By Muhammad Zulqarnain

Pakistan's rapidly expanding digital payments ecosystem is creating greater scope to document economic activity, broaden the tax base and improve transparency, although experts say converting digital growth into wider formalisation will require stronger merchant adoption, public trust and incentives for businesses to move away from cash.

Under the State Bank of Pakistan's Vision 2028 and the Prime Minister's Cashless Pakistan Initiative, the country has accelerated efforts to reduce reliance on cash and expand digital transactions. Mobile banking users have reached 137 million, while digital transactions stood at 11.9 billion as of July 2026.

The expanding digital footprint could help address one of Pakistan's longstanding economic challenges — a large volume of commercial activity that remains outside the formal system. Greater use of digital payments creates transaction records that can make economic activity more visible and help build a more documented economy.

Speaking to Wealth Pakistan, Maryam Ayub, Research Economist at the Prime Research Institute of Market Economy (PRIME), said Pakistan's large informal economy meant a significant share of economic activity remained outside the formal system, while wider adoption of digital payments could improve documentation and tax compliance.

"Bringing more transactions into the documented economy will not only increase tax revenue but also reduce the burden on the existing narrow base of compliant taxpayers," she said.

Maryam said digital payments could also reduce leakages in government transfers and lower administrative costs associated with handling cash. However, she cautioned that the transition towards greater formalisation could not be treated simply as a technological exercise.

Many individuals and small businesses remained outside the formal system because formalisation itself could involve regulatory, compliance and enforcement costs, she said. The challenge was therefore to create sufficient incentives for businesses to enter and remain within the documented economy.

Merchant acceptance would be particularly important. Although Pakistan has developed digital payment infrastructure through Raast, Maryam said small businesses would adopt digital payments more readily when they were reliable, affordable and commercially more convenient than cash.

Concerns over fraud, failed transactions, transaction costs and uncertainty over dispute resolution continued to discourage some merchants even where smartphones and digital accounts were available, she said.

Pakistan should therefore focus on the economics of adoption rather than merely increasing the number of digital accounts or QR codes. Low-cost payment acceptance, reliable transactions and faster dispute-resolution mechanisms could encourage more small businesses to shift towards digital payments.

Maryam said rural connectivity gaps, inadequate digital literacy and lack of trust were additional barriers. Moving towards cashless transactions could not simply be mandated where sections of the population lacked the infrastructure, skills or economic incentives needed to participate effectively in the digital economy.

Zahid Maqsood, an institutional development specialist and economist, said greater digitalisation could help Pakistan document previously unrecorded economic activity, widen the tax net and improve revenue mobilisation while also strengthening transparency and access to formal credit for small businesses.

However, he said digitalisation should not be viewed merely as a taxation instrument. Technology should also make the tax system more transparent, predictable and easier for taxpayers to navigate, helping build confidence among businesses entering the formal economy.

He identified low digital literacy, weak internet access in some areas, cybersecurity risks, data privacy concerns and public mistrust among the challenges that could slow the transition.

Small businesses, Zahid said, would be more willing to adopt digital payments if they saw tangible benefits, including lower transaction costs, simpler compliance and improved access to finance.

He said Raast provided Pakistan with a strong foundation, but wider adoption would require closer coordination among banks, fintech companies, telecom operators, the Federal Board of Revenue and other public institutions.

The objective, he said, should extend beyond reducing cash usage to developing a trusted digital ecosystem that supports formalisation, financial inclusion, transparency and economic productivity.

Experts also pointed to China's widespread adoption of QR-based and mobile payments as a useful reference for Pakistan, particularly in demonstrating how digital transactions can become part of everyday commercial activity when payment systems are inexpensive, convenient and widely accepted by small merchants.

For Pakistan, the expansion of digital payments provides an opportunity to bring a greater share of economic activity into the documented system without relying solely on additional measures targeting existing taxpayers. Realising that potential, however, will depend on making digital transactions sufficiently reliable, affordable and beneficial for businesses and consumers to adopt them voluntarily and at scale.

Credit: INP-WealthPk