Tap, pay, done!
In a small village in rural Punjab, 45-year-old Rubeena Najam effortlessly pays her utility bills and transfers and receives money from her family using her mobile phone. She's one of the 100 million Pakistanis who have embraced digital payments, driving a staggering 35% increase in transactions to 6.4 billion from 4.7 billion in the fiscal year 2024*. This remarkable growth is fueled by the proliferation of digital devices – with over 180 million mobile phone subscribers and 100 million internet users in Pakistan.
The widespread adoption of mobile phones, even in rural areas, has bridged geographical divides and empowered individuals like Rubeena to manage their finances securely and efficiently. Pakistan's digital landscape has transformed dramatically, led by urban centres like Karachi and Lahore. However, it's the rural areas that have witnessed the most remarkable growth, with digital payments increasing by 50% in the past year alone.
As digital payments become increasingly ubiquitous, it is essential to examine the key trends, drivers, and implications of this growth. While digital payments offer numerous benefits, such as enhanced convenience, increased financial inclusion, and reduced transaction costs, they also pose significant challenges, including cybersecurity risks, infrastructure constraints, and unequal access to digital services.
Moreover, the shift to digital payments raises important questions about financial literacy, consumer protection, and the potential for exclusion of marginalised communities. To navigate these complexities, Pakistan can draw valuable lessons from countries like China, Sweden, and South Korea, where digital payments have become the norm. By studying their successes and setbacks, Pakistan can refine its strategy to address the challenges, leverage the opportunities, and create a more inclusive and secure digital payment ecosystem.
Digital payments, the new normal
Pakistan's digital payment landscape has undergone a transformative shift in recent years, revolutionising the way people live, work, and transact. According to the annual Payment Systems Review released by the State Bank of Pakistan, digital payments now account for an impressive 84% of the total transaction volume, up from 76% just the year before, with a staggering 6.4 billion transactions recorded in the fiscal year 2024. This remarkable growth is a testament to the increasing adoption of digital channels, innovative payment solutions, and proactive regulatory measures.
At the forefront of this digital revolution are mobile banking apps and Internet banking portals. These platforms have witnessed a remarkable 62% increase in transactions, with 1,345.9 million payments processed in the fiscal year 2024 with the total value rising by 74% to Rs69.8 trillion. This surge in digital banking can be attributed to the convenience, accessibility, and security offered by these platforms. Users can now effortlessly pay bills, transfer funds, and check account balances from the comfort of their homes or on-the-go.
"I used to spend hours in bank queues to pay my bills," says Amna Khan, a 28-year-old marketing professional from Karachi. "Now, I can do it all from my phone in just a few taps. Mobile banking has been a game-changer for me." The ease of use and widespread acceptance of digital banking have made it an essential part of daily life for many Pakistanis.
Branchless banking wallets have emerged as the dominant force in Pakistan's digital payment landscape, accounting for 42% of the total transaction volumes at 2,697 million payments made by customers through their BB mobile app wallets. These wallets, offered by banks and financial institutions, provide users with a convenient and secure way to store and transfer funds. The growth of digital payments has also been driven by the increasing adoption of digital wallets, such as EasyPaisa, JazzCash, and NayaPay, which offer seamless payment experiences.
Rubeena Najam, a resident of rural Punjab, struggled to access banking services and pay bills due to limited mobility. Rubeena was hesitant to adopt digital payments due to concerns about security and scams. However, after using digital wallets for some time, she has become increasingly confident. "It was difficult at first, but now it seems too easy," she shared. "Digital wallets have simplified my life, saving me time and effort."
"Now, I receive money from my family working in another city directly into my digital wallet," she explained. She uses it to pay bills and other expenses on the go. “No longer do I need to visit an ATM or physically go to shops to make payments," she said.
For small vendors, shopkeepers, ride-hailing services, and street carts, this service has been a game-changer. By using their mobile number as their account number, they can easily access financial transactions. However, despite the introduction of debit cards, users still face challenges withdrawing cash from their accounts, as they need to visit a service provider vendor.
