Special Section: Digital Financial Services (DFS) – innovations, trends,

opportunities and challenges for Pakistan’s financial system

Background strata of the population. Research suggests that
countries with inclusive and easier access to
The last few decades are marked with rapid
financial services achieve higher economic
developments in information and
growths and greater reduction in poverty and
communication technologies (ICT). These
income inequality195.
developments have brought significant changes
to firms’ business processes, products, and While the innovation and use of technology in
delivery mechanisms in all sectors of economy products and processes have improved overall
and promise major benefits for customers and efficiency, experience of customers, and
society in terms of convenience and efficiency. financial inclusion, the same have also raised
However, the approach to embrace innovation some policy concerns related to financial
in financial sector across the globe is relatively stability, consumer protection and information
more prudent compared to other sectors due to and cyber security risks, requiring enhanced
policy considerations of financial stability and focus and costs for the financial institution and
conduct supervision that warrant judicious policy makers.
balancing with objectives of efficiency and Evolution and growth of DFS – a global
convenience. perspective
The expansion in financial sector and greater The scale of development in DFS significantly
use of technology has amplified the differs across countries particularly with
digitalization of financial sector worldwide. respect to the extent of digitization of financial
Digital financial services (DFS) involve use of infrastructure and use of technology in
new and emerging technologies and digital provision of financial services. Based on the
channels such as internet banking, mobile extent of underlying services, adoption of DFS
banking, electronic money models and digital by customers and replacement of cash and
payment platforms to fulfill the customers’ need paper-based instruments, the continuum of
for traditional financial services. DFS covers progress on DFS can be categorized into four
broad range of financial services including stages (Chart S1.1). Talking about the two ends
payments, deposits and lending, savings, of this continuum; countries on lower stratum
remittances, insurance, advisory, etc.194 of DFS development, such services mainly focus
The digital channels are gradually becoming the on basic access to transaction accounts that
primary medium for delivery of financial gradually get wider adoption by the customers
services across the world. Simultaneously, DFS in the economy. For countries at advanced
offers low cost, faster, and secure transactions, stage, DFS services have attained widespread
and tailored financial services according to the adoption by individual consumers and small
needs of the population. Due to its scalability to and medium enterprises, and have moved
support outreach of financial services to beyond basic access to transaction accounts
consumers, DFS promises expansion in the and retail payments to more sophisticated
economic opportunities for the underserved financial services, such as, credit and insurance.

194Alliance for Financial Inclusion (AFI) Guideline Note-19 195Zhuang, Juzhong et al. (2009): Financial Sector
“DFS-Terminology”, 2016. Development, Economic Growth, and Poverty Reduction: A
Note: The term “digital channels” refers to the internet, Literature Review. Asian Development Bank Economics
mobile phones, ATMs, POS terminals, NFC-enabled Working Paper Series, No. 173.
devices, chips, electronically enabled cards, biometric
devices, tablets and any other digital system.

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 Chart S1.1: Stages in Development of Digital Financial Services

STAGE 1 STAGE 2 STAGE 3 STAGE 4

BASIC ACCESS TO MORE INTENSIVE MOVING BEYOND WIDESPREAD

TRANSACTION USAGE OF PAYMENTS TO ADOPTION AND
ACCOUNTS TRANSACTION OTHER DFS USAGE OF DFS BY
ACCOUNTS FOR PRODUCTS (E.G. INDIVIDUALS AND
DIGITAL CREDIT, MSMES
PAYMENTS INSURANCE)

_________________ ________________ ______________ _______________

Pakistan, Bangladesh, Brazil, India, Thailand, Kenya China, USA, Sweden
Ghana, Tanzania, Turkey, Kazakhstan
Egypt, Algeria,
Ethiopia, Indonesia,
Morocco, Nigeria,
Rwanda, Vietnam,
Peru, Senegal,
Zambia

Predominantly
Increased Penetration of and usage of Digital Services Fully Digital
Cash Based

Source: World Bank Study- Digital Financial Services, 2020

It is important to note that branchless banking development have made significant gains over
(BB) has particularly made the strongest impact the recent years and created immense potential
in developing countries as it has enabled the for bringing unbanked population into the
provision of financial services through agents formal sector, they still lag in terms of digital
without establishing a conventional bank infrastructure development and penetration of
branch. It makes a significant contribution DFS usage among the population.
towards expanding the unbanked populations’
reach to financial services by reducing barriers COVID-19 pandemic enhanced focus on ICT and
to access, and lowering cost. For instance, catalyzed the adoption of DFS …
during the past decade in developing economies Recently, Covid-19 pandemic and associated
the share of population with a bank account has social distancing restrictions significantly
increased to 71 percent in 2021 from 42 accelerated the adoption of DFS worldwide and
percent in 2011. Similarly, the gender gap in encouraged the unbanked population to access
terms of difference between male and female DFS because of the convenience they offer. For
bank account ownership has decreased from 9 example, around 80 million and 100 million
percent to 6 percent during this period.196 adults in India and China - the world’s two
While countries in early stages of DFS largest countries - respectively, made their first

