The P2M vs P2P puzzle

For years, we have heard everyone lament the fact that Pakistan is cash-driven and lacks digitisation in payments. On the surface, it appears to be true, as only the big retailers have point-of-sale machines or other such infrastructure, while much of the main street stubbornly clings to cash. However, this is only half the truth.

Take an InDrive, head to Saddar to buy clothes or whatever, and stop by a roadside dhaba for chai. The chances are that you won’t have to use any cash. All those merchants most likely will accept online fund transfers — whether through a bank or JazzCash/EasyPaisa. So the payment channel is definitely digital, just that the underlying rails are person-to-person (P2P) instead of person-to-merchant (P2M).

Now, the government and the State Bank want to change that as they try to expand the adoption of Raast’s P2M module. Under the cashless economy initiative, the prime minister has directed regulated financial institutions to activate two million merchants for digital payments by June 2026. While we don’t know the exact number at the moment, the latest Payment Systems Review notes that there are over 770,000 Raast merchants, the majority of whom use QR codes.

As far as announcements go, the Finance Division has also mandated all shops in the country to 1) display a QR code and 2), as a rule, accept digital payments if a customer asks for it. The deadline for this was Aug 31, so it’s safe to assume things haven’t yet moved at the desired pace.

There were more fund transfers in a day through peer-to-peer transactions than through peer-to-merchants in the first quarter of the year, as per the latest Payment Systems Review

Simultaneously, other regulators are stepping in to do their bit. For example, the Oil & Gas Regulatory Authority directed all marketing companies, gas utilities, CNG stations, LPG and LNG operators, refineries and lubricant marketers to introduce and prominently display digital payment options, including Raast QR codes, at their outlets.

However, initial results have been mixed at best. As per the latest Payment Systems Review, P2M processed only 1.5 million transactions worth Rs4.5 billion between January and March. To put the numbers in context, the average daily volume through the P2P module was 4.1m during the same period. In other words, there were more fund transfers in a day via the P2P rails than P2M in the entire quarter.

Throughput-wise, too, it was the same story. Similarly, the former has a substantially higher ticket size (Rs 21,761) compared to the latter’s (Rs 3,000), attributable to several factors, including, but not limited to, transactions between one’s own accounts or buying high-value items through merchants that treated them as P2P payments rather than P2M.

So why has the uptake been unimpressive? There could be countless reasons, with the usual ones thrown around being: financial institutions not doing enough acquiring efforts to expand the merchant network, retailers shying away from digital because of tax or cost considerations.

One big, and perhaps underappreciated, problem is that both buyers and sellers seem largely content with P2P transfers, be they through Raast or 1LINK’s interbank funds transfer.

Though both digital, there are some broad differences, such as the design (eg push vs pull) or the dispute resolution mechanism. Most importantly, who bears the cost of the transaction: in P2P, it’s the sender who pays the charges, while in P2M, the merchant has to absorb the fees, known as the merchant discount rate (MDR).

So when you buy a laptop worth Rs200,000 from Techno City and pay via funds transfer, the shop owner pays zilch. That obviously makes it attractive for retailers. In contrast, the P2M, by design, has a discount factor, which at a rate of one per cent, would mean the merchant nets only Rs198,000. This pricing structure naturally makes the P2M module less attractive, and if you want people to transition to something new, there should be some incentives.

For the longest time, those incentives were missing. While the regulator certainly wanted to expand the P2M network, banks had a good thing going on with P2P and didn’t seem too interested in upping the acquiring efforts, except for one or two from the branchless side. After all, it required heavy investments and an uncertain return, at least in the medium term.

Unlike India or even Egypt, there were hardly any venture capital funding inflows either, so fintechs couldn’t aggressively subsidise customer acquisition and transaction costs.

Finally, the government is stepping in to foot the bill and recently approved subsidies to this end. As per media reports, Rs3.5bn has been earmarked to support the usage of Raast P2M, for which it will reportedly pay the lower of 0.5pc or Rs200 (some reports suggest Rs100). Let’s put the numbers in context: based on the current average ticket size of Rs3,000, this translates into MDR support of Rs15, enough to cover volumes of almost 233m annually.

But the more important question is: how long will it take to get there? In the case of the P2P module, the figure (on an annualised basis) was hit shortly after the seventh quarter of launch. If things proceed at the same pace, the MDR subsidy is expected to run out in the very first year of its approval.

However, comparing them is apples to oranges: the former already had a high organic growth trajectory while the latter needs to be built from the ground up, against existing systemic frictions.

The challenge is that most of our financial institutions have little merchant acquiring expertise. Until recently, only nine scheduled banks were doing point of sale, half of whom were in closed-loop. And that industry, despite seeing healthy growth in the last two years, remains at 179,000 terminals as of March. In comparison, the new targets are an order of magnitude higher with practically just nine months to go.

Of course, with QR, there are no hardware costs as acquirers do not have to import point of sale machines. However, both the reach on the merchant end, as well as the underlying tech infrastructure to enable and run those operations, are a challenge, particularly for smaller banks that have absolutely no experience in this business.

In this respect, one recent development looks promising. 1LINK and Paysys Labs recently launched a QR acceptance platform for banks, who no longer have to buy or build tech from scratch. Instead, they can simply integrate with the 1GO platform, allowing them to focus their energy entirely on acquiring merchants. Especially for smaller financial institutions, this can substantially speed up their roll-out.

To sum up, there now exist solutions to two core pillars of the P2M puzzle: fixed costs for the acquirers can be avoided by adopting a plug-and-play approach, while transactional opex will be covered by subsidies. What remains to be seen is whether the merchants cared more about the MDR or avoiding the tax authorities.

The writer is the co-founder of Data Darbar and works for the Karachi School of Business and Leadership

Published in Brackly News, The Business and Finance Weekly, September 15th, 2025