How State Bank of Pakistan just killed the Payments & Fintech Startup Industry of Pakistan.

State Bank of Pakistan recently released the much anticipated Rules for Payment System Operators & Payment Service Providers.

The expectations were high. The results. Disappointing.

tl;dr: SBP has essentially killed the startup payments industry with favoritism.

The date: 23rd of October, 2014 would long be remembered as a dark day for the payments industry in Pakistan. It was the day when SBP via its PSD Circular No. 03 of 2014 released the Rules for Payment System Operators & Payment Service Providers (PDF).

These rules (for an application) are laid out for anyone wanting to become a licensed operator in Pakistan for Payment Systems.

Payment System Operators (PSOs) and Payment Service Providers (PSPs) can include the following (as per the circular):


  • Electronic Payment Gateway Service Providers to perform routing and switching of payment transactions/messages to facilitate:
    • e-Commerce
    • Remittances
    • Point of Sale (POS) network
  • Clearing Houses to provide payment related Clearing services.
  • ATM Switch Operators to provide routing of ATM transactions through inter-connectivity between the participants of the network.
  • Any other Payment System Operator or Payment Service Provider as may be permitted by SBP.

Before I delve and explain why in my opinion SBP has essentially killed the startup payments industry in Pakistan and offered favoritism to operators like 1Link and MNet (owned by MCB and run by Euronet Pakistan), let me go on a tangent and give an example worth reading up on.

In the world of money transmitter licenses, Payment Service Providers (PSPs) rarely have to get licensed. Why? Because PSPs are utilizing the mechanism of the existing licensed entities such as Money Transmitters and Banks to handle their transaction processing. A PSP’s business model hinges on having a transaction solution.

A PSP is essentially a full stack operator. They have acquiring relationships with the card schemes, they work with Money Transmitters for purposes of stored value or across-State-lines transactions and are even allowed to handle e-money (i.e. digital money, provided commingling of funds is not done and a licensed banking financial institution is providing them with depository and transaction banking services).

If the PSP itself cannot find a method to partner up with a licensed entity, then they go and obtain a money transmitter license themselves. Examples of this are operators like Braintree Payments, Balanced Payments, Stripe, WePay, etc.

The fact that even a POS network has to be licensed, implies, that if you make a Square dongle based mobile POS, guess what – you need to cough up $2 Million. Have Jumio to do a image scan of the card – same thing. Cough up $2 Million. One would argue that this is just not fair.

On the flip side, when we talk about deploying any form of an ATM network, same thing – you need a licence. In the US for example Interbank Networks like Pulse, STAR, Cirrus, etc. are regulated via the banking arrangements, and independent network operators who aim to provide a 3rd party ATM switched network are given the coverage by either the bank’s license (which in this case would not be allowed) or via the money transmitter licenses (which in this case is too expensive).

Let me highlight an example of three very important US States whose Money Transmitter Licenses are coveted world over.

The US States of…

These three States issue the money transmitter licenses that at times represents the bulk of US financial transactions. No where in the world is a money services business license more valuable than NY, CA and TX (respectively, in order of priority, with NY having the highest demand).

Even in these US States, the net worth requirements for applicants is at US$ 500,000 (in California) and US$ 250,000 in Texas and New York. The Surety Bonding for $1 Million is provided at a 3% per annum, so even obtaining bonding is economical. It is important to note, that these three States comfortably can be classified as the States that generate 80% of the transactions for US (give or take). They process Billions of Dollars in transactions, yet they are affordable to the common start-up in the US.

If we are to offer a licensing regime in Pakistan, it should be reflective of the on-ground economics, i.e. the licensing fees needs to come down drastically.

Why State Bank of Pakistan has set a very high bar, requiring US$ 2 Million almost in paid-up capital (net worth) for a company in order to apply — needs to be questioned and possibly have it readdressed.

No doubt, as everyone in the industry knows this is the effort of continual subliminal lobbying and advisement by vested groups who would not want any other company to apply and by 1Link – which is most threatened by opening up the licensing regime.

The new Rules are Protectionism at its best, packaged so that only the uber-rich can afford them. As a payment consultant who works with foreign clients mostly, I deal with the issue of licensing in the US, Canada and EU continually. Even the EU Payment Institution license does not have such stringent financial requirements.

The barrier to entry vis-a-vis the paid up capital of Rs. 200 Million is clearly a deterrent for those in the startup phase. It is a warning shot that SBP does not welcome entrepreneurs who are more passionate about payments and payment systems when compared to the likes to big multinational names and schemes.

The amount of financing they require is what someone would raise in 2nd or 3rd rounds in the US for venture funding. Mind you, the Rs. 200 Million is only the paid up capital requirement. The additional parameters as set forth, will also require deep pockets.

One cannot express disbelief when reading through the rigorous requirements set in play. SBP provides no relief in self-inflicted delays to the project, and yet requires all applicants to be up and running with their pilots in 6 months. A typical NOC for SECP registration at Payment Systems Department (PSD) takes in excess of 6 months, so the whole concept of timelines is questionable at best.

