May 08, 2020 (MLN): The global crisis amid pandemic Covid-19 is likely to have an impact on low- and middle-income countries, including Pakistan. As more people are employed under vulnerable employment, and lesser Small and Medium Enterprises (SMEs) are linked to the formal financial sector, the ability to respond to the impact will also be weaker.

A research report by Karandaaz, a non-profit organization, titled ‘Industry Note: COVID 19 and its Impact on Pakistan’s Digital Financial Services Landscape’, has analyzed that Digital Financial Services (DFS) are being favored as the preferred mode of financial transactions as they resonate with the precautions necessary amidst the lockdowns and widespread social distancing to contain the spread of COVID-19.

Lately, State Bank of Pakistan has taken measures to support the digital financial ecosystem through the promotion of DFS, including the waiver of transaction charges for banks and MFBs customers on RTGs transfers and using their online funds' transfer services, offer loan repayment through digital channels and enable digital challan collection. 

The report highlighted that these measures may provide a significant opportunity for the DFS ecosystem in Pakistan to accelerate the adoption and utilization of DFS channels. Other initiatives being undertaken by the Government and Digital Financial Service Providers (DFSPs) include:

• A large Government to Person (G2P) funds transfer scheme (using the Ehsaas PMT Score methodology). The funds will be disbursed through POS of DFSPs and through direct Bank branches, after Bio-Metric verification

• Zakat disbursement is also being undertaken through digital channels

COVID- 19, A Catalyst for High Adoption and Increased Usage

Karandaaz conducted a survey of 17 DFSPS and 8 Fintechs across the country to understand the impact of COVID- 19 on the DFS ecosystem in Pakistan.

The findings from the research show that 94 percent of the respondents feel that adoption and usage of DFS, overall, will increase in the next three to four months. This might be a short-term impact but provides a significant opportunity to influence user behavior, the report said.

Correspondingly, 69 percent of the respondents believe the mobile wallet adoption will increase in the next three months. Whereas 25 percent suggest that adoption might not increase, but usage by current mobile wallet subscribers will increase. Mobile wallet subscription has also been relaxed by the SBP, where, instead of biometric verification at the agent site, in-app biometric verification has been allowed. This is likely to have a positive impact on new account registrations. However, as agents remain closed due to lockdown throughout the country, cash-in and cash-out challenges persist, revealed research by Karandaaz.

As cash is being discouraged to control the transmission of the virus, there will be a significant push towards wider adoption of DFS. To avoid cash, consumers will increasingly adopt digital wallets and opt for contactless payment methods that will require less physical interaction.

Mobile top-up accounts for ~45% of the overall transactions, whereas Bill payments have a ~4% share. However, research showed that under the current circumstances 31 percent of the DFSPs believe that Bill payment will become the most popular use case in the coming months whereas Mobile Top Ups have been identified as the second most utilized use case with 23 percent, exhibited in the above figure.

The shift in the type of transactions can be explained by the closure of a large number of DFS agents throughout the country, reduced banking hours, and limited mobility of consumers. It can also be attributed to COVID-19 induced change in customer behavior, the research concluded.

Similarly, there will likely be a shift to online shopping, as more consumers will shop online for the first time in new categories, particularly groceries and household essentials.

Additionally, while the current estimate of active mobile accounts is around 24.5 million accounts, it is anticipated that many mobile wallet users will be transacting on behalf of friends and family for bill payments, mobile top-up, and donations.

Priorities for DFSPs

Responding to the likelihood of enhanced utilization of DFS, DFSPS believe that developing new innovative products (such as insurance) and introducing new use cases for consumers, undertaking mass awareness campaigns around benefits and utility of DFS especially wallets, improving agent liquidity, and curbing frauds will help in accommodating the increased demand in the coming months, the research highlighted.

Short Term Interventions

Sector Enablers will also need to play a role in providing impetus to the DFS ecosystem in Pakistan in light of the current circumstances. The research suggests that in the short-term, sector enablers can take measures that will support the DFS ecosystem and facilitate consumers and agents. These include:

• Utilization of roaming agents- especially for cash transfers to the elderly, and people with special needs9.

• Provision of Tax Incentives on Agent Transactions for improved agent liquidity and business continuity

• Maximize G2P Transfers through Mobile Wallets – (24.5 million active accounts out of a total of 46 million mobile accounts)

• Include DFS agents in the ‘essential’ services list – DFS agents also fall within the ambit of financial services, the government may consider categorizing them as essential services moving forward.

Long Term Interventions

DFSPs believe that coming out of the current circumstances, the regulator can play a central role in creating a more sustained impact of DFS in the country in the long run. This can be done through:

• Provide incentives for retailers to accept digital payments (by reducing tax)

• Enhance daily cash out limits for agents, especially in rural areas

• Enable a one-window access for all DFSPs so that consumers do not have to download multiple applications to undertake transactions

• Create a central compliant management cell that can receive and track complaints against agents

• Facilitate low cost of payments

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