With financial inclusion a high priority for both the government and retail banks, which are looking to the untapped population to increase their customer base, recent developments in financial technology (fintech) have been greeted with great interest. In particular, the Bangko Sentral ng Pilipinas (BSP), the central bank, is increasingly looking to technology in order to leapfrog some of the current obstacles that many Filipinos face when it comes to opening a bank account, acquiring a home or business loan, or depositing their earnings.
According to the latest statistics available from the BSP, some 52.8m people, or 77.4% of the adult population, remained unbanked as of 2017. This represents a sizeable potential market for fintech firms, promising great investment opportunities and opening up avenues for new start-ups.
Penetration Rates
The reasons why such a large number of people are excluded from the formal banking system include low average incomes; the unavailability of banking infrastructure, particularly in rural areas; and a tradition of seeking financial help within the family rather than from external institutions. At the same time, micro-, small and medium-sized enterprises (MSMEs) often lack the financial history and collateral to secure loans from the formal sector. For mainstream banks, the costs and risks of dealing with MSMEs and low-income individuals in underserved areas are often high compared to those living in urban and wealthier areas, who provide a more reliable and profitable market. Fintech offers a way to overcome these obstacles by removing the need for increased physical infrastructure, while e-solutions can also provide better know-your-customer (KYC) facilities, reducing the risk for banking institutions.
Edwin Bautista, president and CEO of the Union Bank of the Philippines, envisions further gains from the use of these new tools, as their adoption – particularly by unbanked Filipinos – will incite changes in the broader structure of the market, to which banks will adapt accordingly. “Fintech not only provides access to credit and payment processing through mobiles, but it could also bring down the interest rates on loans charged by banks as a result of the lower cost of banking operations, starting with customer acquisition, for example,” he told OBG.
Out of a total population of around 107.4m, there were 67m internet users in the Philippines as of December 2018, representing a penetration rate of 62%. For four straight years, the Philippines has topped global social media user charts, with 99% of Filipino users accessing some form of social media, while internet users in the Philippines spend more time in front of their screens than in any other country at an average of 10 hours and two minutes per day, according to a 2019 report by Canada’s social media management platform Hootsuite and the UK’s digital marketing agency We Are Social.
Technological Advances
These figures provide support for banks’ adoption of fintech to expand their services. The gradual uptake of new technologies is also occurring at a time when lenders are obliged to further digitise their operations in order to meet new reporting standards and risk-based capital requirements, which mandate more accurate real-time information gathering.
As such, there have been a number of significant moves in recent years to establish a robust fintech framework. The National Retail Payment System was launched in 2015 and seeks to raise the level of e-payments from 1% in 2013 to 20% by 2020.
Following the creation of the regulatory framework was the launch of electronic funds transfer (EFT) services PESON et in November 2017. In the same month the BSP and the Monetary Authority of Singapore signed a fintech cooperation agreement, and in 2018 the BSP set up the Financial Technology Sub-Sector to oversee everything from blockchain to settlements and cybersecurity. The year 2018 also saw the launch of another EFT system – InstaPay.
With fintech infrastructure and regulation in place, one area that may see expansion in the near future is e-wallets. Several of these are now in the Philippine market, including Globe Telecom’s GC ash, which recorded 20m users in February 2019; PLDT’s Smart Money and PayMaya, with 8m users combined as of end-2017; and Coins, with 5m users as of May 2018. Many of these subscribers have joined recently, suggesting that e-wallets are building momentum. As Chinese giants Alibaba and Tencent now have tie-ups in the Philippines with GC ash and PayMaya, respectively, the number of e-wallets in the country is expected to increase significantly.
To create their own fintech platforms, banks can benefit from their ability to leverage their equity several times – for every P1 ($0.02) of equity, banks can lend up to P10 ($0.19) – compared to telecoms firms, which have less equity, and non-bank financial institutions, which have to maintain the 1:1 equivalent on their balance sheet. In contrast to banks, however, fintech firms are more technologically savvy, more willing to take on risks and have a consumer base that is less hesitant to accept innovative products. Given the advantages of both players, collaboration between banks and fintech players is likely to become more prevalent in the future, according to Bautista.
