Due to the pandemic, the rising attention and concern for security measures comes about because of the world-wide lockdowns that have been imposed. Because of the global lockdown, consumers have shifted to online purchasing which can be proved with data. The Online Marketplaces report suggests that 62.5% purchases were done online in 2020, which shows a 29% increase from the preceding year.
Where more developed nations have had legislation sufficient enough to keep all parties involved during an online purchase and sale in check, the Pakistani legal system has failed to do so. The accountability is never consistent of online marketplaces even though in recent years, the investments of multinational corporations has increased. There is still a significant difference in how laws are implemented in the case of bank transfers or online banking as it’s more commonly known in Pakistan.
In Pakistan, all companies cannot be involved in a practice or an activity unless relevant licenses or authorizations have been received. All of this comes under the Companies Act 2017, something all companies in the country have to adhere to. Included in this, is the Payment System & Electronic Funds Transfer Act, 2007 which clarifies the mode of the ‘transfer’ that has to take place for it to be classified as an ‘Electronic Funds Transfer’.
In the Payment System Operator and Payment Service Provider (PSO/PSP) Rules 2014, any company or corporation that provides transferring services to the public has to obtain some sort of approval from the main bank in Pakistan (State Bank of Pakistan). Basically, any company that is involved in the transferring of money whether at hand or online, is subject to obtaining these licenses. This displays a lack of clarity and specification in the laws. The vagueness further arises as PSO and PSP both are different terminologies if we take their literal meanings. However, they aren’t separately defined under the laws which creates confusion in the implementation of these laws.
In the absence of regulatory guidance under Pakistani law, parallels from other jurisdictions may be drawn. Payment system operators and payment system providers are clearly defined in the laws of the European Union, the United Kingdom, India, and Bangladesh. This underlines the complexity of the State Bank of Pakistan’s definitions. A PSP is liable for the exchange of a payment transaction (for which a license is required), whereas a PSO is responsible for the operation of the system that executes payment-related activities but is not responsible for any transfer/settlement (license is not necessary). Yet, under Pakistani law, any organization that serves as a transaction facilitator must comply with legal standards that are preset, no matter how vague they are.
With the introduction of foreign online marketplace giants (i.e., Alibaba Group), the government had to come up with some regulations to increase their tax revenues from these entities. This is how the Income Tax Ordinance came into being. This defined the concept of an ‘online marketplace’ and described it as a platform where buyers and sellers can meet to carry out a transaction.
It is feasible to conclude that a corporation involved in the buying and selling of goods or services in Pakistan via a digital platform is perhaps a ‘online marketplace.’ Online marketplaces oversee payments within each transaction (i.e., the payment received is then transferred to the seller’s account). Despite the fact that such payment settlement needs compliance with legislation under the PSO/PSP Rules, and that several online marketplaces in Pakistan are using a similar settlement structure, the State Bank of Pakistan has not suggested that these current organizations are not in accordance. In this sense, the idea of ‘payment systems’ does not include an online marketplace as an exception. As a result, the PS&EFT Act and PSO/PSP Rules disallow online markets from settling transactions within the current legal framework.
The PS&EFT Act’s harmful impact on such businesses has been heavily criticized by researchers and practitioners. The State Bank of Pakistan, on the other hand, has yet to release any explanation or directions. In other jurisdictions, such as the EU, online marketplace platforms must either obtain a payments license or employ an authorized entity to handle the payment leg of the transaction (along with settlement), whereas in India, online marketplaces are classified as a financial intermediary and are further divided into ‘payment aggregators’ (PA) and ‘payment gateways’ (PG). The PA facilitates the marketplace by receiving payment from customers for completion of money transfer and the PG simply offers the systems needed to carry out the payment. A corporation that operates as a PA is required to have a licence, unlike for a PG. As a result, online markets that conduct PA duties must get clearance and segregate their marketplace from aggregator activities.
The PS&EFT Act and PSO/PSP Rules doesn’t provide a provision or exemption for trading platforms, according to an assessment of the laws of the EU, India, and Pakistan. In the case of this ambiguity, any marketplace framework providing payment settlement services or operating as an intermediary in a payment transaction must obtain a PSO/PSP permit under the laws of the PS&EFT Act and the State Bank of Pakistan’s Rules. None of the present online marketplace platforms in Pakistan have met these legal requirements. As a consequence, the practices of online marketplaces in Pakistan may be seen to be in violation of the country’s current laws.
In Pakistan, the current inadequacies and flaws in the existing legislation are still being overlooked. As a result, any company that wants to offer e-commerce systems or, more precisely, set up an online marketplace must conform with the payment systems regulations. Furthermore, the PS&EFT Act and PSO/PSP Rules’ legality is in doubt, as a number of high – profile firms in Pakistan’s e-commerce continue to operate without a licence. The State Bank of Pakistan must address the complex nature of the payment systems law in order for the regulatory and legal framework to be effective. Until this is addressed, the gap in licencing and operations in the online marketplace industry will continue to stifle the Country’s e-commerce growth.