Common Question: If someone wanted to set up a WISE or Paypal-like service in Pakistan would they want an EMI or PSP?

To establish a service similar to Wise (formerly TransferWise) or PayPal in Pakistan, the appropriate regulatory framework would depend on the specific services and functionalities intended to be offered. Here’s a breakdown of the two options:

  • Electronic Money Institution (EMI):
    • Suitability for Digital Wallets and Money Transfer Services: If the primary focus is on digital wallets, prepaid cards, and facilitating digital payments and money transfers (similar to PayPal or Wise), an EMI license would be more appropriate. EMIs are tailored for businesses that provide innovative, user-friendly, and cost-effective low-value digital payment instruments.
    • Consumer-Focused Services: EMIs in Pakistan are expected to offer interoperable and secure digital payment products and services to end users, aligning well with the business model of companies like PayPal and Wise, which are consumer-centric and provide user-friendly interfaces for financial transactions.
    • Financial Inclusion and Digital Payment Adoption: EMIs play a crucial role in promoting financial inclusion and digitizing payments, which aligns with the objectives of services like PayPal and Wise that aim to simplify and democratize financial transactions.
  • Payment System Operator (PSO) / Payment Service Provider (PSP):
    • Infrastructure and Payment Processing: If the service involves the operation of payment systems infrastructure, such as payment gateways, clearing houses, ATM switches, and POS gateways, then a PSO/PSP license would be more suitable.
    • Role as Intermediaries: PSOs and PSPs act as intermediaries in the financial market, providing the backbone for payment processing and routing. This is more aligned with businesses that focus on the operational side of payment systems rather than direct consumer interaction.

Key Considerations:

  • Business Model and Services Offered: The choice between an EMI and a PSP/PSO license should be based on the specific services your business intends to offer. If the focus is on direct consumer services like digital wallets and money transfers, an EMI license is more appropriate. If the focus is on providing the infrastructure for payment processing, then a PSO/PSP license would be suitable.
  • Regulatory Compliance: Both licenses come with specific regulatory requirements and capital stipulations as set by the State Bank of Pakistan. Compliance with these regulations is crucial for successful operation and sustainability in the financial market.
  • Market Dynamics and Partnerships: Understanding the existing market dynamics, potential partnerships with banks and other financial institutions, and the evolving regulatory landscape in Pakistan are essential for making an informed decision.

In summary, for a service akin to Wise or PayPal that focuses on user-facing digital payment services, an EMI license is likely the more fitting option. However, the final decision should be based on a comprehensive analysis of the intended business model, services to be offered, and the regulatory environment in Pakistan.

Difference between an PSP and EMI  in Pakistan :

The distinction between Payment System Operators (PSOs), Payment Service Providers (PSPs), and Electronic Money Institutions (EMIs) is rooted in their respective roles and functions within the financial ecosystem, particularly in the context of Pakistan’s regulatory environment as governed by the State Bank of Pakistan (SBP).

Payment System Operators (PSOs) and Payment Service Providers (PSPs):

  • Function and Scope: PSOs and PSPs are primarily involved in the operation and provision of payment systems related services. This includes managing electronic payment gateways, payment schemes, clearing houses, ATM switches, POS gateways, e-commerce gateways, and other related services. They act as intermediaries for the routing, switching, and processing of payment transactions.
  • Regulatory Framework: They operate under the specific rules set by the SBP and are required to go through a three-stage authorization process: In-Principle approval, Pilot Operation approval, and Final Stage approval.
  • Capital Requirements: PSOs/PSPs must maintain a minimum capital of PKR 200 million, with an additional 25% for each additional line of business. This requirement ensures financial stability and credibility.
  • Restrictions: They are not permitted to act as custodians of consumer funds or perform any traditional banking functions as defined in the Banking Companies Ordinance, 1962.

Electronic Money Institutions (EMIs):

  • Function and Scope: EMIs are entities that focus on offering digital payment instruments such as wallets, prepaid cards, and contactless payment instruments. Their aim is to promote digital payments, foster innovation in the payments industry, and increase financial inclusion.
  • Regulatory Framework: EMIs operate under regulations issued by the SBP in 2019, under the Payment Systems and Electronic Fund Transfers Act, 2007. Their licensing also follows a three-stage process: In-Principle approval, Pilot Operation approval, and Final Approval (License).
  • Focus on Digital Payments: EMIs are expected to offer interoperable and secure digital payment products and services, thus playing a pivotal role in the digitization of various types of payments.

