Pakistan's E-Commerce Landscape Set for Major Boost with SBP's Latest Payment Card Regulations

The State Bank of Pakistan's recent announcement regarding the regulation of payment card acceptance infrastructure is expected to have a significant impact on the country's digital economy.?

According to the announcement by the State Bank of Pakistan, the payment card acceptance infrastructure in Pakistan will be improved through several measures. Firstly, the Interchange Reimbursement Fee (IRF) for debit and prepaid cards issued in Pakistan used on domestic POS terminals will not exceed 0.2%, and for credit cards, it will not exceed 0.7%. Secondly, the lower range of Merchant Discount Rate (MDR) of 1.5% has been abolished. Finally, all e-commerce/online payment acquirers operating in Pakistan shall enable acceptance of Domestic Payment Scheme (DPS) card for card-not-present (CNP) transactions on their respective payment gateways by June 30, 2023. These measures aim to enhance the digital economy of Pakistan.

Here are some of the benefits that this regulation is likely to bring:

o???Improved Payment Card Acceptance Infrastructure:?The regulation is aimed at improving the payment card acceptance infrastructure in Pakistan. This will enable merchants to accept digital payments more easily and securely, which will encourage the use of digital payments by consumers. The improved infrastructure will also help to reduce the transaction costs associated with digital payments, making them more affordable for businesses.

o???Lower Transaction Costs:?The regulation has set a cap on the Interchange Reimbursement Fee (IRF) for cards issued in Pakistan used on domestic POS terminals. The IRF for debit and prepaid cards cannot exceed 0.2%, and for credit cards, it cannot exceed 0.7%. This will significantly reduce the transaction costs for merchants, which will encourage them to accept digital payments and pass on the benefits to consumers.

o???Abolition of Low Merchant Discount Rate:?The regulation has abolished the lower range of Merchant Discount Rate (MDR) of 1.5%. This means that merchants will now have to pay a minimum MDR of 1.75%. This will help to increase the revenue of payment service providers and encourage them to invest in improving the payment card acceptance infrastructure in Pakistan.

o???Enabling Acceptance of Domestic Payment Scheme (DPS) Cards:?The regulation mandates that all e-commerce/online payment acquirers operating in Pakistan must enable the acceptance of Domestic Payment Scheme (DPS) cards for card-not-present (CNP) transactions on their respective payment gateways by June 30, 2023. This will make it easier for consumers to use their domestic payment cards for online transactions, which will encourage the use of digital payments in the country.

o???Boost to the Digital Economy:?The regulation is expected to boost Pakistan's digital economy by making it easier and more affordable for businesses to accept digital payments. This will encourage the use of digital payments by consumers, which will in turn promote financial inclusion and help to reduce the country's reliance on cash-based transactions. The increased use of digital payments will also help to improve the efficiency and transparency of the economy.

Let’s understand the Key Terminologies of Payment Card Ecosystem:?

Merchant Discount Rate (MDR):?MDR is a fee charged by banks and financial institutions for providing payment processing services to merchants. It is the percentage of the transaction value that the merchant pays to the bank or financial institution for the processing of the transaction. The MDR covers the cost of transaction processing, network fees, and other related expenses.

Interchange Reimbursement Fee (IRF):?The IRF is the fee charged by the issuing bank to the acquiring bank for processing a card transaction. It is a fee paid by the acquiring bank to the issuing bank for each transaction that takes place using a payment card. This fee is usually a percentage of the transaction value and is intended to cover the cost of processing the transaction.

Domestic Payment Scheme (DPS):?A Domestic Payment Scheme is a payment network that operates within a country and is typically limited to transactions made within that country. DPSs are often designed to promote competition and reduce costs in the local payment market.

POS terminals:?POS stands for Point of Sale, and a POS terminal is a device used by merchants to accept payments from customers. It is a computerized system that facilitates the processing of payments made with credit or debit cards.

Role of Schemes:?Visa, Mastercard, and other similar companies are known as payment schemes. They act as intermediaries between issuing and acquiring banks, providing a network that enables transactions to take place between them.?The payment scheme sets the rules and regulations that govern the use of their payment cards, including card issuance, acceptance, and transaction processing. They also provide a platform for settlement of transactions between the issuing and acquiring banks, ensuring that funds are transferred correctly between them.

Visa and Mastercard also provide additional services, such as fraud detection and prevention, as well as offering rewards and incentives to cardholders. By offering these services, they aim to increase the number of cardholders and encourage more usage of their payment cards, which in turn drives more transactions through their network.

Issuing Bank:?An issuing bank is the bank or financial institution that issues the payment card to the cardholder. When a customer opens a bank account or applies for a credit card, the bank issues them a payment card which they can use to make purchases. The issuing bank is responsible for providing customer support, managing cardholder data, and ensuring that the card is used appropriately.

Acquiring Bank:?On the other hand, an acquiring bank is the bank or financial institution that enables a merchant to accept card payments. When a merchant wants to accept card payments, they need to set up a merchant account with an acquiring bank. The acquiring bank provides the merchant with a point-of-sale (POS) terminal, which allows them to accept card payments. The acquiring bank also processes the transaction, verifies that the card is valid and has sufficient funds, and transfers the funds from the issuing bank to the merchant's account.

Customer Journey explained

In a card transaction, when a customer swipes their card at a POS terminal, the terminal sends the transaction information to the acquiring bank. The acquiring bank then sends this information to the issuing bank for verification. The issuing bank checks if the card is valid and has sufficient funds to cover the transaction. If the card is valid, the issuing bank approves the transaction and sends the approval back to the acquiring bank. The acquiring bank then sends an approval message back to the POS terminal, and the transaction is completed.

