Interoperability and the Pathways towards Inclusive Retail Payments in Pakistan

1. Interoperability of retail payment instruments is not an objective in its own right; rather it is a means of achieving other desirable objectives. Interoperability can promote a range of intermediate objectives such as greater productive efficiency, convenience for customers and dynamic efficiency through promoting competition within the financial sector. However, the attainment of intermediate objectives like these must be prioritized and sequenced in order to reach broader desired outcomes. In Pakistan, two such wider outcomes are relevant: first, the goal of greater financial inclusion; second, the goal of reducing the use of cash for government payments. These two goals may be combined in the vision of an 'inclusive cash lite' society, in which cash is still used but is no longer pervasive. 2. An inclusive cash lite society is one in which a high proportion of adults have an electronic store of value and use it to make electronic payments of various types. It therefore requires a high level of financial inclusion but also helps promote inclusion since the high cost of cash handling deters usage of these services. As a way of calibrating this objective, we suggest a target of 100 million people using electronic financial services by 2020. This is a very ambitious target, many times the current number; however, it merits consideration because, in a similar period to 2011, voice services have been delivered to more than 100 million subscribers in Pakistan. 3. Meanwhile, there has been considerable progress in the rollout of branchless banking in Pakistan since it was introduced four years ago, although it has been slower than some had hoped. To date, over-the-counter (cash-to-cash), rather than account-based, transactions have dominated branchless banking, and the two current leading providers do not yet connect their m-wallets to the retail payment system. 4. Achieving 100 million banked clients will require a very substantial investment both by account issuers and by providers of cash handling infrastructure. Using current middle income country norms, an increase in financial inclusion of this magnitude would require a massive increase in the number and spread of financial touchpoints over and above the total of 74,000 branches, ATMs, POS and agents already in existence in 2011. Branchless deployment is essential to reduce the capital expenditure required, but the investment required is still likely to exceed $2 billion in aggregate. Additional new clients are unlikely to be able to generate much revenue on transactional …