Digital transformation is often measured by the adoption of new technologies, digital platforms, and electronic payment systems. However, having technology available doesn’t necessarily mean that it’s being used effectively. Pakistan’s transition towards a cashless economy is a good example of this: although the country has developed digital payment infrastructure, the adoption of digital payments in day-to-day transactions has been limited.
The government reported in July 2026 that annual digital transactions had risen from 6.9 billion to 11.3 billion under the Cashless Pakistan initiative. The active digital payment merchants increased from 0.5 million to over 2 million. The rise of these numbers is a testament to the increasing significance of digital payments in Pakistan’s financial landscape. However, the continued reliance on cash in retail markets and small businesses highlights an important question: why has progress in digital infrastructure not translated into equally widespread changes in payment behaviour?
This is, in part, a legal and regulatory question. Payment behaviour is shaped not only by technology but also by the rules that allocate cost, risk and liability between consumers, merchants, banks and regulators. Where those rules are unclear, fragmented or in tension with one another, rational merchants and consumers will default to cash.
The Gap Between Digital Infrastructure and Adoption
Pakistan has been investing heavily in its digital payment ecosystem. The country’s instant payment system, Raast, allows real-time transfers between the participating users and financial institutions. Additionally, mobile wallets, digital banking apps, and electronic money institutions have also increased access to digital financial services.
Nevertheless, the use of digital payments varies across different types of transactions. Raast processed around 1.28 billion person-to-person transactions worth PKR 29.6 trillion in FY2024-25, according to the State Bank of Pakistan (2025). However, funding for merchants is still a tough issue.
This distinction matters because transferring money digitally is not the same as using digital payments for routine purchases. Consumers may receive money through a mobile wallet but withdraw it to pay for groceries, transportation, or other everyday expenses. If digital platforms are mostly used to transfer and withdraw money, their impact on the commercial activity is still low.
The challenge, therefore, extends beyond the development of technological infrastructure. It also involves changing user behaviour, improving the commercial viability of digital payments, and ensuring that the systems work effectively for both consumers and merchants.
The Existing Legal Framework
The legal architecture for digital payments is not absent. The Payment Systems and Electronic Fund Transfers Act, 2007 (the PS&EFT Act) is the foundation statute. It was enacted to regulate payment systems and electronic fund transfers and to set standards for consumer protection, including disclosure of terms and conditions, documentation of transfers, pre-authorized transfers, and error and complaint resolution. The State Bank of Pakistan (SBP) issues regulations under it, including the Regulations for Electronic Money Institutions (first issued in 2019 and revised in June 2023), which allow electronic money institutions to offer services such as payments aggregation, payment initiation and escrow for domestic e-commerce transactions. These sit alongside the earlier Rules for Payment System Operators and Payment Service Providers, 2014.
The legal recognition of electronic records is also settled in principle. Section 3 of the Electronic Transactions Ordinance, 2002 gives legal recognition to documents and transactions in electronic form, so a digital payment record or digital receipt is capable of serving as proof of a transaction. The difficulty is therefore not the validity of digital payments in law. It lies in the allocation of liability, the cost of compliance and the availability of timely remedies when something goes wrong.
Institutional, Structural and Economic Barriers
Raast merchant services had more than 2.6 million merchants onboarded or registered by March 2026. This is a useful indicator of growing merchant reach, but onboarding or registration alone does not establish that merchants use digital payments regularly. The merchants might be hesitant in adopting digital payments due to transaction fees, tax transparency and clarity, documentation needs, and regulatory compliance doubts. The additional expense and administrative burden of accepting digital payments may make it less attractive to businesses with narrow profit margins. Likewise, complex onboarding procedures can discourage merchants from adopting systems intended to simplify transactions.
Tax law illustrates how legal design can work against adoption. Under the Sales Tax Act, 1990, a “Tier-1 retailer” (section 2(43A)) must integrate its outlets with the FBR’s computerised system for real-time reporting of sales (section 3(9A)). A Tier-1 retailer that does not integrate faces a 60% reduction in adjustable input tax under section 8B(6), as raised by the Finance Act 2021. On the FBR’s compiled text, the definition of Tier-1 retailer includes a retailer that has acquired a point of sale for accepting debit or credit card payments from a bank or other SBP-authorized digital payment service provider. It also now covers retailers whose deductible withholding tax under section 236H of the Income Tax Ordinance, 2001 exceeds Rs 100,000, by virtue of S.R.O. 1842(I)/2023. A small merchant may therefore reasonably perceive that adopting digital acceptance invites mandatory integration with the tax authority and a heavier compliance burden. The policy of documenting the economy is legitimate, but tax enforcement and payment adoption objectives need to be sequenced and communicated so that accepting digital payments is not itself treated as a trigger for disproportionate compliance costs.
Tax law has also been used in the opposite direction, as an incentive. Section 21(1a) of the Income Tax Ordinance, 2001, inserted in 2021, made company expenditure above Rs 250,000 under a single head inadmissible as a deduction unless paid by digital means from the notified business bank account (thresholds and conditions have since been revisited, so the current text should be checked). FBR guidance on domestic e-commerce has also reportedly applied a 1% withholding tax where payment is made through a digital intermediary and 2% where couriers collect cash on delivery. Measures of this kind show that legal incentives can shift behaviour, but only if they are stable and understood by small merchants.
