By now, the rise of electronic payments in Pakistan is quite clear and has been covered extensively by many publications, including this magazine. What is less clear is that what should be the implication of the rise of digital payments – that the proportion of payments in Pakistan made in physical cash is going down – has not happened yet, or at least not nearly as much as the rise in digital payments might imply.
During the third quarter of 2024, digital payments – bank apps, websites, and card-based e-commerce payments – have increased to approximately 9.3% of the value of all transactions that take place in Pakistan, up from just 0.3% in the same quarter in 2016, which is a nearly 31x increase in market share for digital payments, according to data from the State Bank of Pakistan.
You would think that cash would have fallen by a corresponding percentage, but you would be wrong. According to Profit’s estimates based on data from the State Bank, the proportion of transactions in Pakistan that took place purely in physical cash (which means excluding cash deposits and withdrawals from bank branches and ATMs), were approximately 35.7% of the value of all transactions that took place during the third quarter of 2024. Eight years ago, in 2016, that number was 38.4%, so cash is down slightly from where it was almost a decade ago.
But not by nearly as much as that rise in digital payments number might have led you to think.
So what is going on? Reality has a habit of being complicated and not lending itself to a simple narrative, and the evolution of how people in Pakistan pay for things is one such matter.
There is absolutely no question that digital payments are on the rise, and that those businesses that are gearing up to either facilitate or otherwise take advantage of this rise will stand to benefit. But equally importantly, that rise is mostly coming at the expense of non-cash paper payments (cheques, demand drafts, etc.). Only about 30% of the rise in digital payments is coming from removing the need for physical cash transactions.
In other words, Pakistanis are both adopting new techniques and sticking to the oldest ways of doing business.
In this story, we will examine how the methods of payment are changing, and what is staying the same, and look into some data points that may provide insights as to why this bifurcation of trends is happening.
But first, a note on the sources of our data, and the methodology used to analyse it.
Methodology of data analysis (feel free to skip)
A brief note on the data and methodology used in this article. The data comes from the State Bank of Pakistan’s quarterly and annual Payment Systems Review reports from the third quarter of calendar year 2016 through the third quarter of calendar year 2024. The reports extend much further back into the past as well, but the data appears to be compiled using a different methodology in prior years, and we included only data from the years where it seemed most directly comparable. Unless we specify otherwise, all growth rates mentioned in this article refer to the total value of transactions, not volume.
Profit has not just compiled the data, but also combined it with other banking sector data to create as holistic a picture of payments in Pakistan as possible.
While the data for every other payment method is available in that report, what is not available is the volume of cash transactions that do not touch the banking system at either end (i.e. neither the giver nor the receiver of the cash is a banking or financial entity). While the volume of cash transactions is not directly measured by the State Bank of Pakistan, because it issues bank notes, it has a fairly good idea of exactly how much physical cash is in circulation at any given moment in time.
We made a simplifying assumption that the velocity of transactions involving physical cash is approximately the same as that involving the payments system in any given period. We are not certain as to how accurate this assumption is likely to be, but we also do not have a better number to go on.
Having calculated the total value of transactions involving cash, we then subtract from that the value of cash transactions involving the banks (ATM or branch withdrawals and deposits) to arrive at an estimate of the size of the cash-only transactions economy. This estimate is then plugged into any calculations involving market share of cash vs electronic payments.
One other note: we excluded interbank settlements and government bond transactions in our analysis, since those are transactions that are needed to keep the payments and banking system running. Counting them would likely end up double-counting many transactions and hence result in a skewed picture of what people are actually using to make their payments.
One final bit: we are putting in US dollar equivalents for many numbers in this story to help illustrate the scale of what we are talking about. Since almost all of the numbers involved represent flows over a period of time, we will adopt the convention of utilising the average exchange rate during that period, defined as the midpoint of the open market buying and selling exchange rates as published by Business Recorder.
The rise of digital: a mobile story
Two-thirds of the value of electronic payments in Pakistan is through the mobile apps of banks. Digital payments in Pakistan happen through bank apps on smartphones more than any other method of payment, meaning effectively that they happen through the Interbank Fund Transfer (IBFT) system and now through the State Bank’s new payment rails, Raast.
It is not just that this is the fastest growing segment of the payments ecosystem – growing at an average annualized rate of 127% per year for the past 8 years – it is that the numbers are now starting to get interesting. During the 12 months that ended September 30, 2024, the total value of money that moved through the banks’ mobile apps was Rs53 trillion ($190 billion).
Massive amounts of money are moving through the banking system’s mobile apps, and on this front, the State Bank of Pakistan deserves to take a victory lap: at least part of this stunning rise is due to the central bank’s insistence on capping the costs of transactions being made electronically, and now in the case of Raast, transaction costs have been eliminated completely for all person-to-person transactions.
What are people using the bank apps for? Mostly paying other individuals, based on the State Bank’s data. But these supposedly person-to-person payments are likely hiding a considerable amount of commercial activity since most small businesses in Pakistan are sole proprietorships, which means that their bank accounts are those of individuals, and hence commercial transactions with sole proprietorship businesses look like person-to-person transactions.
