are on UPI. ATM is down to 10% and cheque and automated clearing has dropped to 14%.
The positive thing about Pakistan is the private sector’s readiness. It is much stronger today than it was in India in 2016. Wallets do exist now. Some share was achieved by IBFT. But these, in silos, have hit their respective limits. The development is that of an S-curve. To step onward, it needs a drive. The goal of Raast is to provide the drive.
In Pakistan, EMI (Electronic Money Institutions) regulations are stronger. A few companies, such as NayaPay, SadaPay, Finja etc., have the license. EMIs are not banks, but deposits may be stored by them. Such are the agnostic banks and telcos. Raast is providing a sandbox for them to score sixes. A household name may become one or more of these. SBP is opening an ambitious office that could lead to new ideas.
But internet access and smartphone penetration are imperative for them to rise. The other alternative is the African way of using working phones. In India, China and many other nations, the game is called QR code. The QR code has not been effective in Pakistan so far. It requires data. Pakistan is primarily a market for prepayments. Data free options for QR codes can be created by some players (just like Facebook free with limited options).
The overall connectivity of the internet needs to expand. In Pakistan, in some areas, telcos have grown. In urban centers, Jaaz is tall. Zong is a player in the north; Telenor specializes in the rural market. Some concentrate on area coverage, while others concentrate on density. Density, for QR codes, is the answer. New spectrums are to be published for that. A cash-strapped government would like to raise income from it. Telcos would like to get these at a nominal cost and invest in infrastructure growth.
The government wants to find a middle ground. Smartphone penetration is the other issue. The new strategy supports the local assembly of cheap handsets. They build factories. That was worked out. For Raast to fulfill his potential, the spectrum problem needs to be solved.
Then, by reducing the tax on digital transactions, the government will provide nudges. In the last budget, the Punjab government did some creativity by reducing GST on card payments for restaurants and beauty parlors. That has resulted in higher demand in urban Punjab for POS (point of sale) machines. Fiscal incentives for digital transaction promotion should be provided by the federal government and other provinces.
All of this can help to solve the documentation puzzle. The currency in circulation in Pakistan is, and is rising, among the highest in the world. Raast’s platform offers the ability to fix this. The need is for both hands to be on the table. This is the dice being rolled.