"Many customers use these services, but when I need to fuel up, several gas stations don't accept digital payments, forcing me to pay in cash,” Javed Ali, a 42-year-old ride-hailing driver, shared his experience. “Although carrying cash is risky, especially in a city like Karachi, it's sometimes the only option."
Pakistan's digital payment ecosystem has also seen significant investments in infrastructure development, with the establishment of the National Financial Switch (NFS) and the Pakistan Real-time Interbank Settlement Mechanism (PRISM). These initiatives have enabled faster, secure, and efficient payment processing, paving the way for a more inclusive and efficient financial system.
As digital payments continue to gain traction, a significant implication is the declining relevance of traditional banking and cash-based transactions. With digital payments offering greater convenience, security, and efficiency, the role of physical banking channels is being redefined. The question is, what does this mean for the future of cash and traditional banking in Pakistan? The answer lies in the shifting landscape of financial transactions, where the once-dominant cash economy is slowly but surely giving way to a digital revolution.
This transformation raises important questions about the fate of traditional banking and the implications for financial inclusion, economic growth, and societal change.
The decline of cash
The rise of digital payments has led to a corresponding decline in cash transactions and traditional banking. For the second consecutive year, cash transactions via bank branches have decreased, with a 4.16% decline in fiscal year 2023 and a 0.52% decline in fiscal year 2024. The cash transaction declined from 599.1 million in fiscal year 2022 to 571.2 million in fiscal year 2024. This trend is mirrored in the sharp decline of traditional bank branches' market share, which has plummeted from 45% in 2020 to a mere 8.9% in 2024.
The shift away from traditional banking is driven by the growing adoption of alternative payment methods. Mobile banking, Internet banking, and point-of-sale (POS) transactions have become increasingly popular, offering consumers greater convenience, security, and efficiency.
Mobile banking transactions increased by 70% for the second consecutive year, reaching 1,122.8 million. Internet banking transactions grew by 30% from 172 million to 223 million.
In a bid to promote digital payments, provincial governments have introduced incentives to encourage card transactions. The Sindh government, for instance, reduced sales tax on restaurant payments from 15% to 8% for card transactions, while the Punjab government slashed sales tax from 16% to 5%. These measures have played a significant role in driving digital adoption, particularly in the retail sector.
"The reduction in sales tax has been a game-changer for our business," says Fahad Ahmed, owner of a restaurant chain in Karachi. "We've seen a significant increase in card transactions, which has not only reduced our tax burden but also streamlined our payment processes. Previously, we had to deal with lengthy queues and manual reconciliation of cash payments, which was both time-consuming and prone to errors. With digital payments, we can now focus on providing better customer service and improving our overall dining experience."
"Moreover, the reduced sales tax has allowed us to pass on the benefits to our customers," Ahmed adds. "We've noticed a significant increase in customer loyalty and retention since the introduction of the reduced sales tax. Customers appreciate the convenience and savings that come with digital payments, and we're happy to oblige. It's a win-win situation for both our business and our customers," he said.
Consumers have also welcomed the reduced sales tax on card transactions. "I get to enjoy my favorite meals while saving on taxes. It's incredible how much of a difference seven percent can make,” said Farhina Latif, an MBA student.
The decline of cash transactions has also been driven by the increasing availability of POS machines. The number of POS machines has grown to 125,593, up 8.9% from last year, enabling more merchants to accept digital payments. A number of 271.4 million POS transactions worth Rs1.5 trillion were processed, up 36% in volume and 41% in value from the prior year. This expansion has been particularly beneficial for small and medium-sized enterprises (SMEs), which have traditionally relied on cash-based transactions.
Moreover, the shift towards digital payments has improved financial transparency and accountability. Digital transactions leave a digital trail, making it easier to track and monitor financial activity. This increased transparency has helped reduce the incidence of tax evasion and financial malfeasance.
However, the shift away from traditional banking also raises concerns about financial exclusion. As digital payments gain traction, there is a risk that marginalised communities may be left behind. To mitigate this risk, policymakers must ensure that digital payment platforms are accessible, affordable, and user-friendly for all segments of society.
