For PayPal, operating in Pakistan isn’t a sound business decision — here's why

Ever wondered why there are no international payment gateways in the country?
Published May 21, 2019
The American company is afraid to come to Pakistan because 'there are no regulations to protect its interests.'— *Shutterstock*
The American company is afraid to come to Pakistan because 'there are no regulations to protect its interests.'— Shutterstock

To the disappointment of many, PayPal will not be introducing its services in Pakistan.

As of this year, PayPal — a worldwide payment system supporting online money transfers — operates in about 200 markets and has 277 million registered accounts. Additionally, it allows its customers to send, receive and hold funds in 25 currencies.

Exporters, freelancers and IT companies in Pakistan were eager for PayPal to launch in the country for ease of payments.

But as people express their frustration over the online payment giant's refusal to operate in Pakistan, the question to ask is: how did we get to this stage?

Why aren't major international payment gateways — such as PayPal, Google Pay or Stripe — operating in Pakistan, even though they operate in similar countries?

And more importantly, why aren't companies from the fourth largest freelancing country able to send invoices to international customers which they click to pay?

The short answer is that for PayPal, operating in Pakistan isn’t a sound business decision at this point.

Here’s why:

Govt attitude towards digital economy

Digital payments are an important part of the digitisation of our country. And while there has been some effort from individuals, the field lacks a robust effort by the government. One of the major challenges in Pakistan today is the mindset surrounding the digital economy and the low priority given to it by our leadership; sadly, the digital ecosystem has always been and continues to be a sideshow.

Pakistan needs to develop an overall ecosystem to motivate a company like PayPal to enter the market.

For anyone running an e-commerce company and wanting to make a payment to a vendor in, say, China, State Bank allows 35% repatriation of funds for exporters but the process requires cumbersome documentation that makes it difficult to send money abroad.

Regulations and money laundering

Another reason for our current standing is our regulatory ethos.

PayPal would have to pay the SBP-mandated $2 million license fee if it wanted to work in Pakistan. If the same regulations existed in the US, perhaps the world wouldn't see the likes of Elon Musk and Peter Thiel, who created small startups like PayPal just to automate payments in the US.

For a company like PayPal, which earns between 2% to 3% on transactions, even a $100 million transaction a year could not justify a $2 million license fee. This coupled with intense regulation like FATF and the perpetual fear of financial fraud would discourage most companies.

While there are ways in which the government can resolve this issue, like the setting up of an indemnity fund for these companies, it is something which would require a serious effort from the government.

Technical issues for PayPal

With everything said, at the end of the day, PayPal can only act as a transaction company.

Even in places like India, PayPal cannot use its platform for person to person transfers or payments due to strict regulations. One can only transfer money to banks in India via PayPal.

Pakistan lacks a central system or a platform through which customers can transfer money to any bank in the country. In places like India and the US, companies like PayPal can connect to any bank to process payments without acquiring a licence.

For PayPal to have the same option in Pakistan, it will not only need a licence but will also have to commit to tough edicts of financial regulations.

How online payments work.—*Source: PayPal*
How online payments work.—Source: PayPal

So what's the way forward?

For someone who is not a financial or regulations expert, this is is a very difficult question. Here are some suggestions:

1. Enable a digital payment system

One of the biggest issues in Pakistan is over-regulation. Banks are used to the kind of regulation they face from the State Bank. However, many fintech players who want to set up or create something like wallets, WeChat payment systems or something like PayPal are highly discouraged not only with the $2 million fee but also the regulations. Lengthy processes are another cause of concern. Normally, it takes at least a year to get a license and the process is complicated so many companies either give up or lose interest. Some are blocked by the high cost of entry into the fintech ecosystem.

The financial industry also needs to update from legacy systems and provide open API platforms so integration between different providers can become easier. There is almost no incentive for e-commerce players as well those who compete with the smuggled goods and the non-tax paying retail sector. With increased bank hacks, and credit card hacks, users also prefer to pay with cash on delivery

2. Payment wallet

One of the best solutions would be to set up a local payment wallet that allows exporters to retain their earnings in USD. Fintech companies should be encouraged to set up such a wallet rather than the government itself. The system should be easily integrated with popular e-commerce and WordPress platforms.

This should allow companies to pay expenses with ease to their international vendors. The government can tax the system as well as a small percentage of revenue to make money for itself. Exporters and companies would gladly pay it. Startups already have a three-year exemption from taxes so they, too, would be covered. The government will get to hold the entire amount in USD.

The system should have built-in easy dispute mechanisms like PayPal offers —one of the company’s biggest features which has earned customers’ trust. If there is an issue or fraud with a payment, a claim for money back can easily be processed.

3. Other alternatives

This is an opportunity for us as a nation to create our own payment system that international and local customers can trust. Our own system will give us an opportunity to keep the money in Pakistan.

Conclusion: Pakistan has much to gain — or lose

Pakistan seriously needs to work on its digital payment ecosystem. This is the only way to convert our “cash only” economy and bring it into the taxation system. It will enable businessmen, traders and freelancers to do business not just locally but internationally as well and increase our exports.

The idea is to enable not just our freelancers but also the traders sitting in Faisalabad, Sialkot and Gujranwala to run e-commerce websites and sell their goods to the world.

Perhaps success in the digital payment space with more credit card usage, more users using online payments, more online merchants, higher volumes and the success of other payment gateways can motivate PayPal to come to Pakistan.

If we don’t expand our digital footprint, these entities will continue to open companies in the USA, UK or UAE to operate their businesses from outside the country because they are unable to receive payments from customers and pay their vendors abroad. The cost is great, and the money stays out of Pakistan.

Barkan Saeed is the ex-chairman of Pakistan Software Houses Association, P@SHA, and runs an IT company based out of Islamabad.