Imagine a system that can give you a view of every transaction in the economy, however small. A system that can bring vast amounts of the money that currently circulates in our economy as undocumented cash into a formal payments system and bank accounts. Pakistan has one of the highest cash to bank deposit ratios in the world, a fact that underpins the undocumented sector. But that can change within a matter of years given the right incentives.
The financial services’ industry is at a tipping point of ubiquitous payments. Three years ago, 10pc of Pakistani adults had conventional bank accounts. This percentage has dropped to less than 9pc today. In contrast, almost 6pc of adults have a mobile account today, up from 3pc around the same time last year.
The leading provider of mobile financial services in the country manages nearly Rs1.3bn in 5.1 million mobile accounts. This is money that has made its way into the formal economy from an estimated Rs2 trillion informal economy. If the 50m mobile accounts target set by the industry is achieved and each account has a Rs100 balance, then we are looking at Rs5bn moving from the informal to the formal economy. And this would only be the beginning.
But there are a few hurdles to cross before that happens. While we’re seeing an impressive growth in numbers of accounts being opened, only 8pc of all SIM holders have opened a mobile account thus far. This is set to accelerate very quickly now that accounts can be opened within sixty seconds. Compare this with conventional bank accounts that can take up to 48 hours. Conventional banks opened 39m bank accounts over six decades, while mobile accounts are reaching for a projected target of 50m by 2017. A mobile account in every bio-metrically verified SIM is a near term reality.
In second of a three-part series, a banker argues that mobile banking is changing the nature of banking altogether, and opening new possibilities for documenting the economy down to the last detail.
But time and ease of opening are not the only drivers behind rising mobile accounts. The bigger challenge lies in driving more transactions through the accounts that have already been opened. Typically, about 70pc of registered mobile accounts become inactive after 90 days, a trend seen to be consistent globally. Simply opening more mobile accounts is not enough. In a culture dominated by cash, how do we get more people to start using mobile accounts to settle small ticket transactions?
There are a number of ways to do this, and the forthcoming budget provides a good opportunity to push things along. First would be creation of savings instruments for the poor and the unbanked, much like traditional banking treasury bills and prize bonds.
Broken up into small denominations, micro T bills and prize bonds could help the government borrow directly from the unbanked, thus freeing up resources in the commercial banks, and eliminating the benami nature of prize bonds.
The second way would be payments: the ability to pay using a mobile account, with digital money or loyalty points, at all category retail and online stores. But the big push to mobile transactions can become possible if government gets in on the act. How about paying school teachers through mobile accounts? What if all small payments made by government were steadily migrated onto digital pathways? This would open up an economic space of almost Rs900bn, thereby pulling enormous quantities of money out of the cash economy into digital payments.
Payments are the easiest way to get people onto formal financial services. In the absence of acceptance of mobile banking by large retail networks, mobile accounts will continue to remain dormant, and their full potential unrealised. To achieve this network effect, a large acceptance infrastructure is critical, as is its growth proportionate to the geographic density of accounts. By some estimates, a merchant network of more than 500,000 will be required to make mobile payments part of our economic mainstream, and this process can be accelerated if government were to migrate its small payments onto mobile accounts.
In due course this could expand to include other payments made by and to government. Imagine paying traffic fines and road tolls with your mobile phone. Imagine National Saving Schemes paying their returns into mobile accounts, or paying vehicle registration fees from mobile accounts. The field is limitless once it begins to open up, and can serve as a significant catalyst to the wider acceptance of mobile payments in our economy.
The budget provides an opportunity to open this door. Specifically, the framers of the budget can consider the following. First, the removal of the requirement of payments to be collected only at a government-owned institution. Second, an electronic prize bond and a micro T bill can be created. Third, all government salaries can be paid through a mobile account. Fourth, withholding tax on over the counter transactions can be eliminated.
All four of these steps would be easy to legislate into being, and the infrastructure to process the mobile payments is already in place. The resultant boost given to the mobile banking industry would not only help drive a game changing innovation in our economy, it would bring the benefits of modern financial services to the unbanked, and help drain the swamp of a vast cash economy that provides the oxygen for the undocumented sector. The benefits of documentation would then yield their second round effects through greater visibility of the transactions that make up our economy, and create the possibility of fine tuning the fiscal architecture to avail the benefits of this visibility.
The possibilities are now within our reach. All we need is one push to kick the ball rolling. The forthcoming budget could provide that push.