Global financial services are being disrupted by digital payments technology, and the Philippines has a particularly large opportunity for improvement. The innovation and development we are seeing present enormous opportunities for the innovators but risks for the established players, particularly the banks, whose high-margin business is rapidly disappearing.
A significant change in consumer behavior has been one of the main forces behind the adoption of digital payments in the Philippines, but users now prefer digital wallets with better user interfaces, like GCash and PayMaya. In addition, these digital payment methods have made it possible for more consumers to access financial services, which is a huge benefit in a nation where such a high percentage of the population lacks even basic banking access. Banks are under pressure because consumers are now accustomed to the advantages of digital payments and because digital
The Bangko Sentral ng Pilipinas (BSP), a regulatory body, has been a major force behind the development of digital financial services even though regulation is typically seen as a source of difficulties. The Bangko Sentral ng Pilipinas (BSP) introduced PESONet and InstaPay as digital payment platforms in 2017–2018 as part of the National Retail Payment System. Along with increased use of electronic money (e-money) and Internet banking, their use increased significantly during the pandemic as state-run pension payments. High-value transactions conducted through PESONet increased in value year over year by 47% as of July, reaching PHP 3 point 46 trillion. During the same time frame, InstaPay transaction volume increased by 25% to over 300 million, and value increased by 37% year over year to PHP1.91 trillion.
BSP is also promoting payments digitalisation and financial inclusion under the Digital Payments Transformation Roadmap (DPTR) and the National Strategy for Financial Inclusion (NSFI). The DPTR pursues BSP’s twin goals of converting at least 50 percent of all retail payments into digital form and onboarding at least 70 percent of Filipino adults to the formal financial system by 2023.
In June 2021, BSP launched its Open Finance Framework, which detailed policies for portability, interoperability, and collaborative partnerships between BSP-supervised financial institutions and fintech players. This saw the entry of significant payment players like GCash and PayMaya. The industry also welcomed digital banks like Overseas Filipino Bank (acquired by Landbank), Tonik, and GOTyme Bank. In its report, Forging Pathways to a Cash-Lite Society, BSP noted that the volume of digital payments hit 20.1% of total average monthly payments; in 2019, it was 14%. Now the organisation is looking to achieve a 50% target by 2023 as part of its Digital Payments Transformation Roadmap.
Cross-border payments are also benefitting from new developments in the industry, which is particularly relevant for the Philippines as it has one of the world’s highest numbers of workers overseas. These workers contribute around 10% of GDP, which totalled $31.4 billion in 2021, but an additional $3.4 billion was paid in remittance fees. Now, countries are working in partnership to connect their real-time payment networks, which provide fast, low-cost payments domestically. This has happened between numerous countries in APAC, meaning consumers can travel from one country to the other and pay for goods or send money using the same digital payment apps they use at home.
International cooperation is increasing. The central banks of Singapore, Malaysia and Italy are developing Project Nexus, which is model of connecting national payment systems, whilst a Memorandum of Understanding (MOU) on cooperation in Regional Payment Connectivity (RPC) was signed by Indonesia, Malaysia, Singapore, Philippines and Thailand on this month in Bali, Indonesia, on the sidelines of the G20 Leaders summit.
Another factor driving innovation in the Philippines is the emergence of Banking as a Service (BaaS) and embedded finance. BaaS enables digital banks and other third parties, such as digital wallets, to connect with banks’ systems directly via so they can build banking offerings on top of the provider’s regulated infrastructure. Embedded finance allows traditional financial services, such as lending or payment processing, to be embedded into non-financial apps or websites, such as ecommerce. This can be a major new revenue stream for banks as it enables them to go directly to customers at their point of need, instead of customers having to choose and connect with the bank. This is demonstrated by the success of Buy Now, Pay Later (BNPL) which is expected to have grown by 80% in 2022 alone in the Philippines.
Some technologies and trends that have enabled the rapid proliferation of digital payments include increasing use of cloud infrastructure, Software as a Service (SaaS) and open APIs. Cloud infrastructure is known for being cheaper than on-premises infrastructure, as well as enabling much greater agility and speed to market. This is why it is favoured by neobanks like Tonik. Concerns over issues like security and regulatory compliance have previously prevented incumbent banks from moving to the cloud, but these concerns have been mostly overcome in recent years following huge investment from cloud providers like Amazon, Google and Microsoft. Application Programming Interfaces (APIs) enable the seamless sharing of data. This has led to more banks choosing to buy specially designed software from banks which they can plug into their own systems, rather than build them themselves. Instead of taking years to develop new services, banks can choose, implement and launch new services in months or even weeks
One of the biggest disruptive changes at a global level is the introduction of a new global standard for exchanging electronic messages between financial institutions, called ISO 20022. This has been a game-changer because all payments are sent via electronic messages containing various information in a particular format. All participants within a domestic payments network use the same ‘language’, but these languages vary from country to country. ISO 20022 provides a central dictionary that enables banks around the world to understand each other, which means the user experience enjoyed in domestic real-time payments can be replicated internationally. It also enables these messages to contain more meaningful data, which can be leveraged to offer value add services on top of payments. BSP is supportive of ISO 20022. Pgilpass has already been migrated to the new standard. Instapay, the Philippines’ real time payments network, also supports ISO 20022. ISO 20022 is expected to support 80% of transaction volumes and 87% of transaction value worldwide by 2025, so banks need to focus on overhauling their existing legacy systems to support the new standard. With benefits ranging from the potential for increased revenue, improved compliance and increased operational efficiency, there is no good reason for banks to delay.
Dheeraj Joshi, Regional Head, Payments Solution Consulting, Finastra commented: “With ever-increasing competition, constantly shifting regulatory and compliance obligations, evolving customer behaviours and expectations, increasing complexity and higher costs, banks are facing significant challenges. As a result, banks need agility, scalability and elasticity. With digital wallets and fintechs offering cheap, fast payments within easy-to-use apps, banks need to reduce their operational complexities and cost per transaction, whilst matching their digital competitors on customer experience.”
Tal Weiser, Managing Director Sales, Payments, APAC, Finastra, concluded: “We are in the most interesting era in the payments business. With changes being driven by shifting consumer demands, competition and business demand, as well as government initiatives, it’s a real perfect storm for the industry. If banks want to protect their revenue and stay relevant, they need to commit to modernization and investing in payments technology solutions that meet their growing and changing needs. Fortunately, banks do not need to do this on their own. Payments Solution provider like Finastra can provide the solutions they need to become agile, efficient, modern payments players. In the end it does not need to be ‘fintechs vs banks’, but fintechs working together with banks to push the industry forward.
Finastra is one of the largest fintechs in the world today, with its software used by 90 of the world’s top 100 banks. Finastra services over 8,500 customers across 130 countries, offering an unmatched depth and breadth of fintech solutions across Payments, Digital and Retail Banking, Lending, and Treasury and Capital Markets.
Asia is an extremely important growth market for Finastra’s global business, with 550+ clients and 4,300 employees in the region. Finastra has been servicing banks in the Philippines for three decades, including large incumbent banks and international banks with a presence here, as well as digitally native startups like Tonik – which runs on Finastra’s core banking platform. Finastra has around 900 in the Philippines and Finastra’s Payments business in particular is investing heavily in the country, recruiting people to manage clients and help even more banks and financial institutions accelerate their digital transformation.
