How are Digital Wallets Changing Customers Behavior in Pakistan?

Digital wallets and financial services area in Pakistan is undergoing a major shift. This change is accelerated by the pandemic-induced behavioral shift, during which people preferred to use contactless services for financial transactions. What began as a necessity during lockdown has transformed into a sustained preference for digital convenience. 

The Making of Fertile Ecosystem for Digital Wallets

This statistical trajectory of digital wallets and digital payment adoption in Pakistan reveals a number of facts: 

• Consistent growth in contactless financial transactions across retail industry 
• Rapid adoption of digital channels for funds transfers 
• Increased usage of mobile top-ups and bill payment platforms 
• Expanding digital payments across emerging rural and urban markets 

The synergy between infrastructure development and technological innovation has created opportunities for digital financial inclusion. 

Digital Retail Payments During FY24

Looking at the numbers for the past two fiscal years, we observe that the share of digital payments in the total retail space has increased from 76% in the year 2022-2023 to 84% in 2023-2024¹. During fiscal year 2023-2024, 5,371 out of 6,387 million retail transactions were conducted using digital channels. 

Source: SBP report on payment system review 2023-2024

Digital Payment Channels in Pakistan

Pakistan is rapidly embracing the trend of online shopping and digital wallets. This includes traditional methods like Cash on Delivery (COD) to modern payment methods like Buy Now, Pay Later (BNPL) and digital wallets.

The digital payment channels used by the customers in Pakistan consist of the following:

Internet Banking

Digital banking is growing steadily in Pakistan with people transitioning from traditional banking to internet banking for transactions such as funds transfer or loan payments. It allows users to perform most of the tasks via computer, laptop, or any other device having an internet connection.  

Mobile Banking

Compared to internet banking, mobile banking is performed via the bank app installed on phone or tablet. Mobile banking is more convenient compared to internet banking as it is easy to perform transactions via mobile app on-the-go. With mobile banking, you can handle bill payments or funds transfer in a few clicks easily. That’s why we see a huge rise in mobile banking transactions in recent years. This is expected to grow more in the coming years.  

E-wallets by EMI

Electronic Money Institutions (EMIs) is a financial institution authorized to issue electronic money. They provide payment services like online transfers and give you an option of e-wallet. EMIs operate in the same way like banks with the exception that they are not allowed to lend money.  

Online Banking Vs EMI’s E-wallets 

The number of users of EMI`s e-wallets is the least compared to users of other digital channels` users. This is because EMIs are in the business for 3 years only. Below is the number of users for each of the digital payment channel as of end of June 2024:

• Internet banking users: 12 Million
• Mobile banking users: 18.7 Million
• EMIs` e-wallets: 3.7 Million

The above numbers reflect confidence of the customers in digital payment instruments. A strong driver for this changing behavior of the customers is the ease and convenience offered by mobile payment methods. Instead of visiting a branch/ATM or showing the payment card, it is more convenient to use the in-hand mobile device for making payments and transfers.

Factors Affecting the Growth of Digital Payments

To better assess the digital penetration in the payment system, other indicators also need to be taken into account. For example, internet connectivity on mobile devices plays an instrumental role in enabling digital payments. 

Internet Connectivity 

With a population of around 241.4 million², Pakistan is the fifth largest country in the world in terms of population. Out of these almost  241.4 million potential customers, 193 million are cellular users which makes up around 79.4% of the total population³. And the number of mobile broadband subscribers is 139 million which constitutes around 57% of the population.

Therefore, internet coverage needs to be expanded to cover maximum clients for the growth of the digital payments landscape.

Number of Bank Accounts Vs. Users of Digital Channels

Another indicator to evaluate the growth in adoption of digital means is the ratio of users of digital payment channels to the total bank accounts in Pakistan. As of June 24, there were almost 207.3 million bank accounts maintained with commercial banks, development financial institutions, and microfinance banks⁴. 

However, out of these accounts, only 34.4 million are users of internet banking, mobile app banking and EMIs`s e-wallets which makes up only around 16% of the total bank accounts. If we add the number of branchless banking mobile app users, which is 58.7 million, the ratio is still 44%. Therefore, not only the unbanked but also the banked population needs to adopt digital payment channels and increase financial inclusion.

Digital Wallets: The Dominant Digital Payment Channel

Currently, there are 45 banks including microfinance banks which are operating as of the end of fiscal year 2024 while there are only 5 EMIs. These institutions are part of the country`s payment system and offer digital payment channels.

The number of users for all of the digital channels provided by banks and EMIs is growing on a year-on-year basis. As per the payment system review for 2023-2024 issued by State Bank of Pakistan (SBP), e-wallets of EMIs have grown by 85% followed by the users of internet banking (25%) and mobile banking apps (16%) on YoY basis. Not only the number of users, the percentage growth in volume of the transactions conducted using EMI`s e-wallets has also exceeded other digital payment channels.

Since the launch of e-wallets in 2021, the growth rate for both in terms of value and volume of transaction is the highest for EMI`s wallets compared to other digital channels. If we compare the number of EMI`s e-wallet transactions during the year 2022-2023 with those during the year 2023-2024, there is a growth of around 156%. The number of transactions conducted through e-wallets of EMI were 33.3 million and this number has increased to 85.2 million in just a year (2023-2024). The value of these transactions has also increased significantly from 71.9 billion in 2023 to 226.4 billion in 2024.

