Strategy Note /

Pakistan digital payments are picking up, but structural issues remain

  • Mobile wallets in Pakistan are now more numerous than bank accounts. Transaction volume is also rising

  • However, some structural issues are limiting growth, making it harder for digital payments companies to survive

  • Slow merchant payments adoption, the undocumented economy and high costs are some of the key problems

Pakistan digital payments are picking up, but structural issues remain
Rohit Kumar
Rohit Kumar

Global Financials/Thematics

Rabail Adwani
Rahul Shah
Tellimer Research
23 June 2022
Published by

Pakistan’s digital payments opportunity is attracting interest from the corporate sector. The adoption of mobile wallets and e-banking services is picking up, which is an encouraging trend for the sector. However, there are some key obstacles that are limiting the overall development of the ecosystem. As a result, some of the top fintechs in the country are struggling to survive; Easypaisa, a leading digital payments operator, is up for sale and banks appear to be shying away from the space after incurring heavy losses. A potential slowdown in startup funding would add to the list of challenges already being faced. In this note, we discuss the recent trends in digital payments adoption in Pakistan along with key issues limiting the sector’s growth.

Pakistan now has more mobile wallets than bank accounts

There were around 80mn mobile wallets in Pakistan at the end of 2021, which is c25% more than the 63mn bank accounts in the country. This marks a sharp turnaround from 2017, when the number of bank accounts exceeded mobile wallets by a similar percentage. Today, 57% of the 80mn mobile wallets are active, which is higher than global norm of c40%. This indicates that Pakistan’s population is swiftly adopting mobile wallet technology. However, these wallets are primarily used for P2P payments, while merchant payments volume (which is a key profit and margin driver for payments operators) remains very low. We discuss this issue in more detail later in this note.

Pakistan now has more mobile wallets than bank accounts

Digital banking volumes are rising, but branch-based transactions still dominate

Digital banking volumes, as described by the State Bank of Pakistan, have grown at a 3-year CAGR of 26% to US$650bn in 2021 (US$100bn excluding real-time online branches and ATM transactions, which are not purely digital). In addition, customer-oriented mobile wallet transactions have grown at 62% CAGR to US$38bn in 2021.  

E-banking versus mobile wallet transaction value

Looking at the mix of banking transactions, paper-based activity still dominates with c57% share in transaction value, but this share has declined from 61% in 2021 and 71% in 2018. Online/digital banking transactions are currently 49% of the total, but even within this category, the major contributor (75%) is real-time online branches (RTOB), where branch involvement is still required. Note that these numbers contain both retail and commercial customer transactions, but big-ticket interbank transactions have been excluded.

Pakistan banking transaction mix

The biggest challenges for the digital payments sector

1. Merchant payments need to grow.

Retail payments, also known as merchant payments, are key to the development of any digital payments ecosystem. This is because operators have thin margins on P2P transfers, particularly those driven by agents. Therefore, the major profit generator for these companies is merchant payments. In addition, merchant payments help operators keep funds in the system, facilitating repeated usage by customers and also helping to generate float income. The major reason for the low share of merchant payments in Pakistan, in our view, is retailers’ reluctance to join the ecosystem as cash transactions allow them to avoid documentation. Also, there is less incentive for retailers to join the system as consumers are comfortable using cash and transactional costs are usually higher than cash handling.

Mobile wallets transaction mix

2. The undocumented economy is a huge hurdle.

Pakistan is a heavily cash-based economy, with M0 (a proxy for cash in circulation) at 35% of M2 compared to the median of 11% for emerging market peers. The undocumented economy has hurt Pakistan’s economy in many ways and is also a key brake on digital payments growth. Consumers prefer to deal in cash for almost every type of transaction; a lack of trust of online channels is one of the main issues, but avoiding taxes and documentation are also contributory factors. We think the efforts taken by the government in this area are much lower than is required.

Pakistan is a heavily cash-based economy

3. High cash-out costs charged by incumbent mobile wallet operators.

Our earlier studies suggest that fintech customers are extremely price-sensitive. However, Pakistan’s incumbent mobile wallet operators are more expensive than traditional banks, which limits usage. However, new players (like SadaPay) are offering much more competitive pricing and the Raast network is also likely to bring transactional costs down.  

High cash withdrawal cost for mobile wallets

4. Lending and investech are key fintech areas, but missing development.

In our study on fintech economics, we highlighted that lending and investech businesses are highly profitable segments, while payments fintech is not. This is one of the reasons why payments fintechs (such as Alipay, Paytm) diversify to lending and investments once they achieve scale.

However, in case of Pakistan, both lending and investment fintechs face significant challenges. Digital lending suffers from low credit bureau coverage, religious sensitivities and low financial literacy, while for investechs, the proportion of Pakistan’s population investing in capital markets is significantly lower than the global average.

Lending and investment fintechs are most profitable

Raast could be a game changer

Raast has been launched by the State Bank of Pakistan to develop the digital payments ecosystem and provide a level playing field to payments companies. Raast is a secure, efficient and low-cost digital infrastructure backbone that private companies can use to create front-end platforms, while enjoying interoperability with other organisations.

Raast can significantly reduce transactional costs and improve the user experience by allowing all payments providers to transact through it. It should also promote innovation and increase consumer trust in the digital payments system.

Similar platforms in other countries like India (UPI) and Brazil (PIX) have shown strong consumer response and we also expect Pakistan to benefit.

UPI and PIX payments in India and Brazil