In 2022 it was reported by the State Bank of Pakistan (SBP) that approximately 30% of the broad money (i.e., the total amount of money circulating in a country’s economy) is in cash form. The comparative figure for the developing world as a whole is less than 20%. Higher volumes of cash in circulation (CIC) come with a set of associated costs and challenges. One of these is the need for more currency to be printed to meet the demands of the local economy. This cost was PKR 15.762 billion in FY21, amounting to an increase of 18% from the previous year[1]. Money-led inflation is also caused by a large amount of cash being available in the economy, with too much money chasing a limited amount of goods. Higher CIC also means that the size of Pakistan’s undocumented economy is still significantly large. CIC percentage can be brought down by a shift towards cashless ecosystems, which can address these and other associated challenges.

There is ample global evidence that going cashless improves the size of the formal economy. As more data on digital transactions become available, it allows innovative fintechs and digital financial services providers to provide credit and sophisticated financial services using artificial intelligence led data analytics. There is a palpable excitement among all the stakeholders to drive the uptake and adoption of this system given the incentives at stake – it is estimated that the achievement of National Financial Inclusion Strategy (NFIS) goals will add $5.5 billion to the GDP and create 3 million new jobs out of which 1 million will be through digitization alone[2].

The numbers put forward by the latest edition of the K-FIS reveal an encouraging development: financial inclusion in Pakistan has grown by 9 percentage points from 2020 to 2022[3]. The State Bank of Pakistan (SBP) Annual Payment Systems Review for 2021-22[4] highlights a significant expansion in the digital payments ecosystem during the past fiscal year. Mobile phone banking surged by 100.4% to 387.5 million transactions, while internet banking witnessed a 51.7% growth to reach 141.7 million transactions. However, despite encouraging indicators a huge gap still exists between digital services and consumers, with there being 78.81 million mobile money accounts in 2021 of which 44.9 million are active.

A large proportion of payments in the country are still cash based and to constantly print money, destroy old bank notes and all other related logistics have a cost – the higher volume of transactions eventually propels further costs as well. Digital payments relatively have a lesser cost compared to this and will be beneficial in the long run. The switch will also gradually decrease the existing informal sector and bring them into the formal sector, allowing for an increase in the tax net, a boost in financial inclusion and be one of the economic drivers for Pakistan.

Various diverse use cases exist wherein cash-based transactions are predominantly prevalent but can be effectively digitized. One such challenge frequently encountered by Micro, Small, and Medium Enterprises (MSMEs) pertains to the timely disbursement of funds and employee benefits. In many instances, financial operations heavily rely on non-digital methods, resulting in cumbersome cash handling procedures that necessitate additional personnel for management. Furthermore, when a significant proportion of the workforce remains unbanked, both employers and employees face the absence of proper record-keeping practices. Addressing these concerns, mobile money wallets emerge as a favorable starting point, given their user-friendly nature that enables even individuals with limited literacy levels to comprehend and become familiar with their functionalities.

Moreover, a dearth of cashless alternatives persists for routine transactions. The majority of individuals belonging to the salaried class not only possess bank accounts but also exhibit a preference for maintaining their money within these accounts, owing to the advantages of expense tracking and enhanced security. The act of withdrawing cash from their accounts proves to be an inconvenience they would rather avoid. Their inclination leans towards conducting a plethora of transactions digitally; however, the limited embrace and acceptance of digital methods by both fellow individuals and merchants necessitate the retention of physical currency. In order to liberate individuals from the burdensome habit of carrying cash, it is imperative for the financial sector, in conjunction with regulatory bodies, to channel their efforts toward comprehending individual needs and effectively digitizing them.

The implementation of digital fee payment, in strategic partnership with payment aggregators and banks, represents a simple yet pivotal stride towards realizing a cashless future. By embracing this approach, customers can relish the convenience of effortlessly settling bills and managing their day-to-day expenditures, all while liberating themselves from the transactional expenses associated with cash-based transactions. Nevertheless, a prominent hurdle lies in the imperative task of enhancing and fostering financial literacy, hand in hand with digital literacy, among consumers. This challenge can be mitigated by capitalizing on the potential of digital wallets, wherein intuitive UI/UX design elements can be thoughtfully incorporated, gradually fostering consumers’ familiarity and proficiency with such digital products. Furthermore, these digital apps can serve as platforms for delivering financial literacy training, thereby advancing the cause of empowering consumers in their journey towards financial enlightenment.