The startup culture in Pakistan has very recently started to evolve. There is a lot of disruption in the financial services and financial technology (fintech) space world over. All this disruption is helping the consumer with more cheaper, faster and better financial services products. With alt-coins like Bitcoin disrupting the payment rails, with newer and better real-time settlement systems like Ripple and open ledgers like Hyperledger, we here in Pakistan, are greasing the pole so that slippage occurs.

As I have cited in the past, Banana In – Banana Out. Garbage In – Garbage Out. The Rules that have been set are not conducive to the startup community and forces disengagement with players who do not meet the financial requirements.

SBP could have offered slab pricing, and setting limits. Historically, even the Pilot programs will run for years. Technology and product obsolescence sets in quite rapidly in today’s connected world.

Almost 20 years running and we do not have a lot to show for. Four payment gateways and those too struggling. 2 ATM switches with high pricing for transfers. No agnostic 3rd party wallets, no localized PayPal, no 3rd party payment service providers. In fact, no 3rd party at all, because of the snail like pace at which SBP is evolving.

We should have catapulted to the next level with our connected population, our mobile penetration rates and the market potential we have. If you look at Remittances (which too are governed by this Rule set, strangely enough they are not being governed by Pakistan Remittance Initiative from Exchange Policy Department), even this industry vertical is being choked.

Here is how SBP has killed the startup culture…

  • If you had a brilliant idea of making the next PayPal of Pakistan, SBP just killed it.
  • If you wanted to make Pakistan’s version of Venmo, SBP killed it.
  • If you have a working prototype of a mPOS using a dongle for card reading for the acquiring space, SBP killed it.
  • If one wanted to set up a Ripple Gateway, SBP killed it.
  • If one wanted to set up a Bitcoin Exchange, SBP killed it.
  • If one wanted to make an agnostic web/e-wallet, SBP killed it.

I can go on and on.

I am willing to bet with anyone applying that SBP’s exemplary service to delaying will be ever present. Nonsensical debates over your business models (on which I personally see the Regulator interfering) and then the added delays in pilot launch and then maybe in 1-2 years a full-fledge go-to market launch.

Good luck trying to make money.

SBP, I have to say it again. You killed the Payments and Fintech startup industry in Pakistan.



13 thoughts on “How State Bank of Pakistan just killed the Payments & Fintech Startup Industry of Pakistan.”

  1. Baqar Abbas Jafri

    Wonderful Article. I was wondering if someone wanted to make a crowdfunding platform with local gateways of Telenor. Has SECP killed it as well? Business model is to earn money as percentage of the funded amount, routed through telenor’s and international payment gateways. Like Kickstarter with Telenor Payment Gateway? I would be grateful for your kind feedback.

    1. Well essentially what this says is if you are a 3rd party service provider, you need to be licensed. So if you are a Payments Aggregator or as the industry calls it a Payments Facilitator (PF), you’d have to be licensed. All marketplaces would need to be licensed, as they are PSPs essentially.

  2. Baqar Abbas Jafri Well essentially what this says is if you are a 3rd party service provider, you need to be licensed. So if you are a Payments Aggregator or as the industry calls it a Payments Facilitator (PF), youd have to be licensed. All marketplaces would need to be licensed, as they are PSPs essentially.

  3. I fully agree with you, and had raised exactly this concern when Tameer/Telenor signed up with 1-Link earlier this year. That was actually the point at which the SBP killed off any chance of a local independent player to enter this industry. SBP’s current move is just a nail in the coffin.Over a year ago when the SBP came up with their first “working paper” on payment gatways, it had a somewhat progressive undercurrent that seemed like it would encourage indepent operators so that a repeat of 1-Link’s monopoly would not kill-off the growth and success of MFS in Pakistan. This is not happening, and 1 Link has quickly become the first and only option for Banks to bridge their MFS with eachother. With this head start, can you imagine what incumbent SPs would have to do to win business ?

    Moreover, the SBP was to limit how many licenses it would give out. However, we don’t know how many players would be included in the race, it would most likely be a scenario in which several incumbent players kill themselves off in a price war.

  4. A Khan Thank you for your comment and it is genuinely nice to see someone who understands the landscape well. What SBP should have done is taken a singular model, lets say the Money Transmission Rules from State of Texas or Georgia and worked on that. These rules do not allow an Agent (or Sub-Licensee concept), the concept of an Authorized Delegate, the Disclosures are missing, the Consumer Protection elements are missing, slab pricing is missing, the fact if money is not being touch by the fintech, then why be licensed?The question about the number of licenses is one that has been raised by a lot many quarters, so you are spot on in asking that! How many will be issued?

  5. Thank you for sharing this information, Agree with you and disappointed from SBP. Can you please confirm that to offer Bitcoin Exchange in Pakistan is legal ? Or need this license ? I mean on small level, like clients can send bitcoin and we them in bank ?

  6. Pingback: SBP and payments licensing – two years on and still stuck! | BankNXT

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