196World Bank. (2021). Global Findex Report. Washington. https://www.worldbank.org/en/publication/globalfindex

For details, please visit /Data

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digital merchant payment of their lifetime after Evolution of DFS in Pakistan
the start of pandemic. On similar lines, adoption
of digital channels for payments and cash Banking sector started to adopt technologies
transfers significantly increased in a lot of quite early in their business processes as well
jurisdictions worldwide, including Pakistan.197 as in their financial products/services and its
delivery mechanisms. By the dawn of this
…. however, developing economies generally lag century, the use of computers and information
in DFS due to a number of structural issues technologies were quite common in banks, and
they had initiated the automation of their
Despite the significant growth achieved by DFS
processes as well as alternate delivery channels
in many of the developing economies, the scale
(ADCs) such as ATMs, POS machines, etc.
of penetration and widespread usage of DFS is
providing customers multiple touchpoints, and
broadly limited in majority of the developing
moving towards new use cases such as
economies. The consumers’ adoption of DFS has
embedded finance.200
remained somewhat subdued due to a number
of factors. For example, consumers from six Accordingly, Pakistan promulgated the
major economies of South East Asia identified Electronic Transaction Ordinance 2002, which
various barriers to the adoption of DFS gave legal recognition to electronic documents,
including lack of financial and digital literacy, records, information, communications, and
fear of hidden cost, ambiguous contractual transactions, among others. (Chart S1.2).
terms, and complicated application interfaces
and processes. In addition, incidence of frauds, Keeping in view the growing significance of
and cyber security issues were also identified as payment system and emerging best practices
major hurdles.198 A report of Asian across the globe, the Payment Systems and
Development Bank (ADB) establishes that Electronic Fund Transfers Act 2007 was
gender and other gaps persist despite introduced to provide a comprehensive
significant growth in digital financial inclusion. regulatory framework for payment systems and
The major inhibitors include barriers to access, electronic fund transfers in the country. In
cost factors, gaps in financial and digital literacy 2008, Pakistan’s only Real-Time Gross
and skills, and gender biases and sociocultural Settlement (RTGS) system named as Pakistan
norms.199 Real-time Interbank Settlement Mechanism
(PRISM) was established wherein large value
payments are settled on a real-time gross basis
to mitigate settlement risk.

197 World Bank. (2021). Global Findex Report. Washington. 199 Asian Development Bank. (2022). Digital Financial
For details, please visit Inclusion and Literacy from a G20 Perspective.
https://www.worldbank.org/en/publication/globalfindex Mandaluyong, November. For details, please visit
/Data. https://www.adb.org/sites/default/files/publication/843
198 World Economic Forum. (2022). ASEAN Digital 526/adbi-digital-financial-inclusion-and-literacy-g20-
Generation Report: Digital Financial Inclusion. Geneva, perspective.pdf
December. For details, please visit 200 By the end of 2004, 2475 RTOBs and 786 ATMs were

https://www3.weforum.org/docs/WEF_ASEAN_Digital_Ge operating in the country. While a total of 1.59 million debit

neration_Report_2022.pdf cards and 808 thousand credit cards had been issued by
the banks. (Source: SBP)

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 Chart S1.2: Pakistan' DFS Journey

Source: SBP

By late 2000s, the penetration of mobile phones enabled non-bank entities to offer digital
had significantly increased in the country which financial solutions. For this purpose, rules for
not only augmented the economic activities in Payment System Operators (PSOs)/ Payment
general201, but also opened up vast Service Providers (PSPs) and Electronic Money
opportunities for innovation in the financial Institutions (EMIs) were introduced in 2014203
services for both improving efficiency in and 2019204, respectively. The purpose of these
services delivery and reaching out to the initiatives was to provide a level playing field to
underserved segments of the society. non-bank financial entities and to introduce
Accordingly, the regulatory framework of innovation and competition in the DFS
branchless banking was introduced in 2008 to landscape.
facilitate the provision of financial services to
the underserved segments of the society by In 2019, SBP launched the National Payment
utilizing the access provided by System Strategy (NPSS), which sets out a
telecommunication providers. It allowed roadmap to structure the national payments
financial institutions to develop agent networks system on the principles of efficiency and
which led to the introduction and expansion of safety, universal accessibility and protection of
formal financial services into smaller cities and the consumers, and to provide a competitive
rural areas202. The adoption of branchless market environment in the payment landscape.
banking has taken off over the last decade or so. The strategy provides suggestions for key areas
With the growth in economy and financial of legal and regulatory framework, payment
system and the need to innovate and offer infrastructure, retail payments market,
unique and new payment use cases, SBP government payments, remittance market and

