Investing in Local Payment Infrastructure: A Path to Self-Reliance

Pakistan is currently facing significant foreign currency challenges, with a shortage of US dollars causing economic strain on the country. According to the State Bank of Pakistan's (SBP) data, as of January 2023, the country's foreign exchange reserves stood at approx. $8.4 billion, with the gross reserves held by the central bank amounting to approx. $3.1 billion [1]. The fluctuating foreign reserves and a high current account deficit is putting pressure on the economy and making it essential to explore alternative solutions for sustaining financial stability [2]. PayPak, Pakistan's first and only domestic payment network, could play a crucial role in addressing these challenges by reducing dependency on international payment networks, saving millions of dollars, and promoting the development of local payment infrastructure.

Launched by 1LINK, the largest interbank network in Pakistan, PayPak aims to provide an affordable and accessible domestic payment card alternative to international payment schemes like Visa, Mastercard, and UnionPay. By focusing on the local market and encouraging the use of PayPak as the primary payment mechanism, Pakistan can reduce the outflow of foreign currency and save millions of dollars in fees that would otherwise be paid to international payment networks. Moreover, this strategy can stimulate the growth of the local financial ecosystem and facilitate the development of a more robust and secure payment infrastructure.

In this article, we will explore the potential of PayPak in addressing Pakistan's foreign currency challenges, analyze the benefits of investing in local payment infrastructure, and discuss the role of the State Bank of Pakistan (SBP) in supporting PayPak's growth and adoption. Additionally, we will examine the possibilities of expanding international remittance options through PayPak to increase the inflow of foreign currency into the country.

Background on PayPak

PayPak, Pakistan's first domestic payment network, was launched by 1LINK in April 2016 to provide a cost-effective and accessible alternative to international payment schemes like Visa, Mastercard, and UnionPay [3]. 1LINK, the largest interbank network in Pakistan, operates under the guidance and support of the State Bank of Pakistan (SBP), connecting over 16,000+ ATMs and facilitating interbank transactions across the country in over 200+ cities [4].

PayPak offers various types of payment cards, including debit, credit, and prepaid cards, issued by 35 participating banks in Pakistan [5]. These cards can be used at ATMs, point-of-sale (POS) terminals, and for online transactions within the country. However, PayPak cards are not accepted for international transactions, as their primary focus is on the domestic market.

The main goal of PayPak is to promote financial inclusion and cater to the needs of the local population. By offering lower transaction fees compared to global players which charge an hefty amount like 1.5% to 2.5% per transaction and that too in USD and promoting the use of local infrastructure, PayPak aims to support the growth and development of Pakistan's financial ecosystem. Since its launch, PayPak has seen considerable growth, with multiple banks offering PayPak-branded cards to their customers [6].

Despite its growth, PayPak still faces challenges in terms of market penetration and adoption, as international payment networks continue to dominate the market. However, with the support of the State Bank of Pakistan and continued investment in the development of the local payment infrastructure, PayPak has the potential to make a significant impact on Pakistan's foreign currency challenges and financial landscape.

Dependency on International Payment Networks

Pakistan's reliance on international payment networks like Visa, Mastercard, and UnionPay for electronic transactions has significant financial implications. These global companies charge fees for processing transactions, which are shared among the issuing banks, acquiring banks, and the payment networks themselves. As Pakistani consumers and businesses utilize these international networks, a portion of each transaction fee is paid to these global companies, leading to an outflow of foreign currency.

A study published in the Pakistan Journal of Commerce and Social Sciences estimated that during the period of 2007-2017, Pakistani banks paid around $1.1 billion in fees to international card schemes, with annual fees reaching approximately $150 million in 2017 [7]. This significant outflow of foreign currency puts additional pressure on Pakistan's foreign exchange reserves and highlights the need for a more cost-effective domestic alternative.

By encouraging the use of PayPak as the primary payment mechanism, Pakistan can reduce the outflow of foreign currency and save millions of dollars in fees that would otherwise be paid to international payment networks. This would not only conserve foreign reserves but also stimulate the growth of the local financial ecosystem by directing resources towards the development of PayPak and other domestic financial services.

Furthermore, increasing the adoption of PayPak can help to reduce the dominance of international payment networks in the Pakistani market and create a more competitive environment. This would lead to better services, lower fees, and improved financial inclusion for consumers and businesses in the country.