Key Differences:

  • Operational Focus: PSOs/PSPs are more focused on the infrastructure and mechanisms that facilitate payment processing (e.g., payment gateways, ATM switches), while EMIs concentrate on providing digital payment instruments to end-users (e.g., e-wallets, prepaid cards).
  • Role in Financial Ecosystem: PSOs/PSPs act as intermediaries and facilitators in the broader financial market infrastructure, while EMIs are more consumer-focused, aiming to broaden digital payment adoption among the general public.
  • Capital and Regulatory Requirements: Both have distinct capital requirements and regulatory pathways as mandated by the SBP, reflecting their different roles and risks in the financial system.
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In summary, PSOs/PSPs and EMIs play complementary but distinct roles in Pakistan’s digital payment landscape, with PSOs/PSPs focusing on the operational aspects of payment systems and EMIs concentrating on consumer-facing digital payment solutions. Their coexistence and collaboration are crucial for the development of a robust, efficient, and inclusive financial ecosystem in Pakistan.

Current EMIs (Approved) in Pakistan (Source SBP Website)

The current landscape of Electronic Money Institutions (EMIs) in Pakistan presents a diverse array of companies offering digital payment solutions. These EMIs are pioneering the shift towards digital financial services in the country, providing various forms of e-money wallets and payment gateway services. Below is a summarised note on the existing EMI providers in Pakistan, along with their products, services, and regulatory status:

  • M/s NayaPay Pvt. Ltd.
    • Products/Services:
      • E-money wallet for Consumers
      • E-money wallet for Merchants
    • Date of Approval: August 30, 2021
    • Status: Live
  • M/s Finja Pvt. Ltd.
    • Products/Services:
      • E-money wallet for Consumers
      • E-money wallet for Merchants
    • Date of Approval: September 14, 2021
    • Status: Live
  • M/s CMPECC Ltd.
    • Products/Services:
      • E-money wallet for Consumers
      • E-money wallet for Merchants
    • Date of Approval: March 22, 2022
    • Status: Live
  • M/s SadaTech Pakistan Pvt. Ltd.
    • Products/Services:
      • E-money wallet for Consumers
      • E-money wallet for Freelancers
    • Date of Approval: April 18, 2022
    • Status: Live
  • M/s Wemsol Pvt. Ltd.
    • Products/Services:
      • E-money wallet for Consumers and Merchants
      • Payment Gateway for Consumers and Merchants
    • Date of Approval: July 08, 2020
    • Status: Pilot Approval granted
  • M/s TAG Innovation Pvt. Ltd.
    • Products/Services:
      • E-money wallet for Consumers
    • Date of Approval: October 07, 2022
    • Status: In-Principle Approval and Pilot Operations approval have been revoked by SBP
  • M/s Akhtar Fuiou Technologies Pvt. Ltd.
    • Products/Services:
      • E-money wallet for Consumers
    • Date of Approval: December 16, 2022
    • Status: Pilot Approval granted
  • M/s EP Systems
    • Products/Services:
      • E-money wallet for Consumers
      • E-money wallet for Merchants
    • Date of Approval: January 18, 2023
    • Status: Pilot Approval granted
  • M/s Hubpay Pvt. Ltd.
    • Products/Services:
      • E-money wallet for Consumers
      • E-money wallet for Merchants
    • Date of Approval: February 02, 2022
    • Status: In-Principle Approval granted
  • M/s Careem Payment Solutions Pvt. Ltd.
    • Products/Services:
      • E-money wallet for Consumers
    • Date of Approval: August 28, 2023
    • Status: In-Principle Approval withdrawn by the Company

Important Note: The In-Principle approvals granted by the State Bank of Pakistan (SBP) to these EMIs are based on a thorough review of their applications and the information they submitted. However, this approval should not be seen as an endorsement of the EMIs’ proposed business models or financial viability by the SBP. The SBP does not assume responsibility for any financial, legal, or reputational loss incurred by any entity or individual who establishes a business relationship with an EMI based solely on its In-Principle approval status.

