Opening up to online payment systems

I found it really cute when a year and a half ago my five-year-old discovered that she could order pizza through an app on my smartphone. I had an odd sense of foreboding about the whole business but against my better judgement I laughed it off and posted a status on Facebook. It was a bad mistake; recently while enjoying the rare Karachi winter in my garden sipping Earl Grey tea, a delivery guy rang the gate bell and promptly handed me an invoice for an absurd amount and a box full of Doctor Who merchandise. Apparently my 14-year-old had discovered online shopping.

The implications on a parent’s bank accounts aside, online is quickly becoming the established norm for shopping. According to eMarketer, worldwide online consumer spending in 2015 will be approximately $1.672 trillion. With the total global retail sales at $22.822 trillion this means online will be contributing 7.3% (Source: bit.ly/1Dc5vT7).

In Pakistan we have already laid the foundations for e-commerce. Although there is no concrete study, the estimated size of online spending is agreed to be between $25 to 30 million. There are many different projections on the rate at which e-commerce is growing in Pakistan, but no matter which figure you take, it is sure to raise eyebrows. The consensus on exponential quarterly growth at the moment is 10%. At this rate, it will achieve 75% growth in the very near future (Source: www.kaymu.pk/research). This should sound impressive, but considering global or even regional statistics, it is clear there is a huge potential to tap into.

In Pakistan, one of the hurdles in closing the gap with regional performances is the online payment systems or rather the lack thereof. Even today, 95% of online transactions are compensated through COD (cash on delivery). COD is also a popular system in many other countries, including the UAE and Eastern European countries like Romania. However, it has its shortcomings. While it is a good way to sell small ticket items, it becomes a challenge when more expensive products are involved. Any retailer who wants to ship a large ticket item needs to have payment up front or at least a partial payment made.

While Cash on Delivery (COD) is a good way to sell small ticket items, it becomes a challenge when more expensive products are involved. Any retailer who wants to ship a large ticket item needs to have payment up front or at least a partial payment made.

The current Door-Step-Rejection (DSR) rate (the percentage of rejection when a courier reaches the delivery point – and this includes a scenario when the person who placed the order is not available at the location at that moment or does not have the payment) is estimated at eight to 10%. This worrying DSR rate is also the reason why both the courier service and the retailer have rigorous delivery protocols in place, such as calling to confirm orders, calling before delivery and giving a heads up on when the delivery will be made so that cash is available at the right time. Also, because a third party (the courier company) is involved in handling cash, the cash reconciliation cycle becomes longer, and although large companies can bear this, it has implications for the smaller players.

Read: Online grocery stores in Pakistan

Also, whenever we talk about e-commerce we tend to think of a mobile phone or a t-shirt as being sold online, yet in reality e-commerce has a larger scope. We haven’t yet truly started exploring the potential to deliver services online, but when this does happen (and there is no physical exchange of goods) the cash on delivery model will lead to further challenges. There is a big demand for services such as creative design, online consultation, training and education.

Some of these services have complex recurring payment terms which require a more robust payment system to be in place compared to what we have now; a system which guarantees that compensation for these services is securely transferred from the buyer’s bank account to the providers in real time. In other economies this tends to be solved by payment through plastic money, but the current penetration of these instruments is limited in Pakistan. What this means is that online will become the privilege of the select few who have access to the right bank accounts and credit or debit cards.

Good options, however, have come from the telecom service providers. Working with financial institutions, they are offering mobile based (e.g. Easypaisa or Mobicash) online payment solutions. Keep in mind that even in advanced economies which have excellent credit card penetration, Visa predicts that by 2020 half of all payments will be made through a cellular device so it makes sense that the telecom companies serve as a channel for payment.

Daraz incorporated one of these services in their last Black Friday sale and Kaymu is likely to follow suit. Telecom-based payment systems offer the advantage of deep penetration in the market. Not only does a vast percentage of the population have access to them through their own devices or local service outlets, the penetration is also much more balanced in terms of an urban/rural split compared to other banking alternatives. In fact, services like Easypaisa are already a popular way to transfer funds by urban wage earners to their families in rural areas. Consequently, a vast majority of the population is familiar with the mechanics. (According to mobilemoney.com.pk, Easypaisa accounts for 53% of the market share.)

However, these services open up new challenges. For example, Easypaisa is a Telenor-specific solution, and so if you don’t have a Telenor SIM you will not be able to use the service unless you go to an Easypaisa retail outlet. This has implications for online retailers. They now have to devise deals and work with a wide number of payment providers in order to capture the totality of the market. For example, their checkout systems will have to offer Telenor, Mobilink, Ufone, Warid, Zong, UBL Omni and many other modes of payments. This makes things very complicated for people who want to start their own online business. There is a desperate need for an independent platform for online payments.

The telecom-based services are not designed to deliver international transactions and this means that if a local online business depends on them they can only target the local market.

There is one more snag to all this. The telecom-based services are not designed to deliver international transactions and this means that if a local online business depends on them they can only target the local market. To flourish, Pakistani online commerce will have to open up to the global market.

Another interesting development is the recent courting of independent services like PayPal and AliPay by the State Bank of Pakistan (SBP). PayPal accounts for 16% of all global internet based transactions. In 2014 alone PayPal moved $228 billion in 26 currencies across 190 countries. AliPay accounted for almost 50% of all China based transactions, amounting to nearly $300 billion. An interesting feature about AliPay is that they don’t charge a transaction fee. Between these two platforms Pakistan’s online business community has a good solution for online consumers both locally and internationally.

To conclude, although online consumerism is growing rapidly, we should not be complacent if we are not to lag behind global and regional trends. One of the key issues to unlocking our market potential remains online payment systems. The SBP is moving in the right direction so let’s hope it will build a robust payment gateway to support our fledgling online economy.

Syed Amir Haleem is CEO, KueBall (a New York-based digital company). syedamirhaleem@gmail.com