201 Studies indicate that a 10 percentage point increase in 202 Karandaaz. (2021). Fintech Ecosystem of Pakistan –
tele-density raises the GDP growth by 1 percentage point Landscape Study. June. For details, please visit
(Source: Qiang, Christine Zhen-Wei & Carlo M. Rossotto & https://karandaaz.com.pk/wp-
Kaoru Kimura (2009). Economic impacts of broadband. In content/uploads/2021/06/Fintech-Ecosystem-of-
Information and Communications for Development 2009: Pakistan.pdf
35–50. World Bank). 203 PSD Circular No. 03 of 2014.
204 PSD Circular No. 01 of 2019.

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oversight framework to bring fundamental any mobile operator and make transactions
improvements in the national payment system. with even basic mobile phone without the need
Since 2019, a number of key infrastructure and for internet services.205
regulatory developments, as set out in the
NPSS, have been implemented by the SBP with A major landmark development in payments’
the collaboration of relevant stakeholders. sphere was the launch of Raast by SBP as
Pakistan’s first instant payment system in CY21.
In order to facilitate digital remote onboarding Being cost-free, Raast has introduced
of customers especially non-resident Pakistanis widespread interoperability through mobile
and attract higher remittances, SBP introduced apps which is expected to drive growth in the
Roshan Digital Account (RDA) in 2020. Further, DFS landscape in the future. Its first two phases
the same facility, i.e. remote onboarding, was have been successfully rolled out covering bulk
also provided to residents during 2021. payments and Person to Person (P2P)
Moreover, Asaan Mobile Account (AMA) payments, while work on its 3rd phase is at an
initiative was launched by SBP in CY15 with the advanced stage that will also bring merchants
collaboration of PTA and banks to enable any into the payment landscape of the Raast (Chart
person holding CNIC to open bank account with S1.3).
AMA participating bank by using SIM card of
Chart S1.3: Raast is Central to DFS Development

Source: SBP

At the start of 2022, SBP issued comprehensive sector and support the growth of DFS with
Licensing and Regulatory Framework for prudent regulatory oversight.207
Digital Banks to facilitate the establishment of
digital banks in the country.206 This Framework Taking the benefit of advancement in ICTs and
is the first regulatory step towards introduction wide access to mobile phones, fintech-enabled
of full-fledged digital banks in the country, and financial services emerged as promising
could usher in further digitization of banking businesses in non-bank financial sector.

205 BPRD Circular No. 11 of 2015. NOCs to five of these institutions/service providers for
206 SBP Press Release, dated January 3, 2022. opening of a digital bank.
207 By December 2022, SBP had completed the review of

the twenty prospective institutions/service providers who

had applied for digital bank license and issued provisional

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Financial Stability Review – 2022
Accordingly, SECP introduced comprehensive Chart S1.4: DFS Landscape in Pakistan
regulatory framework for fintech-based NBFCs,
covering consumer protection, IT governance,
and financial risk management aspects. This
framework covers both digital lending as well
as digital investment advisor.208

While cloud computing has numerous

advantages such as convenience, scalability, on-
demand availability, etc. it also faces the various
risks like legal risk, jurisdiction risk, business
continuity risk, and information security risk.
To mitigate these risks while harnessing the
PRISM=Pakistan Real-time Interbank Settlement
benefits of cloud technology, SBP has provided Mechanism, EMIs=Electronic Money Institutions,
a framework in 2023 on Risk Management in PRI=Pakistan Remittance Initiative, PSPs=Payment
Service Providers, PSOs=Payment System Operators
Outsourcing Arrangements and Outsourcing to Source: SBP
Cloud Service Providers (CSPs).
In recent years, advancement in financial sector
SBP has instituted a comprehensive regulatory
digitalization and consumers’ evolving
and supervisory framework which aims to
preferences has brought significant changes in
promote the sustainable innovation and
their consumption pattern of financial services.
efficiency in financial sector by appropriately
Most significantly, the payment transactions
balancing the objectives of financial stability
using paper-based instruments have been on a
and consumer protection and coping with
declining trend. At the same time, electronic
emerging risks especially cyber and
banking has been consistently maintaining its
information security.
strong growth momentum in all of its key
Current State of DFS in Pakistan segments. Particularly, mobile and Internet
banking uptake has enhanced tremendously
The current state of DFS infrastructure and making further clear the trend of customers’
spectrum in Pakistan comprises of underlying shifting preference towards digital mode of
legal and regulatory frameworks, infrastructure payments (Chart S1.5).
and a host of platforms and products (see
Chart S1.4).

