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Challenges to net payment solutions in Pakistan

Regulatory framework of financial sector disallows any intermediary to play a role between customers and sellers for payment solutions.

By Jawwad Rizvi

Strict rules and regulations are the basic hindrance to the development of Internet payment PayPal-type solutions in Pakistan, restricting the robust growth of online businesses.

Currently, more than 95 percent of online purchases are completed through the cash-on-delivery model in Pakistan while banks and telecom companies are trying to find some easy payment solutions. However, the conservative regulatory framework of the country’s financial sector disallows any intermediary to play any role between customers and sellers for payment solutions.

According to the regulations, the State Bank of Pakistan (SBP) never allows any third party for financial services without having a banking company license from it. Even the telecos in Pakistan acquired microfinance bank licenses when they started their cellular financial services which were then completely regulated by the central bank. Otherwise, the Pakistan Telecommunication Authority is the sole regulator of the telecommunication sector.

In spite of the cellular financial sector’s tremendous growth during the past couple of years which makes it easier and convenient to transfer money, online sellers’ complaints of being unable to get merchant accounts are not addressed so far. The merchant account allows them to make card payments online.

The Citibank Pakistan was the only bank in the country to offer online merchant accounts, which were not even easy to get, but when the bank closed consumer-banking operations in 2012 in Pakistan, it left its almost 14 approved merchants high and dry without an online card processing facility.

Currently, a majority of banks are providing the Inter-Bank Fund Transfer (IBFT) facility to their customers, which is the main source for them to directly transfer funds from their banks electronically to online stores. They offer Internet banking or Internet bank fund transfer (IBFT) payment facilities through their websites.

But in these Internet banking facilities, one should be registered with the bank having an account; otherwise, he/she cannot avail such services. But this payment solution model is only limited within the country. If someone wishes to do online shopping from an international online store or a website other than Pakistan, he/she will require a valid debit or credit card.

It is expected that by 2017, the annual size of Pakistan’s e-commerce market will be over $600 million from the current size of around $50 million being spent on online shopping. However, the consumer trust on cloud-base shopping is another obstacle in growth of e-commerce in Pakistan. This customer’s attitude is hardly different from that of his/her American counterpart though. In the 1990s, people in the United States were reluctant to give their credit card information for online shopping while now more than 70 percent of Internet users are online shoppers.

Contrary to this less than three percent Pakistani Internet users are online shoppers and the figures would increase with the passage of time, depending on the nature of financial regulations implemented by the government.

In Pakistan, in 2008, Inov8 ─ a technology and consulting solutions provider company for cell and branchless banking ─ launched a third-party payment solution in collaboration with the Mobilink and a number of commercial banks with the name of ‘Mobilink Genie’. However, the central bank barred them from providing the service under the pretext that they lacked a banking license to perform the services of switching transactions between two parties.

According to prescribed guidelines of the SBP for the branchless banking, the customer data should be in the bank’s control alone. Thus, another company with no banking license can perform the activities of branchless banking. So the ‘Genie’ was soon gone with the wind.

Later, in October 2014, the SBP released Rules for Payment System Operators (PSOs) and Payment Service Providers (PSPs) allowing any applicant to become a licensed operator in Pakistan for payment systems. As per PSD Circular No. 03 of 2014, payment system operators (PSOs) and payment service providers (PSPs) can include the following:

i: Electronic payment gateway service providers to perform routing and switching of payment transactions/messages to facilitate: e-commerce, remittances, point of sale (PoS) network.

ii: Clearing houses to provide payment-related clearing services.

iii: ATM switch operators to provide routing of ATM transactions through inter-connectivity between the participants of the network.

iv: Any other payment system operator or payment service provider as may be permitted by the SBP.

The SBP then fixed the minimum paid-up capital requirement for the PSOs and PSPs (where applicable, free of losses) of Rs200 million or any other amount as may be prescribed by the bank from time to time, for each PSO or PSP-related business application, an additional 25 percent of the capital requirement, they will maintain at all times at least 10 percent of the required capital or any other amount prescribed by the bank as security deposit at SBP Banking Service Corporation (BSC) Office. Five percent of the security deposit will be kept in a non-remunerative current account with the SBP-BSC Office and five percent in the form of government security to be kept under lien at the SBP-BSC Office.

Globally, the PSPs rarely have to get licensed as they use the mechanism of the existing licensed entities, such as money transmitters and banks, to handle their transaction processing. A PSP’s business model hinges on having a transaction solution.

A PSP is essentially a full-stack operator acquiring relationships with the card schemes; it works with money transmitters for purposes of stored value or across-state-lines transactions and is even allowed to handle e-money (for example, digital money, provided commingling of funds is not done and a licensed banking financial institution provides it with depository and transaction banking services).

If the PSP itself cannot find a method to partner with a licensed entity, it will go and obtain a money transmitter license itself.

Faisal Khan, running a banking, payments and FinTech consulting firm, believes the new ‘rules are protectionism’ at its best, packaged so that only the uber-rich can afford them.

“As a payment consultant who mostly works with foreign clients, I continually deal with the issue of licensing in the United States, Canada and the European Union. Even the Euro fold’s payment institution license does not have such stringent financial requirements.”

The states of New York, California and Texas in the US issue the money transmitter licenses at times which represent the bulk of US financial transactions while a money services business license is more valuable in the three states than anywhere in the world.

The net worth requirements for applicants is at $500,000 in California and $250,000 in Texas and New York. The Surety Bonding for $1 million is provided at three percent per annum. So even obtaining bonding is economical.

Summing up the situation, easy Internet payment solutions are necessary for the growth of e-commerce in Pakistan for which regulators need to adopt a modern approach towards regulations instead of sticking to the conservative ones. Other than this, both services providers and regulators need to create users’ trust that their plastic money details are secured when they shop in ‘cloud’. The two steps are required for which some easy guidelines and opening up of the financial sector for new entrants through relaxed rules and regulations are vital.

This will open the way for a new era in e-commerce and the country’s economic development.

Khubaib Usmani, senior joint director, external relations department of the SBP, says that in order to create an enabling regulatory environment for technology-based payment solutions, the SBP on Oct 23, 2014 issued the Rules for Payment System Operators (PSOs) and Payment Service Providers (PSPs).

“The PSOs and PSPs are payment intermediaries, which will perform the role of providing, preparing, routing, switching and clearing of electronic and paper-based financial transactions under various business applications such as internet payment gateways, ATM switch operators, POS network gateways, e-commerce payment and remittance gateway, domestic payment schemes etc.; thereby facilitating banks and consumers of banking services.”

Explaining further, Mr Usmani says the concept was aimed at developing e-payment infrastructure for promoting electronic transactions in Pakistan. This regulatory framework therefore has enabled private sector companies to establish payment businesses, including PayPal-like interface for facilitating e-commerce transactions.

“A number of companies are now in the process of getting approval and establishing payment systems-related businesses (including Paypal-like interfaces) under these rules. However, the success of these companies and business will depend on market demand.”


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