One milestone that has now been crossed by the payments system: the majority of utility bills are now paid online, mostly through bank websites or mobile apps.
The next most popular digital method of payment is through the banks’ own websites, which accounts for almost the entirety of the remainder of digital payments. It appears that Pakistanis have largely decided that they trust the banks with their money.
So why the distinction between the mobile apps and the bank desktop websites? It seems mostly to be a matter of size. When conducting larger transactions, Pakistanis appear to be more comfortable with a desktop experience, not a mobile one.
During the third quarter of 2024, the average transaction size conducted on the banks’ mobile apps was Rs43,400 while the average transaction conducted on the banks’ desktop website was Rs125,000. Whether this is the result of richer people preferring desktops or whether the same person makes a decision about which platform to use depending on the size of the transaction is not entirely clear from the State Bank’s data.
Plastic cash: the ATM dominates the use of cards
Then there is the rise of the card, which in the case of Pakistan is mostly the debit card. About 87% of the use of these cards is the withdrawal of cash from an ATM, with a much smaller fraction going to payment by card at a physical point-of-sale or by entering the card information online on an e-commerce website or app.
However, the current strength of the ATM is likely to be illusory. Card-based e-commerce payments – albeit from a much smaller base – is among the fastest growing payment methods in the country (yes, despite the popularity of cash-on-delivery), growing at an average rate of 53.4% per year for the past 8 years, crossing $1.6 billion during the 12 months ending September 30, 2024, the latest period for which data is available.
Even the use of card-based payments at physical stores is rising faster than cash withdrawals at ATMs, growing at 29.6% per year for the past 8 years, compared with just 18.4% per year for ATM transactions during that same period. For the past 12 months, Pakistanis spent $6.2 billion by swiping their cards at physical retail outlets.
Indeed, over the past year, a big milestone was crossed: Pakistanis conducted a higher value of transactions from their bank’s mobile and web apps than they withdrew in cash from ATMs.
The continued resilience of physical cash
One would think that – with such stellar growth numbers – digital payments would be eating into the use of physical cash, but as we have stated earlier, that is not the case in Pakistan. So where is this expansion in market share coming from.
Simple: the transactions that were both documented and took place through physical means – cheques, transactions at bank branches – are the ones that are seeing decline. By far, the single biggest decline has come in the use of cheques and other paper instruments. As recently as the third quarter of 2016, they commanded a 39% share of the total value of payments in Pakistan. That is now down to just 21.5% as of the third quarter of 2024.
Physical cash itself? People are giving it up, but relatively slowly.
Profit’s calculations of physical cash transactions as a percentage of total transaction value relies on the simplifying assumption that that the velocity of money for physical cash is the same as that for other means of payment. But that is about all that we have assumed about physical cash transactions. While there are lots of anecdotes about how cash is used, there is no concrete data to tell us what the cash is being used for.
We do, however, know the following facts. For the third quarter of 2024, according to the State Bank’s data, the average cash deposit at a branch was Rs304,000 and the average cash withdrawal was Rs215,000 (people conduct smaller withdrawals from ATMs, so only the larger withdrawals happen at branches). The total number of these transactions was almost completely stagnant, but the per transaction amount increased, albeit basically by inflation.
For every other form of payment, it is not just the value of transactions that is increasing, it is also their number. For cash deposits and withdrawals – which presumably happen after at least one or two layers of both-sides-physical-cash transactions – the number is up by a measly 2% per year since 2016.
Who is still sticking with cash?
If we had to guess, we suspect that the number of people who are conducting cash-only transactions is not materially increasing in Pakistan, and the total value is increasing basically only in line with inflation. These are obviously a relatively well-off group of people, which means they are likely both older and less technology savvy than younger people. And their wealth does not appear to be increasing as a percentage of the total economy, and in fact, appears to be slightly decreasing.
Based on the above data points and inferences, we think it is reasonable to assume that cash is mostly used by older businesses that were set up as cash-based sole proprietorships, and now have a hard time formalizing their businesses, so they keep doing business in cash. Their number and size is not growing relative to the size of the economy, and the growth in the economy appears to be coming from the formal sector, not the informal sector as is commonly stated by economic analysts.
These businesses have staying power for now, which is why the use of cash is not completely collapsing the way one might have expected it to with the rise of digital payments. But they are clearly the past and will likely reach a point in the next decade or so where they either adapt to new realities or die off as a meaningful corner of the economy.
The size of the strictly-cash focused part of the economy – as much as we have been able to calculate – also indicates that the notion that there is some massive informal sector of the economy that is not captured in the gross domestic product (GDP) numbers is likely not accurate.
Cash is still king in Pakistan, and clearly is sticking around a lot longer than any modernizing sensibility might have hoped for. But details of its use – the minimal amounts we are able to surmise – leads us to conclude that its days are numbered, and it will eventually make way for a nearly completely digital payment system.
The future is on its way. Just a bit slower than hoped for.