This summary provides a snapshot of the evolving EMI sector in Pakistan, highlighting the varied services offered and the regulatory milestones achieved by these institutions. The sector is dynamic, with new players entering the market and existing ones expanding their services, all contributing to the digital transformation of Pakistan’s financial landscape.

Current Approved PSD’s in Pakistan (Source: SBP Website)

The Payment Systems Department of the State Bank of Pakistan plays a pivotal role in the oversight and regulation of the country’s payment infrastructure. This includes the authorization and supervision of Payment System Operators (PSOs) and Payment Service Providers (PSPs). The department ensures that these entities operate in compliance with established rules and regulations, thereby maintaining the integrity and stability of Pakistan’s financial system.

Below is a legal note on the list of authorized PSOs and PSPs under the Rules for PSOs and PSPs:

  • 1LINK Guarantee Ltd.
    • Authorized Payment System: ATM Switch, Interbank Fund Transfer Services/Utility Bill Payment Services, PayPak Scheme, POS Switch
    • Date of Approval: Varies (2015 – 2017)
    • Status: Live
  • Virtual Remittance Gateway
    • Authorized Payment System: Electronic Payment Gateway
    • Date of Approval: April 17, 2017
    • Status: Live
  • Webdnaworks (Pvt.) Ltd.
    • Authorized Payment System: White Label ATMs
    • Date of Approval: April 30, 2020
    • Status: Live
  • NIFT (Pvt.) Ltd.
    • Authorized Payment System: Paper Based Instruments Clearing, E-Commerce Payment Gateway
    • Date of Approval: Varies (2016 – 2021)
    • Status: Live
  • Avanza Premier Payment Services
    • Authorized Payment System: E-Commerce Payment Gateway
    • Date of Approval: May 21, 2021
    • Status: Live
  • ForeePay Private Ltd.
    • Authorized Payment System: Payment Initiation Services/Account Information Services, Payment Aggregation Services
    • Date of Approval: Varies (2020)
    • Status: Approval for Pilot Operations granted
  • Safepay (Pvt.) Ltd.
    • Authorized Payment System: E-Commerce Payment Gateway
    • Date of Approval: August 15, 2022
    • Status: Approval for Pilot Operations granted
  • TPL Rupiya (Pvt.) Ltd.
    • Authorized Payment System: Mobile Payment Switch
    • Date of Approval: April 29, 2016
    • Status: In-Principle Approval granted
  • Infotech (Pvt.) Ltd.
    • Authorized Payment System: Automated Clearing House, E-Payment Gateway
    • Date of Approval: August 08, 2016
    • Status: In-Principle Approval granted
  • Mobidirect (Pvt.) Ltd.
    • Authorized Payment System: E-Commerce Payment Gateway
    • Date of Approval: August 04, 2017
    • Status: In-Principle Approval granted
  • Zingdigicomm (Pvt.) Ltd.
    • Authorized Payment System: E-Commerce Payment Gateway and Person to Merchant Payments
    • Date of Approval: November 02, 2017
    • Status: In-Principle Approval granted
  • Euronet (Pvt.) Ltd.
    • Authorized Payment System: Bulk Transfers & Instant credit/Invoice fee-based Payments Processing
    • Date of Approval: November 02, 2017
    • Status: In-Principle Approval granted
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Important Note: The In-Principle approvals granted by the State Bank of Pakistan to PSOs and PSPs are based on the information provided by them and a review of their application under the Rules for PSOs/PSPs. These approvals should not be interpreted as an endorsement of the entities’ proposed business models or financial viability by the State Bank of Pakistan. The SBP will not bear responsibility for any financial, legal, or reputational losses incurred by any entity or individual who establishes a business relationship with a PSO/PSP based solely on its In-Principle approval status.

This note reflects the current status of authorized PSOs and PSPs in Pakistan, highlighting the diversity and specialization within the country’s payment systems landscape. It underscores the SBP’s commitment to facilitating a robust, secure, and efficient payment system environment, pivotal for the country’s financial stability and growth.

Payment Systems in Pakistan

The landscape of payment systems in Pakistan has undergone a transformative evolution over the past decade. This progression is marked by the introduction of advanced payment instruments, the expansion of electronic payment infrastructure, and the adaptation to shifting consumer preferences. These advancements have facilitated a significant migration from traditional paper-based instruments to a multifaceted array of electronic payment options. This migration is supported by an efficient and reliable clearing and settlement infrastructure, which has been instrumental in enhancing the overall effectiveness of the payment systems in the country.

