Payment System in Pakistan

Payment Systems are critical for effective functioning of the financial system and smooth transmission of monetary policy in a country. With the advancements in technology in recent years, Electronic Payment Systems have become drivers  of digital financial services as they enable people to conduct day to day transactions digitally. Apart from cash, other payment instruments like cheques, payment order etc. were offered by banks for which SBP field offices performed the role of clearing houses. In 1995, the National Institutional Facilitation Technologies (Pvt.) Ltd. (NIFT) was established and the function of clearing was outsourced to it with settlement still performed by SBP BSC offices. In 2014 SBP standardized the layout and security features of cheques, demand drafts and pay orders in Pakistan to streamline the process of clearing in the country.

In year 2001, SBP, with World Bank’s assistance, embarked upon a major IT automation program that resulted in the implementation of a world class Core Banking System that led to the transformation of the payment systems in the country. SBP, capitalizing on its IT infrastructure, completed the implementation of its RTGS system, named as Pakistan Real-Time Interbank Settlement Mechanism (PRISM) in 2008. Today, on average, the PRISM system settles around PKR 1.2 trillion worth of transactions on any given day. SBP also allowed RTGS to be used by customers for transferring value over PKR 100,000/- for inter-bank transfer of home remittances, settlement of clearings and transactions originated by SBP like Premium prize bonds., Prior to implementing RTGS, the Payment System & Electronic Fund Transfer ACT was enacted in 2007 to provide legal basis to SBP for the Payment System Oversight and Supervision in the country with the objective of promoting efficiency, security and soundness of Payment Systems.

Next came the evolution in digital retail payments in the country. The first ATM was installed in Pakistan in mid 1980s and Pakistan is one of those few countries where ATM interoperability was achieved almost right from the beginning when ABN AMRO and Askari Bank connected their ATM networks thereby establishing the first Shared ATM Switch Network in the country. This was followed by the establishment of MNET switch by MCB Bank in 2001 and 1LINK Switch in the year 2003 by a consortium of 11 member banks. SBP further mandated that all scheduled banks should join any of the two Switches. In 2004, SBP instructed the two switches to interconnect with each other to make the approximately 350 ATMs across the country interoperable. To boost the number of ATMs in the country, in 2012 SBP mandated that all banks shall  have one ATM per branch thus increasing number of ATMs to approx. 14,000 as of December 31, 2018.

To leverage upon the enhanced tele-density and growing usage of mobile phones in the country, in 2008, SBP allowed commercial and microfinance banks in Pakistan to partner with Mobile Network Operators for providing agent based banking services, also known as branchless banking, to people who don’t have access to formal bank branches in the country. After issuance of this regulatory framework, a massive uptake was seen especially in the area of domestic remittances which was previously taking place through informal channels.

In line with global practices for promoting plastic cards, SBP in 2009 issued comprehensive operational guidelines for credit card business of banks, followed by Regulations for prepaid cards and payment card security. It may be mentioned that SBP has mandated EMV? compliance by 30 June 2018 after which the card-based transactions in the country will largely become secure. Further, in 2016, Pakistan’s own Domestic Payment Scheme, branded as PayPak was launched, offering affordable and secure payment cards to consumers.

In recent years, internet and mobile-based banking is also being offered increasingly by banks to their customers offering them ease and convenience. Recently, SBP worked with the Federal Board of Revenue and Pakistan Customs to enable 24/7 collection of taxes and duties using ADCs like internet banking and ATMs. To ensure the safety and security of payment systems in the country, SBP has also strengthened its oversight framework by imparting training to its staff as well and implementing standards like the Principles of Financial Markets Infrastructure. To introduce account code standardization and efficiency in processing of payments for domestic as well as cross border transactions, the International Bank Account Number (IBAN) standard has been implemented in the country.

Being mindful of its role as a catalyst in the payments industry, SBP in recent years has introduced a number of enabling regulations aimed at facilitating non-bank entities in setting up e-payment gateways in the private sector. A number of companies are in process of setting up their gateways in the domain of e-commerce, e-payment processing, bill aggregation and white label ATMs. Further, in order to facilitate non-banking payment processors, SBP is presently working on its e-money framework that would facilitate provision of payment and wallet services to merchants and consumers alike.

SBP has also determined priority areas which include promotion of e-commerce and digitization of brick-and-mortar merchant transactions as well as Government receipts, collections and wage payments by adoption of technology for providing secure digital financial services to customers. SBP has also issued Regulations for the Security of Internet Banking in 2015 to mitigate risks associated with Internet Banking.

Of late, SBP has aligned itself with the rapidly changing technological advancements and innovations like Artificial Intelligence ), Big Data Analytics (BDA), and Distributed Ledger Technology (DLT) that are bound to change the financial landscape. SBP as a progressive regulator is already taking various policy initiatives in these areas to provide convenience and enhanced user experience to the citizens of Pakistan.