Future outlook and challenges
The future of digital payments holds immense promise for further growth and innovation. As the country continues to navigate the complexities of a shifting financial landscape, several emerging trends are poised to shape the future of financial transactions.
The introduction of the Raast Payments System, a cutting-edge payment infrastructure developed by the State Bank of Pakistan, promises to revolutionise the way Pakistanis make domestic transactions. Raast enables real-time person-to-person payments, easing the process of sending and receiving money within the country.
Raast processed 496.1 million transactions amounting to Rs11,558.3 billion in fiscal year 2024. The SBP launched Raast person-to-person (P2P) use case, offering a free-of-cost facility for fund transfers between individuals.
"I've been using Raast for domestic transactions, and it's been a game-changer," said Hassan Nadeem, a 29-year-old freelance writer from Lahore. "The speed, convenience, and security of Raast have made it my go-to payment method. I can receive payments from clients in real-time, without worrying about lengthy delays or high transaction fees."
"Previously, I had to wait for days to receive payments from clients, which would hold up my work and impact my cash flow," Nadeem explained. "With Raast, I can instantly receive payments and focus on delivering quality work to my clients. The transparency and efficiency of Raast have also helped me manage my finances better, allowing me to track my transactions and make informed decisions."
Pakistan's real-time gross settlement system (RTGS), PRISM, has also witnessed significant growth. PRISM enables instantaneous fund transfers, settlement of government securities, and ancillary clearing in real-time, ensuring smooth, efficient, and irrevocable transactions. In fiscal year 2023, transactions via RTGS saw a remarkable increase, with volume rising from 4.9 million to 5.8 million and value soaring from Rs640.4 trillion to Rs1,043.1 trillion.
The growth in RTGS transactions was primarily driven by the settlement of government securities, followed by inter-bank fund transfers, third-party customer transfers, and ancillary clearing settlements. This impressive growth has improved the efficiency and security of large-scale transactions, facilitating Pakistan's economic growth.
Transactions via RTGS saw a significant uptick, rising from 4.9 million to 5.8 million in volume and from Rs640.4 trillion to Rs1,043.1 trillion in value during fiscal year 2023.
Pakistan's payment ecosystem is driven by a combination of factors. The increasing availability and adoption of digital channels, such as mobile and Internet banking, has provided consumers with unparalleled convenience. Regulatory initiatives like Raast have paved the way for faster, cost-effective transactions. Moreover, the shift from cash to digital payments reflects evolving consumer behavior, where speed, accessibility, and security are now paramount.
The surge in e-commerce and the rise of micro-merchants embracing digital solutions further indicate a broader transition toward a cashless economy. Together, these forces are shaping a new financial landscape, positioning digital payments as the cornerstone of Pakistan's economic future.
However, despite these advancements, challenges persist. Digital literacy remains a significant obstacle, with many Pakistanis lacking the knowledge and skills to navigate digital payment platforms. Infrastructure constraints, particularly in rural areas, also hinder the adoption of digital payments.
Security concerns are another major challenge. As digital payments increase, so do the risks of cybercrime and data breaches. Ensuring the security and integrity of digital payment systems is crucial to maintaining consumer trust.
To address these challenges, the government has launched several initiatives. The State Bank of Pakistan's National Financial Inclusion Strategy aims to increase digital payment adoption among underserved populations. The government has also established the Digital Payment Advisory Committee to facilitate collaboration between stakeholders and drive the growth of digital payments.
Additionally, the Pakistan Telecommunication Authority has introduced regulations to enhance mobile banking security, and the National Information Technology Board is working to develop a national cybersecurity framework. These efforts demonstrate the government's commitment to addressing the challenges and creating an enabling environment for digital payments to flourish.
As Pakistan continues to address these challenges and harness the potential of digital payments, the stage is set for fintech companies to play a pivotal role in driving innovation and growth.
*All statistics are from the Payment Systems Review for the fiscalyear 2024 released by State Bank of Pakistan