Throughout this process, both the issuing and acquiring banks play crucial roles in ensuring that the transaction is secure, efficient, and accurate. The issuing bank protects the cardholder's funds and ensures that the card is used appropriately, while the acquiring bank enables the merchant to accept card payments and processes the transaction efficiently.

The customer journey begins when the customer decides to make a purchase and selects the item they wish to buy. Once the customer has made their selection, they proceed to the POS terminal to complete the payment process. The customer will then hand over their payment card, either a debit or credit card, to the merchant who will swipe the card through the POS terminal.

Once the card is swiped, the POS terminal reads the information stored on the card, such as the cardholder's name, card number, and expiry date. This information is then transmitted to the payment processor, which verifies the card details and confirms that the customer has sufficient funds available to make the payment.

If the payment is approved, the payment processor sends a message back to the POS terminal, which displays a message indicating that the payment has been successful. The customer is then asked to enter their PIN (personal identification number) on the POS terminal or sign a receipt to complete the transaction.

The payment processor then deducts the amount of the transaction from the customer's account and transfers it to the merchant's account, minus any transaction fees charged by the payment processor and the acquiring bank. The acquiring bank is responsible for processing the transaction and forwarding it to the payment processor for authorization.

In summary, the customer journey when using a card to make a payment at a POS terminal involves the following steps:

1. Customer selects an item to purchase
2. Customer presents their payment card to the merchant
3. Merchant swipes the card through the POS terminal
4. POS terminal reads the information stored on the card and sends it to the payment processor
5. Payment processor verifies the card details and confirms the payment
6. Customer enters their PIN or signs a receipt to complete the transaction
7. Payment processor deducts the amount of the transaction from the customer's account and transfers it to the merchant's account, minus any transaction fees charged by the payment processor and acquiring bank.

Let us take an example,?there was a person named Ali, who wanted to buy a shirt from a store. He picked a shirt and went to the cash counter to pay for it. The cashier asked him if he wanted to pay in cash or use his payment card. Ali decided to use his payment card, so he swiped it on the Point of Sale (POS) terminal.

Now, let's see what happens behind the scenes

Issuing Bank:?Ali's payment card was issued by a bank. When Ali swiped his card, the information on the card was sent to the issuing bank to validate it. The issuing bank checked Ali's account balance and other information to see if he had enough funds to make the payment.

Scheme:?The payment card used by Ali was a Visa card. Visa is a payment scheme that connects issuing banks, acquiring banks, and merchants. Visa ensured that the payment was authenticated and secure.

Acquiring Bank:?The store where Ali was shopping had a relationship with an acquiring bank that provided it with a POS terminal. When Ali swiped his card, the information was sent to the acquiring bank, which validated the payment information with the issuing bank.

Payment Validation:?After validating the payment information, the acquiring bank approved the payment and sent a message to the POS terminal, indicating that the payment was successful. The cashier then gave Ali a receipt, and he left the store with his new shirt.

MDR:?When the acquiring bank processed the payment, it charged the merchant a Merchant Discount Rate (MDR) for using its payment services. The MDR is a fee charged by the acquiring bank to the merchant for processing electronic payments.

IRF:?Additionally, when the payment card used by Ali was issued in Pakistan and used on a domestic POS terminal, the issuing bank charged the acquiring bank an Interchange Reimbursement Fee (IRF). The IRF is a fee paid by the acquiring bank to the issuing bank for processing electronic payments.

So that's how Ali was able to buy his shirt using his payment card, and the payment was processed securely and efficiently through the issuing bank, acquiring bank, payment scheme, and the POS terminal.

Implications for the Fintechs and small merchants

The recent regulation by the State Bank of Pakistan (SBP) to improve the payment card acceptance infrastructure in the country is expected to benefit fintechs and small merchants in several ways.

Firstly, the reduction in Merchant Discount Rate (MDR) will lower the cost of accepting card payments for merchants. This means that small businesses, especially those with low-value transactions, will be able to accept digital payments without incurring high fees. This will encourage them to adopt digital payments and move away from cash-based transactions, which are costly and time-consuming to process.

Secondly, the requirement for all e-commerce/online payment acquirers to enable acceptance of Domestic Payment Scheme (DPS) cards for card-not-present transactions will provide a boost to the e-commerce industry. This will allow small merchants who operate online to accept digital payments more easily and at a lower cost. This is particularly relevant in the current era of Covid-19, where online transactions have become more important than ever.

Thirdly, the Interchange Reimbursement Fee (IRF) for cards issued in Pakistan used on domestic POS terminals will provide benefits to both small merchants and fintechs. By capping the IRF at a low rate, the cost of accepting card payments will be reduced for merchants. This will encourage them to adopt digital payments and move away from cash-based transactions, which are costly and time-consuming to process. For fintechs, this means that they can offer their services to small merchants at a lower cost, making their offerings more attractive and accessible.

Overall, the recent regulation by SBP is expected to provide a boost to the fintech industry and small merchants by making digital payments more accessible and affordable. This will lead to a more efficient and cost-effective payment system in Pakistan, ultimately benefiting both businesses and consumers.

In conclusion, the State Bank of Pakistan's regulation of payment card acceptance infrastructure is a significant step towards promoting the use of digital payments in the country. The regulation is expected to bring several benefits, including improved payment card acceptance infrastructure, lower transaction costs, and a boost to Pakistan's digital economy.

Written by: Hassan Azwar - Assistant Director SBP        

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