Stay tuned with CashEssentials news ! - beyond payments
By subscribing, you accept our Privacy Policy.

The Future of Cash in Pakistan

Categories : Cash connects people, Cash does not require a technology infrastructure, Cash is available to all users, Cash is easy to use
November 15, 2023
Tags : Cash, Digital payments, Pakistan, Payments
Cash dominates in Pakistan. However, digital technologies and financial inclusion are transforming payments. This article analyzes the current use of cash, explores the factors influencing its demand, and assesses possible future scenarios.
Aftab Baloch

Advisor at Federal Tax Ombudsman, Government of Pakistan

This post is also available in: Spanish

As technology advances, so do the opportunities for innovations that can transform our daily lives. Digital payments began several decades ago with the advent of credit/debit cards. These innovations significantly reduced reliance on cash and offered consumers greater flexibility in managing their finances.

Digital payments offer unparalleled convenience. With just a few smartphone taps or computer clicks, transactions can be completed instantly, irrespective of geographical boundaries. Compared to carrying cash, digital payments provide a higher level of security. Encryption and tokenization protect sensitive financial information, reducing the risk of fraud and theft.

While digital payment methods are gaining traction in Pakistan, cash remains significant in the country’s economy. Until now, most people in Pakistan rely on cash payments, referring to it as more convenient and safer than any other available media. Concerning the choice of payments, customers usually adopt a specific payment option based on several determinants they consider to be in their favour. Hence, determinants such as education level, income/wealth, and risk factors like security and safety can impact the digital payments system in Pakistan. This also has much to do with the fact that digital payments and online transactions are viewed with great suspicion by the general populace owing to rumour mills, some troublesome experiences, or a lack of understanding of the system.

Further, cash is widely used as a traditional gift-giving method in social and cultural contexts. Cash serves as a domestic store of value for many individuals. The presence of high-denomination banknotes, such as Rs. 1,000 and Rs. 5,000, has implications for the shadow economy.

Moreover, cash provides anonymity and prevents traceability. While some would prefer their transactions remain outside the purview of regulators and governments, for most Pakistanis, transparency could allow for more effective subsidy pay-outs.

Low Penetration of Digital Payments

Today, digital payments only account for 0.2% of Pakistan’s 100 billion transactions annually, whereas the share of digital transactions in peer countries, i.e., India, China, Thailand & South Korea, ranges from 1.5% to 7%. This can be primarily attributed to the challenges within the payment ecosystem. Here are some of the potential causes for the limited success of digital payment systems in Pakistan:

  1. Limited Internet Penetration: A significant portion of the population does not have internet access or limited access, thereby curtailing their ability to use online payment systems. As such, the issue emanates from a lack of basic infrastructure, including the availability of Internet services across the country that would foster online banking.
  2. Lack of Digital Literacy: Many people in Pakistan, especially in rural areas, are not digitally literate, which means they are not familiar with e-payment systems and are more comfortable with cash transactions. However, there has also been an uptake in using platforms such as Easypaisa, JazzCash, etc., which could serve as the stepping stones for future digital payment innovations and systems. As an added measure, their role has been enhanced by inclusion in various government-related bills/challan payments, further promoting their usage.
  3. Security Concerns: Concerns about online security and the risk of cybercrime make people hesitant to use e-payment systems. The fear of financial fraud and data breaches deters many potential users. Due to a spur of rumours, online transactions are viewed with suspicion, and as such, customers are more inclined towards cash-based payments, which they view as more secure and non-fungible.
  4. Cost of Digital Payments to the End User: End users are charged fees for transferring money digitally and ATM withdrawals, making digital payments unfeasible for a significant portion of the population who would conduct their transactions in cash to avoid transaction fees and taxes.
  5. Limited Acceptance: Not all merchants and businesses in Pakistan accept electronic payments, which makes it inconvenient for users who prefer digital transactions.
  6. Informal Economy: A significant portion of Pakistan’s economy operates in the informal sector, where cash transactions are more prevalent. This informal economy makes it challenging for e-payment systems to gain traction.
  7. Emergency Preparedness: Cash provides security during emergencies or when electronic payment systems are unavailable or unreliable. It enables individuals to meet immediate needs such as food, shelter, and transportation, ensuring their well-being during unforeseen circumstances.
  8. Lack of Incentives: There may not have been sufficient incentives or rewards for users to switch from cash to electronic payments.

ATM cards, smart cards, and online payments are very suitable to meet the challenges of ordinary payments, and they will lead to business growth in Pakistan. In 2009, an opportunity seized by companies like Telenor and Tameer Bank, fuelled by the State Bank of Pakistan and the Branchless Banking license, leading to the creation of Easypaisa – to get people to start banking on their mobile phones, which led to another eight such services including Jazzcash jumping into the market. It is a general observation that Easypaisa and Jazzcash are very common in rural areas, therefore indicating some level of acceptance and usage.

For a cash-centric economy like Pakistan, the population prioritizes cash. However, to enhance Pakistan’s digital payments landscape, the State Bank of Pakistan (SBP), the country’s central bank, has made the following efforts.

  1. RAAST: In January 2021, SBP introduced Raast Pakistan’s first micropayment gateway, wholly owned and operated SBP. Raast enables end-to-end instant digital payments among individuals, businesses, and government entities. Raast allows the Pakistani masses to integrate digital financial services into their daily lives. It covers everyday use cases such as merchant payments and domestic remittances, which are high-volume but low-value transactions. Currently, digital financial services tools are few and far between in Pakistan. The instant payment system will allow start-ups to get on an equal footing with the banks in terms of infrastructure and compete for the same customer base.
  2. Micro Payments Gateway (MPG): The project is an ongoing collaboration between Karandaaz and the SBP. The project aims to improve payment infrastructure, with the objectives of further developing digital financial services, reducing reliance on cash, and driving financial inclusion in Pakistan. MPG will become a core component of Pakistan’s payment infrastructure, enabling individuals, businesses, and government entities to make any payment digitally simply, fast, cheaply, and securely. This micropayment gateway is the initial phase of an initiative that has the potential to evolve into something like PayTM (India).
  3. Modular Banknote Processing Systems: SBP  has installed high-end Banknote Processing and Authentication machines, which are capable of banknote authentication, sorting, and destruction.

Improving Banknote Quality

Moreover, the SBP is trying to improve the quality of banknotes in circulation through various initiatives such as a clean note policy and a currency management strategy. As such, it is ensured that banks carry out proper mechanised sorting of banknotes & SBP offices and that only good-quality cash is allowed to enter the market.

Given the current infrastructure, especially electricity, the financial literacy of the masses, and a shadow economy, dependence on cash seems highly likely for the foreseeable future. However, to effectively manage the future of cash and the adoption of e-payment in Pakistan, the following policies could help:

By striking the right balance between digital payment alternatives and cash accessibility, Pakistan can achieve an efficient, inclusive, and secure payment ecosystem that caters to its population’s diverse needs and preferences.

This post is also available in: Spanish