Electronic Payments in Pakistan (Part III)

Original Publication

This article was first published in February 2009 edition of CIO Pakistan.

Preamble

This is the third article in the four part series covering the subject. In part 1, we defined consumer electronic payments, trends & channels through which it is conducted. In part 2 we looked at ROI for ADCs – Internet, Call Centre and ATM from domestic, regional and international perspective.

In this issue we discuss the trends in plastic and POS industry, and make recommendations on way moving forward for the various stakeholders.

Promoting Debt?

There is prevalent evidence that higher availability of credit cards has resulted in higher levels of debt, not only in the first world countries but also developing nations. Many countries have seen rise in house-hold debt and personal bankruptcies with a simultaneous reduction in national savings. Our motivation in this article is to understand the international trends and suggest solutions to increase electronic payments from efficiency, safety and convenience perspective.

Historical Perspective

In 1950, the first wide scale plastic card was launched as a lifestyle choice for customers to pay for their restaurant bill, with the service appropriately named Diners Club. A few years later, banks started getting into this business. By 1959, Bank of America had issued more cards and had more merchants in California than all the combined Pakistani banks have today.

Networks

Payments are a classic two sided networks. Merchants want to accept payment instruments with most customers. Payers want an instrument most merchants will accept. Hence, size does matter here. However smaller networks - American Express & Diners Club - have been able to do well by positioning themselves as premium products, even charging customers and merchants a higher fee.

Today the plastic industry is dominated by a mix of national, regional and international networks. The largest international networks are house known brands – Visa, Master Card & American Express. Regional Brands, such as Electron, PLUS, Maestro to most extent have been taken over. There are quiet a few national networks – ORIX, 1Link and MNet in case of Pakistan. In fact, to save Interchange fee paid to Visa and MasterCard, many countries are building transaction settlement companies.

	Visa	Master Card	Discover
Regional Brands	Electron, Interlink, PLUS	Maestro, Cirrus	PULSE, Diners club
Locations accepted	30.2 Million	28 Million	4 Million
Card holders	1.6 Billion	916 Million	50 Million
Transactions	52 Billion transactions	18.7 Billion transactions

Some Statistics:

Plastic payments have 2 purposes – credit and convenience. The use of plastic for ‘credit’ is most prevalent in the US. For the rest, it is used for convenience and hence in the form of a debit card. Overall, electronic purchases have grown by 3.5 times from 1996-2006. Americans consume 40 percent of this spending, though their share is going down every year with high growth in BRIC countries.

Growth

Similarly to growth numbers we discussed for ATM, most of the growth is coming from developing world. Visa and MasterCard are seeing 35-50 percent growth in India, Brazil, China, Poland & Mexico.

In Pakistan, the credit card growth has been negative for last few quarters. However there is healthy increase in debit card issuance and transactions of 20%. Density wise, for every 100 residents, in Pakistan there are 4 plastic cards, compared to 500 in US and 600 in 100 Japan.

* Islamic credit cards have circulation of 4,531

POS

Pakistan is an extremely un-connected country when it comes to Point of Sale (POS) devices. We have about 55,000 POS machines deployed at approximately 15,000 retailers and petrol stations. Considering there are 1 Million overall retailers in the county, this is a penetration of less than 2 percent. So 98 percent of our retailers cannot accept electronic payments, let alone remote payments.

Even with this low penetration, the volume is even lower. On Average, a POS is used 27 times a month, or less than once every day. It is hard to imagine how anyone except the solution vendors is making money.

Important note: In the most recent SBP report, the total POS count has mysteriously been reduced to 43,903 for Q4-07-08. No correction has been provided for past quarters. The transactions and Volumes have also been revised. These unexplained revisions are not reflected here.

Looking into lack of growth & usage

Low Banking penetration

Banking penetration is only 10 percent of our adult population (10 Million unique bank accounts). Since banks are responsible for issuing cards and, even if each and every account holder has a plastic card, we are looking at a potential base of 10 Million cards from the current 6.7 Million in circulation and 2 Million active cards. So theoretically there is a room of 400 percent growth by tapping existing base.

Islamic View

Even with the rise of Islamic Banking which now forms 4 percent of total deposits, credit cards are generally considered un-Islamic. Only 1 Islamic card has been launched with 4,500 accounts – certainly not enough even to cover the cost of billboard advertisements for the product.

Lack of Consumer Education

Surprisingly, a lot of consumers still do not know that the debit card they use for their ATM withdrawals can be securely used at POS terminals in malls and stores. Though a scientific breakdown is unavailable, a general survey of POS suggests 80% transactions are credit cards, even though credit cards only constitute 20% of the overall plastic issued. Why aren’t banks able to convince more debit card transactions on POS?