These barriers demonstrate how digital transformation depends on coordination between institutions. The systems and policies of all stakeholders need to be interdependent, including banks, payment providers, regulators, telecommunications companies, and government agencies. If the onboarding process is too complicated or the payment system is incompatible, or merchants lack clarity about compliance requirements, changes in one part of the system can have unintended effects in another.
Trust is another essential factor. Consumers and businesses may be discouraged from using digital payment systems because of issues of fraud, unsuccessful transactions, refunds, or dispute resolution. Introducing technology without adequate user protection may therefore limit adoption, even when the underlying infrastructure is available.
The law offers several overlapping routes of redress, but they are fragmented. Fraud and manipulation of payment systems may amount to electronic fraud under section 14 of the Prevention of Electronic Crimes Act, 2016 (PECA), punishable with imprisonment of up to two years, a fine of up to Rs 10 million, or both, alongside the offences of electronic forgery (section 13) and unauthorised use of identity information (section 16). PECA has been amended, most recently in 2025, so the consolidated text should be consulted. Criminal law, however, punishes the wrongdoer. It does not return money to the consumer.
Civil and regulatory redress runs through the PS&EFT Act’s error and complaint resolution provisions and SBP’s Consumer Grievance Handling Mechanism (BC&CPD Circular No. 1 of 2016 and Circular Letter No. 2 of 2021), under which fraud-related complaints must receive a final reply within 30 days of lodgment. For bank customers there is a further route to the Banking Mohtasib under the Banking Companies Ordinance, 1962 and the Federal Ombudsmen Institutional Reforms Act, 2013, whose jurisdiction extends to complaints about the transfer of funds.
The allocation of liability for unauthorised electronic transfers has itself been contested. In one reported case, the Lahore High Court set aside a presidential order that had upheld a Banking Mohtasib decision against United Bank Limited, finding that the Mohtasib had not adequately considered contributory and comparative negligence. Uncertainty of this kind weakens trust, because a consumer or merchant cannot easily predict who bears the loss when a payment fails or is compromised.
Consumer protection statutes add a further layer but are not uniform. The provinces and Islamabad each have their own statute. The Punjab Consumer Protection Act, 2005, for example, imposes liability for faulty or defective services (section 13), requires receipts to be issued (section 19) and requires a return and refund policy (section 20), with Consumer Courts for enforcement. These statutes were not designed around digital payment disputes, and the Asian Development Bank has observed that Pakistan has no national consumer protection statute that applies directly to electronic commerce. Consumers and merchants may therefore enjoy different rights depending on the channel used and the province in which they sit.
From Technology Deployment to Effective Implementation
Addressing these challenges requires a shift in how digital transformation initiatives are designed and evaluated. Success should not be measured by digital platforms created, number of accounts opened, and the number of payment terminals placed. It should also be assessed based on evidence of sustained use and enhancement of the processes that systems are designed to facilitate.
The proposed reform framework identifies several priorities, including simplifying merchant onboarding, enhancing the interoperability of payment service providers, clarifying and stabilising fee structures, strengthening fraud protection, and enhancing the coordination of the regulatory institutions.
A legal reform agenda would complement these priorities. First, SBP could issue, under the PS&EFT Act, a uniform rule on liability allocation and dispute resolution timelines for person-to-merchant transactions, so that the position does not depend on which bank, wallet or channel is used. Second, merchant fee structures should be stated in a binding, published form, so that clarifying and stabilising fees has a legal footing and not only a commercial one. Third, FBR and SBP should coordinate so that the tax consequences of accepting digital payments, including Tier-1 retailer status, are explained in a single, simple guidance note for small merchants. Fourth, refund and dispute rights for digital payments should be harmonised across the federal and provincial consumer statutes, subject to the constitutional division of legislative competence, or addressed in a dedicated instrument, so that the protection a consumer enjoys does not depend on where they live.
Government-led digitalisation can also support wider adoption. Digitising utility payments, municipal services, government disbursements and other public transactions can generate additional opportunities for citizens in the digital channels in their daily lives. However, such initiatives should recognize the diversity in digital literacy, device affordability, connectivity, and access of women, rural consumers, low-income consumers, and small merchants.
It is also critical to have clearly defined institutional responsibilities and targets for implementation like some measures like merchant activation rate, sustained merchant activity following 90 days, person-to-merchant transactions, and the time needed to resolve fraud complaints. These measures would enable a differentiation between the introduction of a digital solution and its effective use.
Legal accountability can be built into these measures. Publishing complaint resolution data against the timelines that already exist in law and regulation, such as the 30-day period for fraud-related complaints, would make compliance with the rules itself a measured outcome rather than an assumption.
Building a More Inclusive Digital Economy
The cashless economy initiative in Pakistan provides a more broader lesson on digital transformation: technological development and institutional efficiency need to go hand-in-hand. Technically, a payment system may be able to handle millions of transactions, but it has economic value if people can access it, trust it, afford to use it, and use it on a day-to-day basis.
The next phase of digital transformation in Pakistan needs more than just the growth of infrastructure. It calls for coordinated implementation, user-centred design, appropriate incentives, transparent regulation, and accountability for measurable outcomes.
But the goal shouldn’t just be to shift transactions from cash to digital. It should aim to develop a financial infrastructure that would enable digital payments to be useful, safe, accessible and commercially viable. Success in achieving that will depend on the capacity of institutions to embed technological capacity in a longer-term change of behaviour, and everyday economic activity.