In summary, reducing dependency on international payment networks and promoting the use of PayPak can play a significant role in addressing Pakistan's foreign currency challenges by conserving foreign reserves, saving millions of dollars in fees, and supporting the growth of the local financial ecosystem.

Investing in Local Payment Infrastructure

Investing in local payment infrastructure, such as the development and expansion of PayPak, can yield significant benefits for Pakistan's economy, financial industry, and consumers. By focusing on enhancing PayPak's infrastructure, the country can reduce its dependency on international payment networks, save foreign currency, and create a more robust and competitive financial ecosystem.

Benefits for consumers and merchants

By developing a reliable and efficient local payment network, consumers and merchants can enjoy lower transaction fees compared to international payment networks. This can lead to increased adoption of electronic payments, higher financial inclusion, and improved convenience for both consumers and businesses.

Economic growth and job creation

Investing in local payment infrastructure can spur economic growth by creating jobs in the financial technology sector and fostering innovation. This can result in a more dynamic financial ecosystem and contribute to overall economic development.

Success stories of local payment networks

There are several examples of successful local payment networks in other countries, such as RuPay in India and MIR in Russia. These networks have helped their respective countries save millions of dollars in transaction fees, promote financial inclusion, and stimulate the growth of the local financial industry.

Strengthening the local financial ecosystem

A well-developed local payment infrastructure can help strengthen the overall financial ecosystem in Pakistan. This includes better integration of banking and financial services, improved security and fraud prevention measures, and increased consumer trust in electronic payment systems not to mention the consumer data being shared with Global service providers.

To realize these benefits, it is essential for stakeholders, including the government, the State Bank of Pakistan, banks, and financial institutions, to collaborate and invest in the development and promotion of PayPak and other local payment solutions. By allocating resources and providing the necessary support, Pakistan can create a more resilient and competitive financial industry while addressing its foreign currency challenges.

Role of the State Bank of Pakistan

The State Bank of Pakistan (SBP), as the central bank and regulator of the country's financial industry, plays a crucial role in supporting and promoting local payment infrastructure, including PayPak. The SBP's involvement in the development and growth of PayPak can have a significant impact on the success and adoption of the domestic payment network, helping to address Pakistan's foreign currency challenges.

Regulatory framework and guidance

The SBP is responsible for creating a conducive regulatory environment that supports the growth of local payment networks like PayPak. By establishing and enforcing relevant rules and guidelines, the SBP can ensure that PayPak operates within a secure and efficient framework, instilling trust among consumers and financial institutions.

Encouraging adoption by financial institutions

The SBP can actively promote the adoption of PayPak by financial institutions through incentives and support programs. By encouraging banks and other financial institutions to issue PayPak-branded cards and utilize the local payment network, the SBP can help increase the market penetration and reach of PayPak across the country.

Collaboration with stakeholders

The SBP can play a vital role in fostering collaboration among various stakeholders, including the government, banks, and financial institutions, to invest in and develop the local payment infrastructure. By coordinating efforts and facilitating partnerships, the SBP can ensure that resources are effectively channeled towards the growth of PayPak and other domestic payment solutions.

International partnerships

The SBP can also facilitate the expansion of PayPak's reach beyond Pakistan by forging partnerships with foreign banks and payment networks. These collaborations can help increase the inflow of foreign currency through remittances and other cross-border transactions, further contributing to the country's financial stability [8].

Financial inclusion initiatives

As part of its financial inclusion strategy, the SBP can promote PayPak as a cost-effective and accessible payment solution for unbanked and underbanked segments of the population. By supporting the development of innovative financial products and services around PayPak, the SBP can contribute to greater financial inclusion and economic growth in Pakistan [9].

In conclusion, the State Bank of Pakistan plays a pivotal role in the development and adoption of PayPak as a local payment network. By providing regulatory guidance, fostering collaboration, and promoting financial inclusion, the SBP can help address Pakistan's foreign currency challenges while supporting the growth of the local financial industry.

Expanding International Remittance Options

International remittances play a crucial role in Pakistan's economy, as they contribute significantly to the country's foreign exchange reserves and support millions of households. In 2020, remittances to Pakistan reached $29.4 billion, a record high, and accounted for nearly 10% of the country's GDP [11]. By expanding international remittance options, Pakistan can further increase the inflow of foreign currency, support its foreign exchange reserves, and provide better financial services to its expatriate community.