Keeping it off the record

Many people prefer cash payments particularly for large budget items such as jewelery and electronics due to fear that the transaction record will be used at some stage against them by the tax machinery.

No Electronic Commerce

Remote payments require use of electronic means nearly for all their sales. However there is no trend of buying through websites, catalog or telephone.

Lack of protection

Consumers fear that if their cards fall under wrong hands, they will be misused and consumer will have to bear 100% of the loss. This a genuine fear forcing people to leave their cards at home.

Fixing what’s broken

As payments are two sided networks, increasing POS presence and increasing plastic usage will have to happen simultaneously.

POS pervasiveness

A customer should feel comfortable that all their needs can be fulfilled through e-payments, from groceries and medicines to motorbikes and electronics. This will not happen if only 2 percent of retailers accept plastic.

Reduce POS Hardware Cost

The imported POS results in high cost for banks and businesses. We need to invest in a locally produced device which meets the PCI standards but uses local IP, manufacturing and works with local conditions – power breakdowns, voltage fluctuations, pollution, GPRS or Wi-Max. Devices must cost less than $75 (compared to nearly $400 for imported) for production of 20,000 per year and have shelf life for 5 years.

Reduce POS Fee

By investing in a locally assembled hardware costing one-fifth we have already improved ROI. By investing in a common payment settlement engine for the country, banks can eliminate high fee they pay to MC and Visa. This will result in reducing transactions fee from 2 percent to as little as half a percent. Now e-payments become even cheaper than cash payments due to reduced cost of cash management.

Eliminate POS?

Investigate how to eliminate the POS device altogether, and use something which all store-owners already have – the mobile phone – for all electronic payments within a certain per transaction limit to limit fraud.

POS as payment device

Storeowners should be able to use the money they collect via POS immediately. They should be able to pay their suppliers through the same electronic means, perform fund transfers. For smallest retailers, they should be able to collect cash against POS balance without maintaining bank accounts.

Privacy

The government should very strictly announce (and enforce) a complete privacy on these transactions and commit never to use them for taxation purposes, from businesses or consumers.

Other Use-cases

Allow payment of utility bills through the POS so that additional use-cases result in higher use of the POS and higher ROI

Increasing Card Usage

Insurance / Protection

Consumers need to feel absolutely safe when using plastic cards in retail or online setting. Same is true for businesses that accept them. The only true way is to offer 100% protection against fraud. This will require Banks, Insurance Companies, Credit Bureaus & Government organizations to work together to come up with products, policies and investigative units in case crime is committed. These are prevalent in the West and we can easily adopt them in Pakistan.

Improve up-time

ATM users have nothing but complaints about the down-time they see on ATM. I’ve personally had a string where I tried to use my ATM to get cash at Karachi airport where both ATMs were down. Then once I landed in Islamabad, both the ATMs there were down as well. Overall most people agree that 20 to 30 percent transactions fail. The industry needs to gain the trust of its stake holders.

Customer Education

Instead of offering cash-backs and wasting money in flashy advertisements, spend the same money in consumer education on security, safety, convenience and Islamic alignment of electronic payments.

Promote Other Use-cases

Through 6.7 Million cards, the total POS transactions are 90 Billion Rupee annually, which is half of the total scratch card sales. So how do we get more e-payments out of people who maintain accounts and have the necessary tools to make e-payments? Some of the use-cases where some enforcement (the stick) and value proposition (the carrot) can help in multiplying electronic payments are:

Fuel Payments

Petrol stations sell Billion dollar worth of fuel to consumers every month. They should not accept any cash and instead issue the prepaid cards. This could be mandatory for any fuel transaction above a minimum of 3 liter.

B ill payment

It is estimated that every month, home-owners pay PKR 40-80 Billion to utility firms. Banks, through partnership with 1 or more technology companies and blessings of SBP, can stop accepting bills at counters. Instead, people buy scratch cards of various denominations and then pay their bill through their mobile phones by sending the scratch card and bill number to a central SMS short-code.

Next Month

Banks after 60 years have reached 10 percent of the target population. How can Branchless Banking help? In the fourth & final part, we focus on branchless banking to improve financial inclusion.

About the Author

Farzal is passionate about delivery channels – from Branchless Banking and 24x7 Direct Insurance to Mobile Multimedia and Social Networking. He has worked at 4 start-ups in addition to Merrill Lynch and BearingPoint. He is a Director at amaana, teaches E-Commerce at IBA, consults professionally and lives at farzal@ciopakistan.com