Key Features of Pakistan’s Payment Systems:

  • PRISM (Pakistan Real-time Inter-bank Settlement Mechanism): This system represents a cornerstone in large-value real-time fund transfers. PRISM is equipped with contemporary features that enhance liquidity saving and risk mitigation, making it a critical component of the financial infrastructure.
  • Government Securities Settlement System: This system is fully integrated with the RTGS (Real-Time Gross Settlement) System, facilitating electronic settlement based on the Delivery versus Payment (DvP) Model 1. This integration ensures seamless and secure transactions within the government securities market.
  • Real-Time Retail Payment System (Operated by 1Link): This system offers peer-to-peer (P2P) transfer capabilities, operational 24/7 through various Alternate Delivery Channels such as ATMs, Internet Banking, and Mobile Banking. It represents a significant advancement in providing accessible and continuous payment services to the general public.
  • Paper Instrument Clearing Facilities: These facilities operate on a T+1 basis and are supported by an extensive network of more than 27 clearing/satellite centers across the country, ensuring widespread and efficient handling of paper-based transactions.
  • Central Counter Party for Capital Market Transactions: This feature provides a centralized platform for the settlement of capital market transactions, enhancing the efficiency and security of these operations.
  • Agent-Based Branchless Banking: Catering to the cash and fund transfer needs of millions, this feature has expanded financial services to a broader spectrum of consumers, particularly in underserved areas.
  • Compliance with IBAN Standard: Pakistani banking systems now utilize account numbers compliant with the International Bank Account Number (IBAN) standard, facilitating international transactions and improving cross-border payment efficiency.
  • Interoperable ATM Networks: Pakistan boasts one of the lowest interchange fees in the world for its fully interoperable ATM networks, making ATM services more accessible and cost-effective for consumers.
  • PayPak – Domestic Payment Scheme: This recently launched scheme aims to provide a low-cost payment solution to both consumers and financial institutions, further diversifying the payment options available in Pakistan.

Role of the State Bank of Pakistan:

The State Bank of Pakistan (SBP) plays a critical role in the governance and regulation of these payment systems, as outlined in the Payment Systems & Electronic Fund Transfer Act 2007. The Payment Systems Department within the SBP is entrusted with the oversight and regulation of payment systems in Pakistan. This includes operating the PRISM System, which is a testament to the Bank’s commitment to ensuring the stability and efficiency of the national payment systems.

This legal note elucidates the diverse and sophisticated nature of Pakistan’s payment systems, highlighting the integral role of the State Bank of Pakistan in maintaining and regulating these systems for the benefit of the country’s financial stability and consumer convenience.

Legal Update: The PSPOD Circular No 03 of 2023 was issued on 21 June 2023 and addressed to Presidents/CEOs of All Banks, Microfinance Banks (MFBs), Payment System Operators (PSOs), Payment Service Providers (PSPs), Electronic Money Institutions (EMIs), and Prospective EMIs

The State Bank of Pakistan (SBP) has recently updated its regulations governing Electronic Money Institutions (EMIs), a strategic move designed to broaden the reach and capabilities of these modern fintech-driven payment entities. The amendments to the regulations are set to empower EMIs to extend enhanced services to a diverse customer base, including minors and freelancers. These services include expanded monthly wallet limits and the introduction of novel payment services like Payments Aggregation, Bill/Invoice Aggregation, Payment Initiation, Account Information, and Escrow Services for domestic e-commerce. Moreover, these institutions can now offer Services via Application Programming Interfaces (APIs) to Financial Institutions, Fintechs, Third-Party Service Providers (TPSPs), and facilitate Inward cross-border remittances.

Since the initial implementation of EMI Regulations in 2019, there has been a noticeable surge in interest among both local and international fintech companies to operate as EMIs within Pakistan. To date, the SBP has granted commercial operation licenses to four EMIs, with six additional EMIs in various stages of the licensing process. As of March 2023, these institutions have successfully established approximately 1.6 million e-money wallets, accumulating a total e-money volume of Rs. 2 billion.

