TL;DR; Pakistani banks refuse to process wire transfers sent by payment gateways and aggregators. During an ongoing balance of payment crisis, they plan to return US$ 200 million in annual technology and SME linked online export proceeds back to senders. Initiative tagged as supportive for the new revised export policy.
My name is Jawwad Ahmed Farid. I run a small financial and computational finance training site that processes online sales through 2Checkout/Avantgate. 2 Checkout is an online payment gateway that allows me to accept credit card payments, run fraud and risk checks on them, aggregate them and then wire the money into my account when the balance crosses a certain threshold. The 2Checkout payment processing contract takes full responsibility for performing due diligence on customer transactions processed by their system.
There are between 6,000 – 10,000 2Checkout customers across Pakistan who run online e-commerce stores or sell services online and use services like 2Checkout to wire funds through the banking channel into their accounts in Pakistan. Besides e-commerce players there are 15,000 – 20,000 freelance programmers and developers, hundreds of small house hold businesses owned by women and housewives who run drop ship online sales models shipping shoes, kurtis, fashion items and interior design items to customers in the region.
We run online stores that sell to customers outside Pakistan using payment gateways. I sell digital risk and compliance models for treasury, option pricing, financial modeling and Montecarlo simulations to clients in North America and Europe. I know vendors and freelancers who sell Minecraft action packs, WordPress themes, productivity tools, design services, antique tables and other digital as well as physical products. Even the GulAhmed Ideas online store uses a payment aggregator for processing international payments.
Our crude estimate is between USD 60 million to USD 200 million gets wired into the country through this channel every year. Hard earned foreign exchange from legitimate customers to legitimate businesses. The estimate is based on 6,000 – 10,000 online store vendors (according to well placed payment industry sources in Pakistan) and average annual revenues of USD 10,000 to USD 20,000 a year per vendor. The other half of the tally is represented by free lancers, developers, SME and micro-SME businesses that ship to clients in the region.
Sometime last week or early this week we found out that a number of local banks have unilaterally decided to stop processing 2Checkout wire transfer payments. The suspension or ban has been put in place on most payment aggregators, consolidators and gateways. 2Checkout is just the largest. Others gateways include Asiapay, Skrill (Moneybookers), Payoneer and Payolee. Delayed and suspended payments have been reported across the board this week. No official reason in writing has been given for this decision. We have been trying to get a written response or comment from our bank branches but have not been successful other than informal updates that aggregated transactions will not be processed by the bank and the proceeds will be wired back to 2Checkout and others later this week.
For instance, in my case the offending wire was received by my bank on 9th/12th November in Karachi and I was informed this Tuesday evening (20th November) that the transaction would not be processed and the funds wired back to 2Checkout. On further investigation we found out that this is problem was not limited to one transaction but there are multiple vendors who are in a similar situation across Pakistan and the entire banking system. By yesterday evening we were sure that there is some kind of a blanket ban in place because the number of cancelled, on hold and suspended transactions is increasing as well as the number of banks joining the group refusing to process aggregated or nested payments.
We are quite positive that the ban hasn’t originated from State Bank of Pakistan or is based on a SBP directive. The underlying issue quoted from the banking side (informally and unofficially) is that they don’t have visibility on the original transactions that get aggregated. They feel they have liability on the Anti Money Laundering (AML) front because of this reason. As e-commerce vendors we are happy to provide underlying transaction data and customer information to the banking industry to comply with their AML requirements to address the issue but the compliance and banking team doesn’t want to move or engage in that direction.
We may be wrong but we believe that there are a few reasons for this. In the absence of any official correspondence or feedback in writing from our banks all of this is pure guess work.
a) Banks feel that the $40 to $70 they earn on swift fees and their Rs.200 to 4,000 foreign exchange income on these wires does not justify the effort required to fulfill the AML obligation or take on the potential liability. With an average ticket size of 50 dollars, a 2,000 dollar wire may have as many as 40 underlying transactions and customer names behind it. Compared to a traditional wire that only has one originator and one beneficiary, a consolidated wire may have 50 to a few hundred time as many underlying transactions. A primary driver here is efficiency and productivity issues in the AML and compliance teams. Who is going to do this work and what if something slips by. Who will pay the compliance fine when we get hit by it?
b) A second reason is that as part of digitization efforts a number of banks have created options for customers to offer their own bank branded payment gateways. We don’t think this is a driver but for some of the banks this may be a possible consideration. Unlikely but possible. There is unfortunately no shortage of bad ideas when it comes to our friends in the banking industry. While we are all very supportive of a local aggregator and payment option there is nothing viable in the works that meets the profile or services commitment of someone like 2Checkout.
c) A third is the simple challenge of keeping up with complex US dollar processing compliance regulations that have already resulted in large fines levied on some Pakistani banking institutions and the closure of the New York branches for both HBL and UBL.