208By end of CY21, SECP had licensed six fintech-enabled cumulative amount of PKR 6.1 billion to more than
NBFCs which were engaged in nano-lending, P2P lending 365,000 borrowers.
and buy-now-pay latter models and had disbursed

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Financial Stability Review – 2022
 Chart infrastructure parameters210. Since then, a host
Chart S1.5: Segment
8.5: Raast wise
Person toshare in Transactions
Person Retail
Payments Since CY16 of regulatory and infrastructural frameworks
have been launched including a digital banks
E-Banking Payments Paper Based Payments
2500
framework, customers’ digital onboarding
mechanism, mobile app security guidelines, QR
2000 code standardization, among others. SBP
Volume in Millions

significantly enhanced its supervisory

1500
mechanism in respect of DFS, with particular
1000 focus on cyber security, financial soundness,
and consumer protection. In addition, Raast –
500
instant payment system – has been launched
0 offering wider interoperability in the market.
CY16 CY17 CY18 CY19 CY20 CY21 CY22 Moreover, SBP and other stakeholders
Source: SBP successfully implemented the action plan for
Moreover, the tremendous growth of improvement in AML/CFT regime in line with
branchless banking significantly helped in FATF recommendations to enhance the
expanding financial inclusion and outreach of integrity of the financial sector.
financial services during the last decade. Over the last few years, the country has
Pakistan’s DFS landscape has come a long way witnessed the introduction of a number of
over the last two decades or so. In line with modern products and initiatives which
global trend and SBP’s recent policy drive to characterize advanced stages of DFS
use technology as a tool to leapfrog in financial developments. However, these products have
inclusion, the growth is particularly yet to explore their fuller potential, as
phenomenal in the recent few years209 (Table consumers still rely heavily on cash and other
S1.1). conventional paper-based instruments.
Table S1.1: Key Statistics on Digital Finance Services (DFS) in Pakistan
Description CY11 CY16 CY19 CY20 CY21 CY22 Challenges and Opportunities
RTOBs 7036 13,926 15,930 16,165 16,571 16,603
ATMs 4734 12,352 15,252 16,041 16,709 17,133 There are some issues which continue to hinder
Point of Sale (POS) 44383 52,062 47,567 62,480 92,153 104,865 the widespread adoption of DFS in Pakistan.
Debit Cards (In
10,910 17,470 26,440 27,592 30,934 30,162 Despite the launch of branchless banking and
thousands)
Credit Cards (In other user-friendly modes, the issue of low
1,564 1,209 1,644 1,691 1,740 1,800
thousands)
levels of financial and digital literacy persists in
No. of BB Agents 22,512 359,806 437,182 481,837 587,547 622,884
No. of BB the country where a significant segment of the
Accounts 929 19,965 46,103 62,755 78,810 97,097
(thousands)
population remains unbanked. In addition, low
Source: SBP cost and widespread acceptability for payments
though cash and other paper-based instruments
The Economist’s Microscope Index on Financial dis-incentivizes the consumers and businesses
Inclusion for 2020 rated Pakistan high on to adopt digital modes of payment.
government and policy support, products and
outlets, and consumer protection parameters With the increasing adoption of DFS, there is a
but low on stability and integrity, and commensurate increase in IT and cyber security

209The prevailing trends and performance of payments 210The Economist Intelligence Unit. (2020). Global
has been comprehensively covered in the Chapter 8- Microscope 2020 – The role of financial inclusion in the
Financial Market Infrastructures (FMIs) of this Covid-19 response. London. For details, please visit
publication. https://pages.eiu.com/rs/753-RIQ-
438/images/EIU_Microscope_2020_proof_10.pdf

