Why the SBP has JazzCash and EasyPaisa on their toes

Effective July 1 this year, the State Bank of Pakistan (SBP) has decided to continue fee waivers on inter-bank fund transfers on transactions up to Rs25,000 limit, in a bid to keep digital transactions inexpensive for the low-income demographic of the country which will help promote financial inclusion. 

But while the SBP’s push is noble, the captains of financial inclusion, branchless banking players JazzCash and EasyPaisa that have helped bank the low-income segments of the population, are unhappy as IBFTs form a major source of revenue for these players. Consequently, this might affect the goal of financial inclusion if these companies see a decrease in financial viability. 

In a recent circular, the central bank has instructed that commercial banks, microfinance banks (MFBs), and electronic money institutions (EMIs) shall continue to provide free of cost IBFT services to their individual customers up to, at least, a minimum aggregate sending limit of Rs25,000 per month per account or wallet. Individual customers of banks, MFBs, and EMIs shall continue to send out as many free IBFT transactions as long as they remain within their monthly limit of Rs25,000. 

However, financial institutions have been allowed to charge 0.1 per cent of the transaction amount as IBFT fee for transactions beyond the Rs25,000 limit, which the SBP deputy governor said will help banks recover any costs associated with providing these services. The central bank has further capped the IBFT charges at Rs200. 

Sima Kamil, deputy governor at SBP, said that limiting charges on IBFT transactions is primarily aimed at protecting the lower-income groups in the country, and it is the low-income segment for whom IBFTs would in actuality be free of cost.  “According to our estimates and the data that we have analysed, the majority of the customers that carry out IBFTs will be protected and their transactions will remain free,” she said. 

While the banks have been allowed the discretion to choose to charge 0.1 per cent of the transaction amount or Rs200, the SBP has instructed the banks to charge whichever is the lowest amount, encouraging them to further slash the charges at their discretion to promote the adoption of digital payments in the country. The initial waiver that was effected at the onset of the pandemic in March last year removed IBFT charges for all transactions regardless of the transaction amount or limit. 

Among other measures, the waiver was put in place on March 18 to encourage people to use online channels for fund transfers and avoid going to bank branches to control the spread of the virus. “Considering the business and economic situation during the COVID-19 lockdown, the previous decision of waiving charges on IBFT by the State Bank of Pakistan had a significant positive impact on the overall economic challenges which we faced during this time,” says Mudassar Aqil, CEO of Telenor [Microfinance] Bank and EasyPaisa. 

“It enabled the population, in general, to stay safe within their homes by encouraging seamless digital transactions while at the same time, empowering economic activities to continue despite physical operations coming to a standstill,” he adds. 

“All Intra Bank Fund Transfers, as well as incoming interbank fund transfer services, shall remain free of charge,” the SBP has now instructed. Moreover, continuing the old practice, financial institutions have been advised to ensure proper disclosure of charged and free IBFT amounts along with applicable fees to their customers by sending regular notifications through SMS, apps and email. “After every digital transaction, the customer shall receive free of charge SMS on their registered mobile numbers intimating them about the transaction amount and the charges being recovered,” An adjunct guideline in the circular also instructs the aforementioned financial institutions [banks, MFBs and EMIs] not to limit the number of fund transfer transactions on their customer accounts or wallets unless there are genuine concerns related to AML/CFT or frauds. 

Encouraging numbers 

The waiver on IBFTs comes on the back of an encouraging increase in the number of inter-bank fund transfers post-Covid. According to data from the State Bank of Pakistan (SBP), before the central bank waived charges on IBFTs, the number of interbank fund transfers were recorded at a daily average of approximately 188,000, whereas after the intervention, the number rose to more than double on a daily average basis. On a quarterly basis, the number of IBFT transactions using internet banking channels have increased 117 per cent from the third quarter of FY20, January to March 2020 period when the waiver on IBFTs was put in place, to the second quarter of FY2021 (September to December 2021 period).  For Q3 2020, IBFT transactions via internet banking were 4.1 million whereas, by Q2 2021, transactions reached 8.9 million in volume.

