Cashless transition in Pakistan: policy and reality gap

Pakistan's cashless transition is an important initiative of the government to promote financial inclusion and modernisation, but there is still a significant gap between policy objectives and the reality on the ground. The following section analyses the three dimensions of the policy framework, real challenges and directions for improvement:

I. Policy framework: ambitions and top-level design

1. National Financial Inclusion Strategy (2021-2025)
   The goal is to increase bank account holdings among the adult population to 651 TP3T by 2025 (currently around 451 TP3T) and encourage electronic payments through tax incentives.
2. Raast Instant Payment System
   The free digital money transfer platform launched by the central bank has crossed 1 million transactions per day, but is mainly concentrated in urban areas.
3. Regulatory incentives
   • Lower licence thresholds for digital wallet service providers (e.g. Easypaisa, JazzCash);
   • Sales tax reduction for merchants using POS machines.

II. The reality gap: five structural contradictions

1. Infrastructure divide

   • Only 38% of adults in rural areas have mobile phone signal coverage (GSMA data) and smartphone penetration is less than 30%;
   • The national ATM density is 8 per 100,000 people (55 in China).

2. Cash dependency inertia

   • The informal economy accounts for 35% of GDP, and small traders commonly refuse to accept electronic payments to avoid tax traceability;
   • Social welfare payments are still paid in cash, weakening the digitisation drive.

3. User trust deficit

   • 2022 Karachi University Survey reveals that 67% respondents are worried about e-fraud;
   • The Raast system had been delayed by a technical glitch causing 200,000 transactions in a single day.

4. Shortfalls in the capacity of financial institutions
   Small and medium-sized banks lack digital transformation budgets, and rural branch 80% operations are still cash access.

5. The squeeze effect of cross-border payments
   Remittance income accounts for 8% of GDP, but 90% flows through cash channels such as Western Union, which is difficult to replace with local digital programmes.

III. Possible pathways to bridge the gap

1. advance in stages: Prioritise mandatory digitisation of utility payments in urban areas such as Islamabad and Lahore.
2. Public-private partnership model: Drawing on India's UPI experience, allow telecom operators to share KYC data with banks.
   3.Last-mile innovation::

• Deploy a "correspondent banking" model (similar to M-Pesa in Kenya) that authorises grocery shops to provide basic financial services;
• Pilot blockchain-powered distribution of social welfare payments (as in the case of the World Food Programme in Jordan).
  4.Regulatory sandbox trials::
  Develop simple digital ledger tools with low compliance costs for micro and small businesses;

IV. Key findings

The core contradiction in Pakistan's cashless transition lies in the mismatch between the policy's "high-tier city orientation" and the economy's "strong grassroots attributes". In the future, it is necessary to break through differentiated strategies (urban-rural stratification) + pain points (such as remittance digitisation) - this is not only a technological upgrade, but also a systematic project involving the reconstruction of the social contract.

V. Deepening analysis: key bottlenecks and breakthroughs in policy implementation

1. Lack of financial literacy and user education

• status quo: Only 211 TP3T of Pakistan's adult population have basic financial literacy (World Bank 2023 data), and even less than 101 TP3T in the rural female population.
• affect (usually adversely): Even when digital payment tools are available, users still prefer cash transactions because they do not understand the process or are concerned about the security of their funds.
• prescription::
  • Co-opting religious leaders (e.g., mosque imams) to promote financial literacy and use community trust to reduce resistance;
  • Teaching e-payment scenarios embedded in popular TV series (e.g. PTV programmes).

2. "Cost-benefit" imbalance on the merchant side

• inconsistency: The government requires merchants to install POS machines, but the handling fee (1.5%-3%) erodes small and micro profits; and cash transactions avoid taxes.
• case (law): The Lahore Bazaar survey revealed that only 12% vendors accepted mobile payments, but 80% of them gave up after a brief attempt due to platform subsidies.
• Innovative models::
  ① "Zero-rate" window - modelled on China Alipay's early strategy of waiving fees for the first 6 months;
  ② "Tax credit for digitisation" - each e-payment can be offset against an equivalent amount of sales tax.

VI. Technology adaptation challenges and localisation programmes

(A) The rural-urban divide in telecommunications infrastructure

→ alternative::

• USSD code transfer feature (no smartphone required), JazzCash currently reaches 12 million feature phone users;
• Offline QR code payment system (similar to BharatQR in India) that allows for delayed settlement.

(B) Ethical Controversies in Biometrics

The government's push for the Aadhaar model of fingerprint payments has met with resistance:

• Farmers protest in Sindh:: "Fingerprint data sold to insurance companies" (no evidence but reflects a crisis of confidence);
  → compromise route::
  Adopts "two-factor authentication" (SMS OTP + simple password) to balance security and acceptance.

VII. Local adaptation of international experience

Pakistan can selectively draw on the following cases:

(1) M-Pesa's Agent Network Model in Kenya