1. BACKGROUND

In Pakistan, the mechanism for transferring funds digitally is largely focused towards person-to-person payments and consumer-to-business payments. Whenever we talk about business-to-business payments, there are a number of complexities that need to be addressed, specifically in terms of the size of the transaction, security considerations and reconciliation processes. Whenever two institutions are transacting amongst one another there is a contract governing the payment schedule along with invoicing and order management mechanisms at the backend. When corporations are working with multiple organizations pan-Pakistan, onboarding each business, from distributor to retailer, and managing all those relationships becomes a problem. Currently in Pakistan, majority of business-to-business transactions are paper-based with a small minority done through closed loop, online solutions, meaning the entire supply or vendor chain is brought within a single banking network. Even with that, transactions are done in isolation (without the context of the payment – which is necessary for many purposes identified and elaborated in section 6 below) – resulting in manual reconciliation processes done by both the sender and receiver.

Due to the largely paper-based transactions existing in the B2B space today, realization of funds takes a long time (in the case of cheque payments) with a lot of manual processes involved and unforeseen expenses such as the cost of handling cash payments. Even if the intent of the payment exists, it can’t be made in real-time if payment mode is via cheque. For small to medium sized enterprises, this is a huge roadblock for managing liquidity and funds.

If a dealer has the intent to make a purchase, they would have to wait for anywhere between 3 to 5 days before the products / goods are delivered since the payment cycle alone takes a long time. This payment cycle itself directly effects the order efficiency since businesses are willing to work with corporations who have a smoother payment cycle

2. CHALLENGES IN BUSINESS-TO-BUSINESS PAYMENT & CORPORATE GOVERNANCE

2.1. PAYMENT DELAYS

Cheque based payments usually take anywhere between 3 – 5 days to settle. Meaning even if a corporate client is willing to make the payment, the actual money will land in the account after 3 to 5 days.

With manual processes existing today, it’s the corporate itself whose slow manual accounts receivable processes are gumming up the efficiency in making payments, and therefore the entire payment process gets delayed.

2.2. ISOLATION THROUGHOUT THE PAYMENT PROCESS

The digital channels that exist today for corporations are not sufficient enough to cater to all their requirements. B2B transactions are complicated and require reconciling the payment with the invoice or contract governing the payment. In other words, reconciling the payment with the context. Currently paper-based mechanisms, although costly and time-consuming, are the preferred method of payment since it satisfies most of the corporates requirements.

2.3. PROTECTIONIST BEHAVIOR BY BANKS

Regressive behavior in opening up services for corporate and contextual banking has stunted the growth of cash management digitization in the entire value-chain. Banks prefer Onus based operations rather than participating in interoperable environments due to reliance on traditional business models such as

1. Close Loop cash management
2. Reliance on Branch Banking

• Realization/Settlement delays to optimize treasury liquidity

2.4.  PAYMENT COST

When talking about cheque payments, it’s true that a small rectangular piece of paper doesn’t cost much on its own, but all the associated costs that come with issuing a cheque are significant. Distribution and payment costs such as account administration, reconciliation and storage costs (filing and processing after the fact) add up. Postage is another cost that is significantly higher when issuing cheques – cheques are paper and are entirely reliant on the snail-mail system. Factor in materials and handling expenses associated with buying envelopes and paying employees to stuff and mail them, and the final cost can become expensive.

Other challenges related to B2B Payments and Corporate Governance include:

• Limited corporate participation in the FinTech ecosystem
• Regulatory barriers and associated costs of compliance (FBR, SEC and SBP Oversight)
• No preferential tax treatment for digital payment
• Current infrastructure not “open” for integration. Non-availability of unified platform for Corporate & Government receipts or payments

3.THE COLLABORATION BETWEEN REGULATORY TECHNOLOGY (REGTECH) & FINANCIAL TECHNOLOGY (FINTECH)

Fintech industry needs to interact with regulatory authorities of Pakistan to develop a mechanism which provides innovations in digital payments specifically for the corporate industry. Currently the payments made through the banking network are blind and only carry the payment data, i.e. sending and receiver account number along with the amount. Tax authorities and government agencies that are relying on banks data never get nearly the clear picture that they would get in the case of context driven payments – resulting in time-consuming manual investigation processes. For regulatory authorities, there are a number of procedural gaps that can be addressed through a context driven payment mechanism. Such a mechanism can facilitate all the key players involved in the economy, from corporates who will get automated reconciliation reports, to tax authorities and government agencies who require more transparency.

With the participation of regulatory authorities collaborating with FinTech, an enabling environment can be created in Pakistan for innovation that would provide better compliance, usability and regulatory oversight in the B2B payments space.

4. THE NEW STANDARD (Context Driven Payment)

Currently Corporate payments are processed through two services