Pakistan Takes The Next Step Toward A Digital Economy

By Florian Rauchfuss

On Jan 11, 2020, Prime Minister Imran Khan launched Pakistan’s first instant Digital Payment System during a ceremony in Islamabad. Hopes are high that ‘Raast’ will uplift Pakistan’s economy in new spheres. But, what does the new system mean for the domestic e-commerce sector?

In 2020, Covid-19 accelerated the growth of the global e-commerce sector. The Pakistani e-commerce sector developed positively as well. In 2018, the sector was estimated to be Rs99.3 billion, which accounted for year-on-year growth of 92%. An even higher growth rate can be expected for 2020.

The positive trend is not new. However, the Pakistani e-commerce sector has many structural problems that are inherent and partially related to the cash-driven economy, low financial inclusion as well as a fractured online banking system. These obstacles prohibit an even stronger performance. Overall, the sector could not fulfill its true potential until now.

Raast, the country’s new instant Digital Payment System, is supposed to resolve many existing obstacles by streamlining digital payments in the country, increased financial inclusion, lower costs, and instant digital payments. It has been developed since 2016 in a joint effort by the State Bank of Pakistan (SBP), Karandaaz, and the Bill & Melinda Gates Foundation, with additional support from the World Bank, the United Kingdom, and the United Nations.

The positive digital-driven approach is represented by the name itself. Raast, an Urdu word, has multiple meanings. First, the direct path between two points and, second, the right path to choose. In this regard, the right path for the economy is ongoing digitization, and the shortest way is streamlining digital payment systems in the country.

The system will be launched in a phased roll-out with the first phase starting in Jan 2021. In this phase, instant transfers of bulk payments are supported. The second phase allows government entities to digitize payments. The third phase will conclude the launch in early 2022 and enables merchants as well as small businesses to receive instant payments from customers through different digital payment methods. Besides, until July 2021, SBP will digitize all Person-to-Person payments (P2P) using mobile phone numbers instead of account numbers.

Pakistan’s government aims to achieve multiple goals with the new system. The highest priority has increasing the tax collection rate, boosting financial inclusion of women, support government entities with high-volume bulk payments as well as the further digitization of the economy, and reduction of corruption.

Raast has been promoted with a long feature list. It includes instantaneous payments, low-to-no transaction costs for end-users, full sector-wide interoperability, enhanced security & reliability as well as a customer-centric approach. The amalgamation of that promises a fast-paced development towards a digital economy.

Regarding the e-commerce sector, it can be expected that Raast will have a positive impact. Financial inclusion is a major problem in the Pakistani market. Only around 20% of the adult population has a bank account. This is one of the various reasons that Cash-On-Delivery (COD) is still the most preferred medium of payment resulting in liquidity problems for many online businesses. Moreover, it creates a dependence on courier services, a high risk for all e-commerce merchants.

Streamlining digital payments is therefore a remarkable step to support the e-commerce sector overall and to boost its sustainable development. As of now, 33 banks with separated payment systems are regulated by the SBP. Currently, these artificial payment silos can only be synchronized via 1Link but that is a costly alternative. Hence, Raast has the potential of a groundbreaking impact on the sector and to ease the use of e-commerce channels in the country. The proactive approach to boost e-commerce and the digital economy of the SBP with its National Payment Systems Strategy (NPSS) is the right step forward for the country.

However, if the current system will finally lead to permanent and sustainable digitization of the economy cannot be predicted yet but, certainly, Raast cannot solve all existing problems of the sector at once. Problems like missing trust of customers, unreliable courier services, unawareness of e-commerce solutions, and missing innovation are not addressed yet and need solutions. The sooner, the better. Furthermore, it has to be ensured that the customer onboarding is easy, otherwise, the new system will have problems getting traction and all efforts are meaningless.

All in all, Rasta will help to digitize payments and has the potential to boost financial inclusion in the long-run. Other problems, like missing infrastructure, low acceptance of e-commerce channels, and reliability issues with courier services are issues the e-sector has to find answers to flourish in the future. However, with the system in place, the government showed its support of the sector and ongoing positive development can be expected.