All banks in Pakistan settle their local and international merchant transactions through VISA.

Settlement through VISA has one very major short-coming; it is conducted through the dollar. While this is all right for international transactions, local transaction payments through VISA create additional cost and burden on the overall economy.

For instance when an individual shops at a store via a VISA Debit / Credit card of, let’s say MCB bank, and the machine installed in that particular shop pertains to UBL bank, both local banks conduct a local transaction- at the time of the transaction’s settlement though, there is in place a very complicated process.

MCB will have to arrange for dollars in their Nostro account, and then the amount will be debited from there and credited into UBL’s Nostro account, with both accounts maintained at JP Morgan.

The process leads to an increase in the price of dollar in the Pakistani market. Secondly banks have to maintain a credit balance in their Nostro accounts. If this balance is not available the account goes for OD facility. JP Morgan has marked high penalties for such an instance should occur. Further for each dollar settlement through VISA JP Morgan charges 0.13pc, an additional cost banks to bear.

Keeping in view the above scenario the State Bank is looking for solutions to the issue since almost 90pc of merchant transactions are conducted locally. Consequently, 1-link has come up with a solution for this problem and initiated a new mode of settlement in the form of ‘PAYPAK’. PAYPAK will settle its transactions in local currency, without involving dollars, and the process will be similar to that of a Real Time Gross Settlement (RTGS).

If the PAYPAK process is adopted the SBP will be able to curtail the unnecessary demand of dollar, local banks will escape from maintaining additional funds in their Nostro accounts and save the extra cost they pay for local transactions through VISA.

That being said, in launching PAYPAK there is still a major hurdle: all banks are on the VISA channel right now. In order to settle a local transaction through PAYPAK, all cards will need to be converted from VISA to PAYPAK; but if that were to happen, settling international transactions would become a question mark.

The solution might be issuing separate cards for local and international transactions, or developing an additional mechanism to link both VISA and PAYPAK to the same channel.

While the concept is still in its initial stages, with lots of debate and collective wisdom it may become possible for PAYPAK to usher in a new way of settling local transactions.

The writer works in MCB as an Area Operation Officer, and has a Junior Associate-ship from the Institute of Banker’s Pakistan

Published in Dawn, Business & Finance weekly, September 26th, 2016