A Case For Digital Economy
While the world moves on to paying via their phone wallets, we are still stuck at policing content online. Plastic money will soon overtake cash as the preferred method of payment, and it is quite unfortunate to see that Pakistan has not made any arrangements for this. And even when the current government starts looking into it, it thinks of plastic money as a solution when we have lessons to learn from our neighbor, China, for a prospective digital cashless society.
According to the latest data from the State Bank of Pakistan (SBP), the number of plastic money users increased to 42.2 million by March this year from 40.1 million users the same month last year, showing a good growth of 5.2%.
On average, customers of plastic money made 49.3 million transactions with a total value of Rs. 560 billion per month in 2019. In Pakistan, instead of ease of access and improved customer service, banks make it difficult to even conduct in-person business. For example, if your signatures do not match, the check is unacceptable. The world is moving on to submitting checks via mobile banking applications. There is such distrust in the community in general that everyone prefers in-person banking. Banks should do more to support consumers, accepting liability in case of false online transactions or fraudulent activities. They can do this by getting insurance so that their interests are protected as well. This will increase customer trust. There is a need for improvements in banking laws for credit defaulters and a credit rating system. The ease of business scale can only improve if we head towards digitization. This will cut out inefficiencies and improve the service sector.
A Gallup study published in a 2018 article from The Ascent, a Motley Fool publication, noted: 33% of Americans have one or two credit cards, 18% have three or four and 7% have seven or more credit cards. Since debit cards are tied to checking or savings accounts, the average American consumer has at most one or two debit cards, but they have been a very popular payment vehicle, especially for small purchases. A 2016 consumer survey conducted by TSYS Merchant Solutions found that during 2015, debit cards accounted for $69.5 billion in payments, surpassing all other forms of non-cash payments including both checks and credit cards. The survey also showed that 46% of American consumers preferred to use debit cards at grocery stores and supermarkets instead of cash or credit cards, 39% at gas stations, 34% at discount stores and 31% at department stores.
Although America has been replacing its bank-based magnetic striped cards with chips over the past decade, China has undergone a retail payment revolution. Two new payment systems have arisen to dominate person-to-person, shopping, and even business transactions, leapfrogging the card-based system.
China’s new system is based on digital wallets, QR codes, and runs through its own major tech companies: Alipay running through Alibaba (Amazon’s Chinese version) and WeChat Pay running through Tencent (Facebook’s Chinese version). The Chinese system largely disintermediates banks from payment transactions, taking a significant and long-standing source of revenue from banks. It provides an alternate payment environment between retailers, customers, and payment system providers with various rewards. It contradicts the long-standing positioning of payments, as opposed to trade, on the side of banking. This system thus introduces new incentives that could realign current business models and merchant relationships with banks.
In less than a decade, China’s new payment scheme exploded, growing from inception to dominance. The power of network rewards has been unleashed, with over a billion users on each channel. With QR codes replacing tin cups, the modern payment system has replaced cards and cash at registries; how families offer gifts, and even how beggars ask for money. The advancement of advanced technology has enabled the increase in the use of digital payments. The number of 4G base stations in China reached 5.44 million in 2019, more than half of the world’s total, according to the Ministry of Industry and Information Technology ( MIIT). Online and offline payments were further combined with the innovation of the QR code, WeChat Pay and Alipay mobile payment systems that have also led to the growth of China’s cashless society. Bluetooth payment, biometric payment, sound payment, AR / VR payment, and other emerging payment methods have been introduced in recent years.
In China and internationally, what is the future of this system? Will it replace the system based on bank cards that started in America and took over the globe?
China is likely to stay on this alternative platform without a significant shock. It is likely that Chinese retail clients will have to follow Chinese payment platforms. The change can be made easier by potential alliances between western financial institutions and Alipay and WeChat. Or, transaction costs and frictions can remain, creating obstacles for Chinese payment systems to be adopted by non-Chinese firms. The marginal penetration of Chinese payment systems will be affected by these innovations. The ultimate result appears to be clear: China’s payment systems will be incorporated into global payments. It is best suited for Pakistan to follow footprints of China and get Pakistan on the journey of making it a cashless society. The current government should look into making law and getting the advanced technology to facilitate this transition and stop the mere talks on how to make Pakistan a better place to live.
Dr Hassnain Javed is a socio-political analyst and a Sinologist based in Nanjing, China. He is also theauthor of Economic Corridors: A Gateway to Pakistan New Strategic Fit.