Obstacles, however, remain. One issue is the costs involved in installing cashless payment systems for merchants, as well as transaction costs for consumers. “Most consumers, businesses and governments think that there are zero costs involved in cash transactions. However, the cost of handling cash for most businesses runs as high as 15%,” Simoun Ung, president and CEO of OmniPay, a Philippine-based non-bank financial institution, told OBG. “Given the difficulty of changing this mindset, the best way to boost the adoption of e-money is to provide electronic payments free of charge to consumers.”
Other challenges include slow internet connection speeds in some parts of the country, low network coverage and online security. A February 2019 survey by Manila-based data consultancy company TheNerve found the latter to be a key reason why 62.8% of respondents chose not to pay via mobile phone apps. Indeed, while e-commerce continues to boom in the Philippines – growing by 42% in terms of gross merchandise volume between 2015 and 2018, according to Google – cash-on-delivery remains the most popular payment method. Going forward, increasing online security and boosting user confidence in alternative payment methods may be the key to unlocking greater e-wallet growth.
National ID System
On the issues of risk management and KYC mechanisms, legislation mandating all citizens to be in possession of a biometric national ID card is expected to help bring unbanked Filipinos into the financial fold. President Rodrigo Duterte signed the Philippine ID System (PhilSys) Act in August 2018, with plans to begin rolling out the system in 2019. The act aims to boost financial inclusion, streamline bureaucratic processes, and reduce fraud and corruption. As well as standard information such as the holder’s full name, gender, place and date of birth, address and blood type, the new national ID card will carry detailed biometric data, photo, fingerprints and an iris scan.
Spearheaded by the Philippine Statistics Authority (PSA), the first phase of the implementation plan covers procurement, testing, the development of the PhilSys Registry Office and the launch of target registration by the end of 2019. Mass registration is expected to begin in 2020 and all Filipinos are expected to be issued a PhilSys card within five years. The cost of the programme has been estimated at $555m, with a number of private sector companies, including Unisys Philippines, AC Infrastructure Holdings and Aboitiz InfraCapital, among those that applied in August 2018 to develop the platform. In April 2019 the Department of Finance announced that Estonian firms had also expressed interest in bidding for the development contract.
Of the more than 77% of the population without a bank account, 18% said they did not have the required documentation to enter the formal banking system, according to a survey published in 2017 by the central bank. With some estimates putting the number of Filipinos without a birth certificate at 7.4m, it is hoped that PhilSys will address this problem. In addition, the BSP survey data shows that women are twice as likely to have a bank account than men, and are particularly apt to be signed up with microfinance organisations and cooperatives. “The creation of a national ID system is crucial for expanding banking inclusion, as today many citizens cannot meet the requirements for basic financial products due to their lack of official documents,” Hans Sicat, country manager of the Dutch multinational ING Bank, told OBG.
Gender Disparity & Privacy
The gender imbalance in financial inclusion in the Philippines is the reverse of that in most developing countries, and could serve as a pointer for banks and other financial institutions when developing programmes to attract clients. Women seem to have a more positive attitude towards formal banking, while men could be targeted more specifically by marketing campaigns.
Concerns regarding data privacy have also been raised about the PhilSys programme, given that it entails collecting biometric information from the entire population. The PSA will be in charge of handling the data collected on individuals, and while supporters of the national ID system are confident that this will be done securely and safely, some observers have noted the potential for mass surveillance.
Nevertheless, if handled correctly, the PhilSys programme could provide a significant boost to banking penetration over the medium to long term. “KYC technologies are crucial to increase the penetration rate, and the national ID programme will prove to be very useful in this regard,” Wai Hong Choong, president and CEO of Maybank Philippines, told OBG.
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