Whatever the underlying reasons the impact on the e-commerce industry is very clear. There are two significant consequences of this action. The most immediate one is that the next 2Checkout cycle ran last night, the wires will land Friday morning (today) in Pakistan and will be tagged for cancellation or return by Monday.
If our above estimate for the size of the market is correct, the consolidated impact of this move would be somewhere in the USD 5 – 8 million dollars range since a number of e-commerce vendors would have marked these payments for processing month end payroll. The second longer term impact would be a significant shock to the technology based e-commerce, freelancer and micro-SME community in Pakistan. Incidentally this is the group that every financial industry grant proposal aims to serve and the group most in need of support.
Payments and payment gateways have been a pain point for many years for all of us in this space. While 2Checkout wasn’t perfect with its 5.5% transaction processing fee and its additional 5% rolling reserve, it was a functional option in the absence of any other choice for offering an e-commerce payments solution acceptable to our international customers. Cybersource and Easypay/MIGS the two alternate payment gateway promoted by a number of local banks in Pakistan take as long as a few weeks to get setup, have a two decades old interface that is likely to scare international customers off rather than convert them and have a number of significant usability issues. More importantly they only offer pass through services, don’t take any liability, don’t perform additional credit and fraud check and do not offer aggregation services.
To unilaterally roll out a ban without informing customers and users, to inconvenience them to no end is something we can expect from the banking industry in Pakistan. One could or would try and talk some sense into the compliance function at a bank but they remain inaccessible to banking customers or well wishers. But what really takes most of us by surprise is the mindless thinking behind this move and its current timing. Especially in recent context.
In an environment where it is difficult to build and sustain a business, brand Pakistan as a destination for entrepreneurs and investors, technology founders have managed to build US$ 200 to US$ 400 million international e-commerce industry that remits and wires much needed hard currency dollars into the country through official business channels. On one side the Finance ministry and the Central bank are working day and night to roll out programs to bring foreign exchange into the country and facilitate exporters. On the other, to support these efforts the smartest minds in the banking industry have decided to simply return 200 million dollars to the sender and kill a growing export industry that employees thousands of people across Pakistan. Really? Will someone be kind enough to please walk us through the logic of this move. Please.
Our initial engagement with the banking industry has not been very positive or productive. The bigger ones are concerned about liability on account of FATF and they all quote the HBL fine levied by NYFS. The smaller ones say that if HBL and ABL can’t do this, how do you expect us to take this exposure. To their credit and to our thanks at least one digital team at a local bank has been burning the midnight oil to fight this battle internally.
The true picture will emerge on Monday morning when quite a few of us find out that the money we were counting on to process payroll is not available and is being wired back. There is a simple short term and long term resolution possible to this challenge. E-commerce vendors are happy to share underlying transaction data for banking compliance and AML purposes. It is work and we are happy to do our part to reduce the load on our banking partners. But they need to do their fair share.
Local banks need to be convinced that they have a duty to support industries that generate legitimate profitable export proceeds. They cannot hide behind compliance walls, personal egos, incomplete solutions or internal productivity challenges to walk away from their national responsibility. Unfortunately given the conversation so far without direct intervention from the central bank, this is unlikely to happen.
On a more positive note this is further proof that the banking industry in Pakistan is blind to the opportunity represented by the absence of a viable local payment options. While they will all talk about supporting small businesses and their dreams the reality is none of them are willing to walk the talk. For the right players with the right tools and the right mindset the payment play is wide open. The current crisis just goes to prove that neither banking nor telco stalwarts are going to crack it. Sitting comfortably in their offices they don’t understand how hard it is to convert a customer to buy from Pakistan.
Innovation requires one to be creative, responsive to markets, angry enough to challenge the status quo, and be driven, broke and hungry to put in the effort to make it work. While the technology community across Pakistan, despite their many challenges has managed to pass the test, the banking industry, fat and happy with its archaic ways, is heading towards a historical and stellar F.