E-BANKING IN PAKISTAN: CHALLENGES AHEAD

SYED FAZL-E-HAIDER
(feedback@pgeconomist.com)

May 2 - 15, 2011

Information and communication technologies (ICT) have transformed the global economy bringing about a revolutionary change in the financial sector. This revolution finds manifestations today in shape of innovative banking products and services such as Automated Teller Machines (ATMs), internet banking, tele-banking and so on.

Electronic banking has brought non-traditional channels of delivering services in the banking industry. E-banking provides the population low-cost operations and easy access to financial services. E-banking not only enhances business volumes of banks but also increases their outreach to un-banked areas. The e-Commerce is also assisted by the e-banking through electronic cash cheques and smart cards.

The e-banking is fast gaining ground in Pakistan. IT has opened up immense new avenues for the country to use the creativity of its youth for national development. E-banking has improved the retail banking model in the country. It has spurred the development of new electronic retail products through alternate delivery channels including the ATMs, mobile phones/branchless banking and the point of sales (POS). The high volume of ATMs transactions is attributed to the development of robust system providing 24-hour easy access and readily supply of quick cash without waiting in long queue.

Initially, internet banking was launched in Pakistan to provide a limited number of services. In 2002, the government of former President Pervez Musharraf took a landmark step for the promotion of electronic banking in the country by promulgating the Electronic Transaction Ordinance 2002, which provided legal recognition of digital signatures and documentation reducing the risks associated with the use of electronic media in business.

Today, ATMs, tele-banking, internet banking, credit cards and debit cards have emerged in Pakistan as effective delivery channels for traditional banking products. In Pakistan, foreign banks took the lead by introducing ATMs and credit cards in the mid 1990s, and domestic banks followed in the late 1990s.

During the last five years, the banks have expanded their online branch networks, ATM networks and POS networks across the country to accept plastic money. The expansion of electronic banking and the increased use of IT, specialized and innovative software, and modern hardware will require sizeable imports of these items to supplement good advances Pakistan already has made in these fields. But more, modern and imported sophisticated hardware is required on a large scale.

The number of ATMs in the country has reached 4750, while number of plastic cards has now reached 13.2 million in circulation. Of the 10,300 branches nationwide, nearly 7100 bank branches are offering real time online banking. The volume and value of overall e-Banking transactions in country during the Oct-Dec 2010 quarter reached 56.42 million and Rs5.5 trillion respectively showing an increase of 7.30 per cent in volume and 17.47 per cent in value compared to the previous quarter.

Over 400,000 branchless/ mobile banking accounts have been opened collectively by banks and more than 10 million financial transactions took place during the past one-and-a-half-year in the country, according to Yaseen Anwar, Deputy Governor, State Bank of Pakistan.

Electronic payments continued to show a rising trend as both the number and value of such transactions increased in past three years in Pakistan. A few banks also offer transactions through mobile, which include payment through mobile, utility bills payment, intra customer account fund transfers, and inter customer account fund transfers.

Pakistan witnessed a rising trend in use of ATM, internet and mobile phone banking in the current fiscal year 2010-11. E-banking transactions increased by 17.5 percent during the second quarter of the current fiscal year as compared to the first quarter, according to the State Bank of Pakistan. Overall Rs54.62 trillion transactions were made by e-banking in the second quarter, according to the central bank. During this period, transactions of Rs287.50 billion were processed through ATMs, Rs44.75 billion through internet and Rs1.68 billion through mobile phones. According to central bank, out of the total e-banking transactions during July-September 2010, ATMs transactions represented 59 percent of the total volume. The growth in volume of ATM transactions in Pakistan will continue, as the number of ATMs continues to grow with increasing branch network.

CHALLENGES

Pakistan banking industry faces the challenges of competition unleashed in the global arena. The banking sector still needs to take effective measures for improving and strengthening its competitive position vis-a-vis the foreign banks.

- The banking industry must be able to meet increasingly complex banking needs if it is to flourish. The country cannot catch up with its Asian neighbors India and China in terms of economic development without making investment in new banking technology. In the Asian economies, the relative wealth increases among the population and a burgeoning middle-class has brought greater demand for banking facilities and investors and business are also looking for more supportive financial services, with a demand for financing solutions, hedge funds, and asset-based securities.

- Pakistan needs to place ICT on its priority list to keep pace with the advancement in technology and minimize digital divide. The government needs to take measures for creating a conducive environment for technological innovation and its effective use in financial sector.

- The banks offering mobile banking services need to develop aggressive marketing plans and campaigns to attract customers to visit the agent location for their banking transactions.

- E-banking has come as an efficient channel for microfinance for the poor, who have limited access to financial services. The government should take initiative for effective use of ICT in microfinance sector, which has so far remained isolated from the digital world. The advancements in ICT have the potential to change the lives of Pakistan's poor, particularly serving the financial needs of the unbanked poor.

- Customer awareness should be increased to encourage use of services such as ATM, credit cards and internet banking. The banking sector still requires expansion and up-gradation of the ATMs to overcome customer complaints in recent years. The banks must ensure provision of uninterrupted ATM services to customers and take responsibility for resolution of all types of issues emerging from outsourcing of ATM replenishment. ATM is the predominant alternate delivery channel of e-banking that leads the retail level e-banking/online services in terms of volume.