Things got pretty exciting for Pakistan’s freelance community as the State Bank introduced a new framework allowing them to open the Exporters’ Special Foreign Currency Account to retain their dollars. In a similar vein, Sadapay made a big splash when they announced integrating with Apple Pay and GPay, enabling freelancers to get paid directly into their wallets.

The product seems to be pretty seamless, according to those who’ve used it, and further strengthens the argument that Pakistan’s increasingly tech-savvy population is moving towards digital wallets for financial services. However, looking at the industry overall, it’s not all sunshine and rainbows. There’s been a huge exodus of Electronic Money Institutions (EMIs) lately, as at least half of the 12 entities that had some form of approval in the past are now gone.

First, TAG’s license was revoked for fraud while YAP quietly exited the country, reportedly having burned through the money. More recently, Finja sold its EMI business to OPay in an attempt to focus on lending. Meanwhile, Careem and Checkout withdrew their applications, with Zong’s PayMax now joining that list.

While Pakistan’s economic climate must have had a significant role in triggering this exodus, EMIs were always going to be a tough business. As per numbers compiled by Data Darbar, it takes an average of 295 days to reach from in-principle approval to pilot operations and another 495 days to graduate to commercial. And even then, the mandate is severely limited: you can only make payments, which is hard to profit from, especially with Raast now.

Though at least half of the Electronic Money Institutions are gone, the ones left are doing well

That said, two entities seriously pursuing digital wallets have held up well, despite whatever the risks were. According to the State Bank of Pakistan’s Payment Systems Review, EMIs recorded a throughput of Rs 222.2 billion across 81.5 million transactions in FY23 — the first full year of their commercial operations. If you zoom in on the quarterly data, the trends are even more interesting.

In Q4-FY23, EMIs did 29.5m transactions worth Rs 84.1bn, up 824 per cent and 656pc year-over-year, respectively. While the growth is understandably high due to a low base, the numbers have now become meaningful, at least. As you’d expect, funds transfers were the biggest piece, making up 77.9pc of value and 62.4pc of volume last fiscal year. Those shares have only climbed each quarter.

More interestingly, cash transactions had the next highest share of volume at 7.97pc. This shows digital payments still aren’t widely accepted, forcing people to withdraw cash. How much Raast’s person-to-merchant module changes would be interesting to see over the next few months. Volume-wise, e-commerce had the second highest proportion at 13.8pc, as EMIs processed 11.2m transactions. For context, this number is over a third of what banks did during the period.

Meanwhile, the number of e-wallets hit 2.02m by June, up 1.65m year-over-year. EMI-issued cards also grew to 2.83m from just 515,000. That includes physical and virtual cards, so there’s some level of duplication here. But for context, 37 banks issued only 3.7m debit cards during the same period, while a nascent industry with effectively only two players managed 2.3m over the same 12 months.

On the acquiring side, things were mixed. E-commerce merchants onboarded by EMIs were pretty much static in every single quarter, standing at 4,956 by June. However, freelancers exploded to 46,809, despite just launching in Q2-FY23. A lot of the credit for this goes to the central bank for updating regulations and expanding the scope of EMIs.

For example, they doubled the transaction limit to Rs400,000 for verified users, with options to further increase it to Rs1.5m for certain segments. They also expanded the scope of services to now include aggregation, e-commerce escrow and even providing Application Programming Interface to other financial institutions.

Most importantly, digital wallets can now do cross-border payments, opening up the freelancer segment, where we have seen both early growth and product development. Similarly, 75pc of their previous three months’ daily average outstanding balance was in government securities, thus increasing their float income. And, of course, give yet another source of funding to the perpetually cash-strapped finance ministry.

The writer is the co-founder of Data Darbar

Published in Dawn, The Business and Finance Weekly, October 30th, 2023