Embracing the digital financial world

Sylvia Salvador Tax Director, PwC Philippines 25 April, 2019

The Philippine financial sector inevitably faces growing global competition as technological innovation moves forward.

One of the drivers of the industry’s global competitiveness was the liberalization of the Philippine financial market to allow the entry of foreign banks. In 2014, our country opened its doors to foreign banks by allowing them full ownership and control of their banking operations in the Philippines. Under Republic Act No. 10641, a foreign bank can set up operations in the Philippines through any of the following modes: (a) by acquiring, purchasing, or owning up to 100% of the voting stock of an existing domestic bank; (b) by investing in up to 100% of the voting stock of a new banking subsidiary incorporated in the Philippines; or (c) by establishing branches with full banking authority. The Bangko Sentral ng Pilipinas (BSP) has so far approved the entry of 11 foreign commercial banks since the law’s enactment.

On top of global competition, the Philippine financial market has also been preparing to face the complex demands of rapidly developing technology. This is evident in the rise of digital financial services. The significance of such a development is well-recognized and accompanied by certain challenges which need to be addressed.

In 2018, the signing of the Philippine Identification System Act was widely viewed as an opportunity to reach out to unbanked individuals, by easing the requirements for signing up bank customers. Under the law, all Philippine citizens and resident aliens are to have a single card as their official national identification card, known as the “Philippine Identification Card (PhilID).” According to the BSP’s 2017 Financial Inclusion Survey, out of 52.8 million adults who do not have bank accounts, 18% do not have the required documents, such as an acceptable ID, to open an account. Simplifying the documentation by mandating a single ID system addresses this predicament by offering easier access to financial services and products.

Likewise in the same year, the National Payment Systems Act (NPSA) was passed, vesting upon the BSP oversight power over payment systems, including supervisory and regulatory powers to ensure the stability and effectiveness of the Philippine financial system. For regulatory purposes, payment system operators (e.g., banks and electronic money issuers like PayMaya and Globe for GCash) are required by law to register with the BSP. As pointed out by the late BSP Governor Nestor Espenilla, this law provides a regulatory framework for payment systems, to level the playing field among operators, and to generate more competition, greater efficiency, and foster digital innovations for both banking and payments products and services.

The NPSA further enhanced the National Retail Payment System (NRPS) Framework adopted by the BSP in 2017 pursuant to BSP Circular No. 980. NRPS aims to establish a safe, efficient, and reliable retail payment system in the Philippines with the end view of achieving higher economic growth and improving competitiveness. It covers all domestic retail payments which are denominated in pesos for the purchase of goods and services, fund transfers, and other payment obligations with banks and other institutions. With the adoption of this framework, the BSP expects an increase in the level of cashless transactions from about 1% to 20% by 2020.

In implementing NRPS, the BSP launched two automated clearing houses, i.e., PESONet on Nov. 8, 2017 and InstaPay on April 23, 2018. Considered an electronic alternative to paper checks, PESONet covers batch payments on one hand, while InstaPay covers small-value payments for purchases of goods and services.

In BSP Circular No. 1033 issued in February, the BSP expressly recognized the impact of electronic payment and financial services (EPFS) in economic growth by facilitating the movement of funds that fuel productive activities.

EPFS pertains to products or services offered by BSP-Supervised Financial Institutions (BSFIs) to enable customers to receive payments or initiate financial transactions and other related services through an electronic device.

To engage in EPFS, BSFIs should meet the minimum pre-conditions set forth by the BSP. First, the BSFI should have an adequate risk management process in place to identify, assess, monitor, and control the risks arising from the proposed EPFS. Second, the BSFI should have appropriate policies and procedures in specific areas to address all security risks and concerns affecting the EPFS platform and application systems. The areas covered are authentication of identity of both sender and receiver; nonrepudiation or undeniable proof of participation by both the sender and receiver in a transaction; authorization which establishes and enforces access rights of the entities to the specified computing resources and application functions; integrity and confidentiality of the data; and availability of the operating system. Third, the EPFS system should have been tested prior to its implementation and that test results were satisfactory. Last, BSFIs should have adopted a business continuity planning process covering the use of EPFS.

The circular streamlined the process of securing the license to engage in EPFS, doing away with the tedious approval process of requiring conditional and final approval.

Further, EPFS are classified into two types: (a) Basic EPFS (Type C license) which refers to limited services such as receipt of funds and access to information; and (b) Advanced EPFS (Type A/B license) which allows customers to transfer funds and initiate other financial transactions including those services under Basic EPFS.

For Basic EPFS, there is only a need to notify the BSP within 30 days prior to the launch of services, instead of securing BSP approval. In contrast, Advanced EPFS is further categorized into Type A and Type B licenses. BSFIs with Type A licenses must conduct self-assessments against the established criteria by the BSP. Upon meeting the criteria, BSFIs should submit a certified letter of intent stating such compliance. If the BSP concurs with the certification, it shall issue a confirmation of eligibility to the BSFI. For Type B licenses, the process is similar to securing the Type A license except that there is no self-assessment and the BSP requires more documents.

With the use of technology, the Know-Your-Customer (KYC) process is now expedited. Under BSP Circular No. 1022, BSFIs can now accept the PhilID as an official document for financial transactions, and allow use of technology like video calls for customer identification.

Nonetheless, with innovation comes challenges. Rapid improvement of the IT infrastructure in the Philippines is urgently needed to keep pace with technological demands and synchronize existing inter-agency systems. Concomitantly, human resource considerations that may impede the growth of technological innovation, such as brain drain, likewise need to be addressed.

As a developing country, the Philippines may suffer some hiccups as it gears towards full globalization in financial markets, facilitated by advanced technology. Anchored on resiliency and cooperation, the Filipino people, hand in hand, will surely achieve that level of preparedness to fully embrace the digital financial world.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.