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risks, and digital information security which have the tendency to lag in adopting
have become enterprise wide risks. However, technological changes and prefer time-tested
financial institutions working in the country business models and products. As banks
strive to have effective arrangements in place to dominate digital financial landscape, it remains
cope with IT security risk and ensure the a challenge – like any other country - to create
security of their network infrastructure. SBP enabling incentive structure for banks to adopt
has introduced a comprehensive technology and innovation and tap unserved
cyber/information security framework for the and underserved segments of the economy.
financial institutions in recent years to maintain
the resilience and robustness of cyber security Going forward, the implementation of National
measures.211 Payment System Strategy (NPSS)
recommendations is vital for further
Advancement in digitalization has also brought development of national payment landscape in
forward the concerns regarding miss-selling of a sustainable manner. Its implementation
financial products (due to information would also lend support in completion of
asymmetry), and related issues of consumer national goals under the National Financial
protection. Increasing incidence of such nature Inclusion Strategy (NFIS) and the financial
could hamper digitization efforts as costumers stability of the country.212
would tend to assign higher probability of
fraud/information leaks when using digital With regards to the key infrastructure
modes to access financial services. To tackle components of a national payment system,
this issue, improving customers’ financial and Pakistan currently lacks an ACH (automated
digital literacy and awareness of their rights as clearing house)213, which provides convenience
costumers can play a vital role in minimizing and low costs for low-value, bulk payments. It is
the incidence of such issues. Moreover, the expected that RTGS will be upgraded to
frameworks of consumer protection, grievance automated transfer system (ATS) in near future,
handling, regulatory oversight, and complaints which will have RTGS and ACH functionality.
monitoring are already in place by the regulator This upgrade would support the expansion in
to protect the costumers’ rights. Keeping in payment landscape by improving payments
view the fact that more focused approach may efficiency and better management of any
be necessary for effective implementation of underlying risks.
these frameworks, SBP has recently enhanced Moreover, the end-to-end digitization of
its organizational framework by creating payment transfers between individuals,
dedicated departments for regulation and government entities and businesses through
supervision of consumer protection and fair Raast, after its full implementation, would
treatment regime. present a significant opportunity for the
Banks traditionally follow conservative digitization of entire economy. To realize
business approach due to strong financial Raast’s full potential, all the market players
stability concerns and associated regulatory (comprising banks, MFBs, EMIs and PSPs/
regime as well as their relative monopoly in PSOs) will need to make extra efforts for
provision of banking services. Accordingly, they development of associated payment channels

211 For further details on key measures on in cyber payment systems in 2019. Accessed at: National Payment
security, please refer to Appendix A i.e. Regulatory and Systems Strategy (sbp.org.pk).
Supervisory Developments in CY22. 213 ECB definition: Automated clearing house (ACH) is an
212 SBP through World Bank’s Financial Inclusion Support electronic clearing system in which payment orders are
Framework (FISF) program, prepared National Payment exchanged among participants (primarily via electronic
System Strategy (NPSS) for the development of national media) and handled by a data-processing center.

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Financial Stability Review – 2022
and products and further improvement of Nonetheless, Pakistan’s economy holds wide
consumers’ service experience and awareness. prospects for growth of DFS in coming years.
Country has achieved a significant growth in
While interoperability among the various ICT and infrastructural support system. For
payment services in mobile money segment has instance, broadband penetration and tele-
made progress in recent years, further density have reached 54 percent and 82
collaboration between the stakeholders may be percent of total population by end Mar-23,
needed for additional progress. It has respectively215. On the other hand, country’s
significant bearing on convenience of growth potential, which has largely remained
consumers and merchants in conducting online untapped due to some idiosyncratic challenges,
payments as well as the growth of DFS in presents wide space and opportunities for
mobile money segment.214 Furthermore, since acceleration in economic activities. Thus
many cellular subscribers do not have financial institutions can leverage sufficient
smartphones, enabling USSD network can be a availability of ICT competencies and platforms
potential stimulant for DFS uptake concerning to tap large growth potential and create value
transactions in accounts. Active mobile wallets for their investors, customers and wider
still constitute a small proportion of adult economy.
population with access to mobile phones.
The entrance of diversified market players like
Furthermore, the advent of digital currencies non-bank institutions (e.g., EMIs) and digital
and, more specifically, the underlying block banks would increase the pressure on
chain technology holds great potential for traditional players for innovation and will
increasing efficiency and transparency in the continue to disrupt the financial services
financial sector. However, the associate risks ecosystem in novel and profound ways. All
and regulatory incompatibility are still key market players and regulators within the DFS
issues. For further details of crypto assets and landscape need to capitalize on the
associated risks and opportunities, please refer opportunities while remaining vigilant to the
to Box 8.1. risks that technology-enabled financial
innovations bring to the fore.

214 Agentsand consumers were required to maintain service providers due to the absence of interoperability
separate money wallet accounts with each of the various amongst money wallets.
215 Pakistan Telecommunication Authority.

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