On the mobile banking side, transactions were 4.3 million in volume during Q2 2020 that reached 18.8 million transactions in Q2 2021, an increase of over 300 per cent. It is this encouraging growth in IBFTs that underpins the thinking at the central bank that continuing fee waivers would increase digital financial transactions and consequently help digital financial inclusion. However, the increase might not have necessarily come from new users. 

Why are JazzCash and EasyPaisa unhappy? 

Industry stakeholders, though happy with the measure which will boost digital financial transactions, have raised concerns that the waiver would be a blow to branchless banking players such as JazzCash and EasyPaisa that rely on IBFTs as a major component of their revenue, and that the arrangement should have been different for these companies. 

In conversation with Profit, various sources said that large commercial banks have alternative avenues of making money and IBFTs are not a large component of their income, therefore, the measure is not going to affect them much. Whereas EasyPaisa and JazzCash, which had even earlier been lobbying to restore the IBFT charges when the waiver was initially announced in March last year, would not even be able to recover their operational costs if the IBFTs are free for their customers. 

According to a source in the industry, branchless banking companies are agents of financial inclusion and their services have enabled low-income people to become part of the formal financial system. If these companies are not able to recover their operational costs for providing these services, it could lead to financial exclusion in the country. According to data perused by Profit, EasyPaisa charges from Rs35 to Rs350 as IBFT service fee on amounts ranging from Re1 to Rs25,000 pre-pandemic. For amounts up to Rs50,000, charges could go as high as Rs500. Likewise, JazzCash charged as much as Rs200 for amounts up to Rs25,000 as IBFT fee from mobile wallets, whereas for amounts exceeding Rs25,000 up to Rs50,000 would be charged as much as Rs500 for a single transfer. Transactions up to Rs25,000 are now free, whereas ones exceeding Rs25,000 and going up to Rs50,000 would be capped at Rs200 would cause a decrease of 60 per cent for these companies. 

Further perusal of financial statements of Telenor Bank, the microfinance bank behind EasyPaisa, reveals that close to 50 per cent of the income of the bank, more than 50 per cent for a few years, has come from fees, commission, and brokerage income. For instance, for the year 2020, the bank made Rs6.3 billion under the head of fee, commission, and brokerage income, compared to Rs5.9 billion earned as interest income. 

For the year 2019, the fee and commission income were Rs8.2 billion against Rs9.2 billion in interest income.  For both these years, Telenor Bank ran losses in billions of rupees. The bulk of their income comes from fees and commissions validates that a decrease in IBFT fees will hit the non-interest income segment of these banks.

As Mudassar Aqil, the CEO of Telenor Bank and EasyPaisa, told Profit in a statement, that Telenor Microfinance Bank (Easypaisa) waived all inter-bank funds transfer charges at an approximate cost of Rs1.6 billion, between April to September, 2020. “However, the growth that our Bank witnessed during this time was phenomenal as we recorded an increase of 184 per cent in bank transfers via Easypaisa,” he further says. 

On a question how did the bank benefit from the growth when the charges were waived and the bank acknowledged a loss, Aqil said, “We are on a mission to transform Pakistan into a cashless society. Although free IBFTs had an associated cost, it positively impacted the digital payments space as a whole.” Nonetheless, Aqil said that the bank supported the new fee structure announced by the SBP. 

“It is much needed for helping towards the sustainability of IBFT and other associated transaction costs which is essential for documentation of our economy. We look forward to working closely with the SBP towards promotion of digital payments and financial inclusion in Pakistan.” Aamir Ibrahim, CEO at Jazz, said, “We appreciate the steps SBP is taking to increase digital payments and financial inclusion. We are committed to achieving SBP’s goal but in the process, we need to ensure that the financial viability of the key players is not compromised.  Success means a win-win situation for all the parties.” 

According to a source in the industry, to recover their cost, these companies might resort to charging a fee for each cash-in at a branchless banking agent and that is going to hurt cash to digital conversion. “There is a serious problem for JazzCash and EasyPaisa and financial inclusion could be disincentivized if they start telling people that they would have to pay to deposit their funds and get access to digital financial services, which is contradictory to digital financial inclusion.” 

Consequently, it is going to trickle down and the fintech companies that are building use cases to promote digital financial inclusion will be in a fix because these companies rely on the agent network of JazzCash and EasyPaisa for cash-in services. “If this happens, it can topple the entire digital financial services landscape,” the source added.