Source: SBP report on payment system review 2023-2024

Electronic Money Institutions (EMIs) in Pakistan

Electronic Money Institutions (EMIs) are non-banking entities that offer user-friendly and cost-effective solutions for digital payments. EMIs have played a crucial role in various countries for digitization of the payment system and to promote cashless payments. Before the issuance of regulations for EMIs by SBP in 2019, it was only the banking institutions that were allowed to issue payment instruments barring non-banking institutions to issue payment instruments. 

However, non-banking EMIs are now allowed to facilitate digital payments in an innovative and user-friendly way. Entry of these new players in the country’s payment system can also lead to financial inclusion and digitization of payment systems. 

The EMIs need to be registered with Securities & Exchange Commission of Pakistan (SECP) to obtain a license of an electronic money institution from SBP. This may be noted, however, that EMI are non-banking entities which means they are not allowed to take deposits from the public or offer loans to the customers.

Requirements to Establish an EMI in Pakistan

The requirement of minimum/initial capital for establishing an EMI is significantly less than that for commercial banks or microfinance banks. To set up a commercial bank, the minimum capital requirement is Rs.10 billion except if the license is obtained for an Islamic bank where Rs.6 billion is the minimum capital requirement⁵. 

For microfinance banks desirous of operations at  national level, the capital requirement is Rs. 500 million⁶. However, the initial capital required to obtain a license for EMI is Rs. 200 million whereas the requirement to maintain on-going capital depends on the amount of outstanding e-money balance⁷. This makes it attractive for the investors in start-up to set up an EMI and provide payment instruments to the untapped population.

Approved EMIs in Pakistan  

The EMIs have begun operations from fiscal 2022 and they are in the business for 3 years only. The first EMI obtained approval from SBP for commercial operations in 2021 and as of today,  there are five EMIs which are live for operations⁸. Below is the SBP approved list of EMIs:

1. NayaPay
2. Finja
3. SadaTech
4. Akhtar Fuiou Technologies
5. E-Processing Systems

Digital Payments in E-commerce  

E-commerce has played an important role in boosting the GDP across the globe. Retail consumers prefer to make purchases and pay for the goods/services using digital means. In Pakistan too, the share of payments through digital means including payment cards (debit/credit cards) and e-wallets has also increased. 

However, digital wallets/accounts have a larger share when it comes to payment for e-commerce compared to the payments made by the cards. For the year 2024, digital wallets/accounts have been used for around  87% of the digital e-commerce payments whereas the rest of the payments (13%) were executed using debit/credit cards.

Regional Comparison: Where Does Pakistan Stand?

The trend of developing and using digital wallets for retail and e-commerce is increasing in regional and global economies except for a few economies where customers still rely heavily on cash transactions due to trust and reliability issues.

Below is a comparison of the Pakistani market with some other regional economies*⁹.

* The numbers are reported for the year 2023.

Conclusion

Despite being the fifth largest country with regard to the population, Pakistan is still behind in e-commerce. The e-commerce size is only around 5.2 Billion USD which is far less than Indonesia, Philippines and Vietnam¹⁰. 

The population of Philippines and Vietnam is 115 million and 98 million respectively which is less than half of the population of Pakistan. However, the size of e-commerce in both countries is three times more than that of Pakistan. One significant reason for less share of e-commerce in the total economy is that a large part of the economy in Pakistan is informal and people still rely heavily on cash-on-delivery instead of making payments through digital means. 

Pakistan should take a number of measures to increase the share of digital wallets in ecommerce. Firstly, include more people in the banking channel to reduce the share of undocumented and informal economy. The financial inclusion of the masses shall help optimize the allocation of resources available in the country. Secondly, take measures to enhance internet connectivity and coverage to increase the size of digital wallets. 

Notes

• The year means fiscal year which starts from the end of June of a year and ends at the end of June next year.
• Ratio calculations are based on the numbers from the sources reported in this blog.

Sources

1. https://www.sbp.org.pk/PS/PDF/FiscalYear-2023-24.pdf ↩︎
2. https://www.pbs.gov.pk/sites/default/files/population/2023/Pakistan.pdf ↩︎
3. https://www.pta.gov.pk/category/telecom-indicators/164 ↩︎
4. https://www.sbp.org.pk/reports/stat_reviews/Bulletin/2024/Nov/MSB-Nov-24.pdf ↩︎
5. https://www.sbp.org.pk/bprd/2014/C10.htm ↩︎
6. https://www.sbp.org.pk/bsrvd/2008/C7.htm ↩︎
7. https://www.sbp.org.pk/psd/2019/C1-Annex-A.pdf ↩︎
8. https://www.sbp.org.pk/ps/PDF/List-of-EMIs.pdf ↩︎
9. https://offers.worldpayglobal.com/rs/850-JOA-856/images/TheGlobalPaymentsReport2024.pdf?mkt_tok=ODUwLUpPQS04NTYAAAGXN3w7LEtEirc4LIqQ7pj371X0L_3mc-f_SZ3icgfZry9IPT6EVcZ-5Z7-SEvMECobICowFm01bUMOdS3of7vLDLPVs0FxvAa5LpKF8sm_4clux3A ↩︎
10. https://www.trade.gov/country-commercial-guides/pakistan-ecommerce#:~:text=As%20per%20local%20trade%20resources,promote%20their%20products%20and%20services ↩︎