Digital payments are quite a buzz these days. Pick an unemployed graduate from a private university at random and there is a high probability he will tell you about his “disruptive” fintech, which will soon transition Pakistan away from a cash-based economy. When that’s going to happen is anybody’s guess.

The more important question is: how will that come about? After all, digital has many roads, some more sophisticated than others. From internet banking and QR payments to point-of-sale (PoS) machines and mobile wallets, where does our answer lie? Is there a prescribed path or should we attack from all fronts?

For the sake of this piece, let’s stick to PoS on which the recently released Payment Systems Review 2019-20 has a good deal to tell. To begin with, the total volume of transactions through the channel edged lower 2.9 per cent to 70.3 million while the value was down 0.5pc to Rs364.2 billion. Of course, Covid-19 had forced the economy to shut down. So a slight decline in the numbers is not so surprising.

However, one worrying trend from the report was the significant dip in the number of PoS machines, which fell to 49,067 in 2019-20, from 56,911 a year ago. The reason for such a major decrease in an already underwhelming area can be found in the Payment Systems Review for the second quarter of 2019-20, which notes that a major acquiring bank pulled out around 10,000 inactive terminals. Therefore, it had little negative effect on the transactions.

Is the growth of PoS cannibalised by banks’ own competing product lines like mobile wallets, internet banking or QR?

Sources say that it was Bank Alfalah that did so and is now upgrading its machines. So over the next quarter, we can expect a major increase in the number of PoS machines. However, what matters ultimately is not the number of terminals, but the transaction volume and value. On that front, growth over the past few years has been impressive, but not too radical. A deeper look into the underlying numbers could be a cause of concern.

Take the ratio of the PoS-to-ATM volume, which stood at a meagre 13.66pc, while the ratio for the value was 5.6pc. Even better, look at the number of paper-based transactions: there were 112m fewer transactions than ATM ones in 2019-20. Yet they generated the value of Rs131 trillion against Rs6tr generated by ATM transactions.

But back to PoS now. What’s holding it back? There have been factors affecting its growth — the primary one being that acquiring was a loss-making business. How so? Let’s understand how it works first. Whenever a payment is made by a customer, a chunk of that, known as the Merchant Discount Rate (MDR), is paid in charges to the multiple parties involved in that transaction.

First, there’s an issuer, your bank, whose card you swipethrough the machine, which takes the largest share (over 1pc) of the amount. Then enters the card scheme — Visa, Mastercard, UnionPay and now PayPak — that has its commission. Finally, there is the acquirer having its own cut, which is not enough to justify the costs of the entire operations, according to Ali Islam Khan of Keenu, a major player in the PoS business.

In this regard, the State Bank of Pakistan (SBP) in January took three remedies: mandating floor on the MDR for PoS acquiring, capping the interchange reimbursement fee (IRF) for debit and prepaid cards and directing banks/card issuers to offer the SBP-approved domestic payment scheme (DPS) — referring to PayPak — as the default card at the time of issuance or renewal of debit cards.

What that means is that a share of the issuer’s cut will now go towards the acquirer, who can expect a more sustainable unit economics. And the industry is optimistic. “Covid-19 set us back but the new regime will show marginal profitability in full year,” says a well-placed source at a major acquiring bank.

But obviously, there’re still bottlenecks. From the supply side, the cost of installing and running PoS machines is quite high. Estimates from Keenu put it at 30.5pc of total direct charges, including 17pc in sales tax, 3pc in value-added and 5pc in customs duty. There is the even bigger problem of merchants being unwilling to use PoS as it means exposing their sales to the tax authorities.

The Federal Board of Revenue (FBR) for its part is pushing retailers beyond a certain size to register with a central PoS that will document their volumes and bring them into the tax net. However, the portal is more of a sales management system than the kind we have been talking about, one that can accept card payments.

Could it also be that the growth of PoS is actually cannibalised by banks’ (that have the biggest footprint on the acquiring side) own competing product lines, including mobile wallets, internet banking or QR? A good example of this is how at malls or big stores there are mobile ATMs that allow consumers to take the cash route instead of using their cards. In the end, the customer stays with the bank but digital payments clearly are affected. “One size does not fit all and every use case has its one needs. It’s the banks’ responsibility to provide all the channels,” says the banker.

The problem is obviously bigger than just building the network or offering tax rebates. In a paper-based economy like ours, the merchant itself has to bear expenses in cash. So going digital from the customer end possibly makes things even more difficult. For example, they would still have to go to the bank or ATM in order to pay some of the suppliers or the daily labour.

Until the remaining business journey is not made digital, it’ll continue to be a hard-sell for financial institutions to get active users of their different product lines, be it PoS or QR. But that’s unlikely to happen when customers from the lowest strata can be charged as much as 7pc for a certain type of transaction.

Published in Dawn, The Business and Finance Weekly, October 19th, 2020