In the last four years, India has seen digital payments proliferate into every corner of the country. Whether it’s tiny shops or utility payments, there’s a gamut of QR codes, digital wallets, and instant-payment apps. Silicon Valley tech giants are duking it out for new Indian users in an increasingly competitive market with over 500 million internet users. But in neighboring Pakistan, a vast and largely untapped digital payment user base sits ripe for the taking.
Pakistan, where over 60% of the country is below the age of 30, has some of the cheapest data plans in the world. Despite using their phones to access a growing number of social media apps, most Pakistanis don’t make payments online. The preference for cash goes all the way from paying for small items to dispersing salaries — 50% of Pakistanis are unbanked, and the majority of digital transactions in the country are ATM withdrawals. In the absence of international tech giants like PayPal or Google in Pakistan, limited digital payment options are provided by local telcos or major banks.
In other words, the Pakistani market is primed for a massive shift toward digital payments.
Now, Stripe — at $95 billion, the world’s largest valued fintech company — is among the first out of Silicon Valley’s giants to tap into Pakistan’s potential. In a bid to establish Stripe in the country, it led an undisclosed seed round in a relatively unknown startup called Safepay last month.
Founders Ziyad Parekh and Raza Naqvi told Rest of World that they were taken aback by the interest from fellow Y Combinator alumni Stripe. “We were not expecting it and were really intrigued, as they have been a huge inspiration for us,” said Naqvi.“[Stripe’s founders] understand that partnering up with people who are ambitious and want to tackle a problem is a much better way to enter a market than kind of going in there without any context,” he added. “At a founder-to-founder level, we spoke, and they understood what our vision was.”
The deal is one of the few major developments in Pakistan’s otherwise standstill fintech scene in many years. The country’s regulatory environment has been largely inflexible, according to sources in the industry. Banks, which have a monopoly on payment processing, view fintech innovation as competition. Still, Pakistan represents a massive potential user base: more than 220 million people who still rely primarily on cash payments.
The Pakistani market is at a tipping point when it comes to digital transactions: the country has a growing base of more than 60 million internet users, 11 million of which were added in 2020. The country’s e-commerce market climbed over 35% from third quarter in 2019 to the same time in 2020, amounting to a total of more than $600 million in market size. The majority of e-commerce transactions, however, continue to be cash on delivery, as customers are still not as comfortable paying online.
The pandemic is slowly changing people’s preference for cash, creating an urgency for digital payments infrastructure to be built. E-commerce startup PriceOye co-founder and CEO Adnan Shaffi told Rest of World that, six months ago, 98% of the company’s deliveries — mostly smartphones and other consumer electronics — were paid for in cash, but that share is slowly reducing due to the pandemic.
In Pakistan, payment gateway services have primarily been offered by two of the country’s largest banks: Habib Bank Limited and Bank Alfalah. Setting up digital payments with these banks usually takes four to six months of paperwork, red tape, legalese, bank statements going back half a year, and legacy software systems. “It was a long and painful process,” said Shaffi.
As one of Pakistan’s leading e-commerce platforms, PriceOye is now integrated with Habib Bank and Bank Alfalah’s payment gateways but also plans to adopt Safepay for its convenience and flexibility. When it comes to integration, with Safepay, Shaffi said, “you can do it in like one day.”
Safepay has been offline for the last several months, as the company builds financial partners and conducts talks with the country’s central bank, State Bank of Pakistan, to get its product up and running. In order to become an official payment service provider, authorities in Pakistan require companies to have a minimum of $1.2 million paid-up capital. Naqvi said Safepay is gearing up for a soft launch of their services in the coming weeks.
There are other signs digital payments are coming to Pakistan too. Even as legacy banks remain resistant to change, in January, the country’s central bank launched an instant payment system called Raast for quicker movement of money, similar to neighboring India’s unified payments interface, or UPI, which turbocharged the growth of digital payments in the Indian market when it was rolled out in 2016.
Stripe’s investment in Safepay not only validates the company’s and the country’s potential but can also open up the avenue to acquisition. Stripe acquired African payments processor startup PayStack in October, after investing in the company previously, in a bid to expand its global footprint in emerging markets.
According to Misbah Naqvi (no relation to Raza), a general partner at i2i Ventures, an early stage investment firm in Pakistan, even until a year ago, most investors were skeptical about pumping money into fintech startups in the country. With customers and merchants hesitant of moving away from cash, Misbah says investors wondered if fintechs would truly take off there.
But Stripe’s investment in Safepay could signal a sea change.
“One of the challenges in this space has been that banks haven’t taken a lead, and because of a lack of credit data, a lot of banks have been hesitant to even do simple things, like auto loans or mortgages,” said Misbah. “If tech can be leveraged properly, the next few years could be really exciting for fintech in Pakistan.”