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The revised regulations, dated June 21, 2023, align with the SBP’s objective of fostering digital innovation in the financial sector by encouraging the participation of non-banking fintech companies in the payments arena. This initiative aims to extend the operational outreach of EMIs, thereby enhancing the adoption of digital financial services. The development of these new regulations involved comprehensive consultations with current and prospective EMIs, alongside other relevant stakeholders, ensuring that customers can access superior services from these regulated e-money providers.

The SBP anticipates that the updated regulatory framework will further attract fintech firms, both domestically and globally, to the EMI market in Pakistan. This influx is expected to introduce more innovative, cost-effective, and superior payment services, significantly contributing to the growth of digital financial inclusion within the country.

The Revised Regulations for Electronic Money Institutions (2023) show the State Bank of Pakistan’s (SBP), vision to invigorate the payments industry and further the agenda of financial inclusion through digital means, initially issued the Regulations for Electronic Money Institutions (EMIs) under the PSD Circular No. 01 of 2019. These regulations have significantly shaped the landscape of electronic money services in the country.

Since the implementation of these Regulations, there has been a notably positive reception from market participants. Numerous entities have acquired licenses to operate electronic money services, which underscores the success of these Regulations. Additionally, these measures have garnered appreciation and acceptance from foreign investors and institutions.

In a continual effort to boost the adoption of e-money services and to motivate both existing and new EMIs to develop innovative business models, use cases, and technological solutions, the SBP has undertaken a revision of these Regulations. This decision is influenced by both local experiences and global best practices in the field.

The revised Regulations are effective immediately. Existing EMIs currently offering e-money services are instructed to align their operations and processes with these updated regulations. A compliance report, confirming adherence to the revised standards, must be submitted to the SBP by no later than 30 September 2023.

This directive represents a significant step towards enhancing the efficiency and scope of digital financial services in Pakistan, encouraging innovation and competition in the sector, and ultimately contributing to the broader goal of financial inclusion.

Comment

The State Bank of Pakistan (SBP) has recently updated its regulations for electronic money institutions (EMIs), a move that is set to significantly boost the involvement of Islamic fintech companies in Pakistan’s electronic payment sector. These revised regulations, effective from 21st June 2023, are part of the SBP’s strategic initiative to expand the reach and functionality of EMIs in the country.

Under the new framework, EMIs are now permitted to offer a broader range of services. This includes increased wallet limits for various customer segments such as minors and freelancers, and the introduction of novel payment services. These services encompass Payments Aggregation, Bill/Invoice Aggregation, Payment Initiation, Account Information, Escrow Services for domestic e-commerce, and facilitation services via Application Programming Interfaces (APIs) for Financial Institutions, Fintechs, and Third-Party Service Providers. Additionally, the regulations now accommodate inward cross-border remittances.

This regulatory overhaul is anticipated to attract a greater number of fintech companies, both local and international, to venture into the EMI domain in Pakistan. The SBP foresees this development as a catalyst for bringing innovative, cost-effective, and superior payment services to the market, thereby promoting digital financial inclusivity within the nation.

Since the original introduction of EMI Regulations in 2019, there has been a notable upsurge in interest from fintech firms, both domestic and foreign, to operate as EMIs in Pakistan. The primary objectives of these regulations are to encourage digital payments, spur innovation in the payments sector, enhance financial inclusion, and establish a regulatory framework for non-banking entities in the payment landscape.

As of March 2023, the SBP has authorized four EMIs for commercial operations, with six more in various stages of licensing. While it has not been explicitly stated whether these EMIs adhere to Shariah principles, it is generally presumed that most, if not all, comply with these standards in Pakistan.

The EMIs have been successful thus far, having opened approximately 1.6 million e-wallets with a total value of PKR 2 billion (equivalent to US$6.95 million) in outstanding e-money.

In a significant development, Finja Invest, a Shariah-compliant e-wallet platform, has gained the distinction of being the first peer-to-peer (P2P) financing service provider in Pakistan to receive regulatory approval for its operations.

Pakistan’s Islamic fintech landscape, as documented in the IFN Fintech Landscape, comprises 12 Islamic fintech firms. According to the Global Islamic Fintech Index, Pakistan is currently ranked ninth among 64 countries. The Islamic fintech market in Pakistan is projected to grow to a value of US$2.8 billion by 2025.

By The Josh and Mak Team

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