Collaboration with foreign banks and payment networks

The State Bank of Pakistan (SBP), along with local financial institutions and payment networks like PayPak, can forge partnerships with foreign banks and payment networks to facilitate secure and cost-effective cross-border transactions. These collaborations can help streamline the remittance process, reduce transaction fees, and encourage expatriates to send money through formal channels, thus contributing to an increase in foreign currency inflows [12].

Leveraging digital technology

Pakistan can invest in digital remittance platforms that offer convenient, fast, and secure money transfer options for expatriates. By partnering with international fintech companies and payment service providers, Pakistan can tap into the growing market of digital remittances and provide better financial services to its overseas community.

Improving regulatory framework

The SBP can work on improving the regulatory framework for international remittances by simplifying processes, reducing bureaucratic hurdles, and ensuring compliance with international standards. This would help create a conducive environment for the growth of the remittance industry, attracting more players and increasing competition, ultimately benefiting both senders and recipients [13].

Financial literacy and awareness

Pakistan can invest in financial literacy programs targeted at expatriates to educate them about the benefits of using formal remittance channels and digital financial services. By raising awareness and promoting the use of secure and cost-effective remittance options, Pakistan can encourage more expatriates to send money through formal channels, contributing to the country's foreign currency reserves [14].

In conclusion, expanding international remittance options is vital for Pakistan to increase the inflow of foreign currency and support its foreign exchange reserves. By fostering international collaborations, leveraging digital technology, improving the regulatory framework, and promoting financial literacy, Pakistan can create a more efficient and competitive remittance market that benefits both its economy and expatriate community.

Heading: Turning the Tide with a Robust Local Payment Network

In conclusion, by focusing on the development and promotion of a robust local payment network, such as PayPak, Pakistan can effectively address its foreign currency challenges and strengthen its financial ecosystem. The State Bank of Pakistan, the government, and local financial institutions have a vital role to play in achieving these objectives, from creating a conducive regulatory environment to fostering international collaborations.

The benefits of adopting a local payment network are manifold. Consumers and merchants can enjoy lower transaction fees and enhanced financial services, while the country can conserve foreign reserves by reducing the outflow of foreign currency in fees paid to international payment networks. Moreover, the expansion of international remittance options, powered by partnerships with foreign banks and payment networks, can lead to an increase in foreign currency inflows, further strengthening the country's foreign exchange reserves [15].

Pakistan can draw inspiration from the success stories of other countries, such as India's RuPay and Russia's MIR, which have demonstrated the potential of local payment networks in promoting financial inclusion, fostering innovation, and supporting economic growth. By investing in local payment infrastructure and collaborating with stakeholders at home and abroad, Pakistan can turn the tide in its favor and create a more resilient and competitive financial industry for the benefit of its people.

References:

[1] State Bank of Pakistan (SBP) . (2021). Weekly Statement of Position of All Scheduled Banks - 25-Jun-2021.

[2] aljazeera . (2023, January 13). Pakistan’s Foreign Reserve Drop.

[3] DawnNews . (2016, April 22). PayPak - Pakistan's First Domestic Payment Scheme Launched.

[4] Wikipedia . About 1LINK.

[5] 1LINK (Pvt) Limited . (n.d.). PayPak - Pakistan's First Domestic Payment Scheme. Retrieved from

[6] Profit by Pakistan Today. (2019, January 17). Pakistan's First Domestic Payment Scheme PayPak Sees Growth.

[7] Ahmed, A., & Haroon, O. (2019). Economic Impact of International Payment Card Scheme Fees on Pakistani Banks. Pakistan Journal of Commerce and Social Sciences, 13(1), 1-18.

[8] State Bank of Pakistan. (2015). National Financial Inclusion Strategy.

[9] State Bank of Pakistan. (n.d.). Financial Inclusion.

[10] 世界银行 . (2021). Record High Remittances Sent Globally in 2020.

[11] State Bank of Pakistan. (n.d.). Home Remittances.

[12] The World Bank. (2020). Migration and Development Brief 33.

[13] Pakistan Remittance Initiative . (n.d.). Financial Literacy Program.

[14] The News International . (2016, April 24). PayPak: A Bold Step towards Financial Inclusion.

[15] State Bank of Pakistan. (n.d.). Home Remittances.?