The aforementioned issue that impedes the widespread adoption of digital transaction modes revolves around the reluctance displayed by merchants in accepting digital payments. In the current economic climate, merchants exhibit an understandable sense of caution and conservatism in safeguarding their profits. The prospect of digitization entails their inclusion within the formal banking framework, thereby subjecting them to the scrutiny of tax authorities. Additionally, the imposition of transaction fees associated with digital payments acts as a deterrent for merchants. Moreover, merchants argue that a digitized ledger is dispensable given that a substantial portion of their funds is not allocated towards store expenditures, and their profits remain modest. To truly incentivize merchants, digitization must be implemented on a comprehensive scale, permeating throughout the entire value chain and downstream to the end customers.

Merchants currently display an informal inclination towards accepting JazzCash and EasyPaisa payments. Nonetheless, in order to foster widespread adoption of these payment methods, it becomes imperative to provide more robust incentives. A notable development in this regard is the recent introduction of reduced sales tax on transactions facilitated through Electronic Money Institution (EMI) channels, as outlined in the new Finance Act 2023[5]. This reduction specifically applies to restaurants and eateries operating within the Islamabad Capital Territory (ICT), representing a positive step towards encouraging greater digital payment acceptance within the sector.

From the supplier perspective, merchants are primarily concerned with mitigating their cost of acquisition. Therefore, it is essential for the government to direct its focus towards implementing tax incentives that effectively promote digitization across the supply chain. Additionally, given the soaring fuel prices, the expenditure associated with traditional market visits for stock procurement becomes a significant burden. With the provision of appropriate incentives, merchants can be convinced to exclusively source their inventory from online platforms such as Bazaar Technologies or Dastgyr, thereby reducing their overall costs of procurement while simultaneously embracing the advantages of digitized supply channels.

The road to a cash lite future in Pakistan is fraught with multifaceted challenges. Overcoming such challenges will require regulatory efforts, as well as delivering supplementary interventions and innovative Digital Financial Services products that create synergies and can exploit potential transformative opportunities. Developments such as RAAST, a fully interoperable micro payment gateway, and the growth of the Fintech industry in Pakistan, offer tremendous opportunities that can promote a cashless ecosystem. RAAST has been an important component to promote linkages between various segments and players in the financial sector, and pushing a shift from siloed operations to an interconnected industry. In particular, the interoperable payment system allows customers to transact outside the network created by their own financial services providers. By creating an all-encompassing formal ecosystem of providers, it not only enhances customer experience, but more importantly, it creates a competitive environment where players focus less on expanding their individual market shares but more on providing consumer-centric, innovative and cost-efficient products.

Furthermore, in Pakistan, the fintech industry has not only experienced substantial growth – with the digital assets market projected to show a revenue growth of 80.0% by 2024[6] – it has also made a resonating impact in terms of creating a digital lifestyle for consumers through the introduction of BNPL services, bill aggregation, payment facilitation, saving tools such as digital ROSCAs, and even personal financial management and literacy products. Hence, a focal area should be towards developing the innovative start-ups and fintech landscape. The State Bank of Pakistan (SBP) has taken initiatives such as introducing regulatory sandboxes and issuance of EMI licenses which aim to support market players to develop innovative solutions for Pakistani consumers and enterprises for increasing access and usage of financial services within the existing infrastructure of the Ahsan Mobile Account scheme. Other relevant institutions on the public and private sides need to demonstrate a similar level of focus and commitment towards this end.

[1] Rahman, “Pakistan’s Currency in Circulation Soars Above Rs. 7 Trillion” (https://propakistani.pk/2021/11/01/pakistans-currency-in-circulation-soars-above-rs-7-trillion/)

[2] Sarfraz, “Raast – A Critical Piece in the Financial Inclusion Jigsaw” (https://www.brecorder.com/news/40050074)

[3] Karandaaz Financial Inclusion Survey 2022 (https://karandaaz.com.pk/karandaaz-research/karandaaz-financial-inclusion-survey/)

[4] State Bank of Pakistan, “Payments System Review for Year Ended June 2022” (https://www.sbp.org.pk/PS/PDF/FiscalYear-2021-22.pdf)

[5] Federal Board of Revenue Government of Pakistan, Finance Act 2023

[6] Statista Market Insights, 2023, FinTech – Pakistan. (https://www.statista.com/outlook/dmo/fintech/pakistan)