Interview: Amando M Tetangco Jr
What opportunities will a national retail payments system unlock in terms of fostering inclusion and stability?
AMANDO M TETANGCO JR: An efficient national retail payments system (NRPS), which maximises benefits out of digital technology, will bring about faster, more secure and more transparent financial transactions. Once fully operational, the NRPS will provide an inter-operable payments network that will financially link the country – from Batanes in the north to Sulu in the south – 24/7. For the economy, this will reduce costs for businesses and encourage more consumption and productive activities, which could further fuel growth. For individuals, being cash light frees them from the risks and discomfort of carrying hard cash.
Moreover, an NRPS helps make financial services accessible to a bigger portion of the population, thus promoting inclusive finance. Digitising retail payments is critical in the Philippines, where close to 99% of payment transactions are still done on a cash basis, based on a study by multisectoral organisation “Better than Cash Alliance.” The study showed that only 1% of financial transactions of businesses and 0.3% of transactions of individuals are settled electronically. Under the NRPS project, which was launched in December 2015, electronic transactions are envisioned to account for 20% of all financial transactions in the country by 2020.
Cognisant of the important role of an efficient payments system, the Bangko Sentral ng Pilipinas (BSP), together with industry stakeholders, are working together to realise the NRPS. The NRPS, a key element of the country’s National Strategy for Financial Inclusion, will facilitate the country’s transition from a cash-heavy to a cash-light economy, eventually bringing material benefits for the government, businesses and consumers.
How can the banking system use “disruptive technology” to improve services without sacrificing security?
TETANGCO: “Disruptive technology” refers to technology that replaces an old and established one – and which people have been used to – with something that is more sophisticated and poised to bring about a great amount of benefits for users. The BSP looks at technology in two ways: one with appreciation of its benefits in accelerating financial inclusion and the other with recognition of risks that should be properly addressed. For the BSP, technological advancement should be pursued hand in hand with strengthening of risk management systems. We recognise the benefits of technological advancements to banking: efficiency of operations and faster delivery of services. At the same time, we are cognisant of security risks posed by the absence of robust risk management frameworks. Consumer protection is an important aspect of the BSP’s regulatory function; enhancement of risk management will help ensure consumers are protected from various risks in the wake of the constantly changing IT landscape. The BSP has put in place a regulatory environment that properly guides banks and other supervised institutions on how to deal with risks and ensure consumer protection as they pursue technological advancement.
In 2013, the BSP issued Circular 808, which sets out guidelines on IT risk management for all banks and non-bank institutions supervised by the BSP. The extent of required security features for IT-enabled services should be commensurate with a bank’s IT risk profile.
The circular explicitly states that BSP-supervised institutions “should protect consumers from fraudulent schemes done electronically” and lists down specific security measures that the institutions are required to do. One of such measures that BSP-supervised institutions ought to accomplish is the migration from the use of magnetic stripe technology – for automated teller machines (ATMs), point-of-sales machines (POS) and payment cards – to the use of globally recognised EMV (Europay, MasterCard and Visa)-enabled technology by January 1, 2017. This move is expected to significantly help in preventing skimming attacks and, therefore, substantially increase consumer protection. Moreover, in 2015, the BSP issued Memorandum 018, which put in place a rating system for IT risk management of banks and other BSP-supervised institutions. This helps encourage banks to adhere to high standards of IT security as they enhance their services to the public with the use of more modern technology. In the Philippines, where financial inclusion is a key agenda and where improving accessibility of financial services is challenged by the country’s archipelagic nature, technological advancement is useful.
The country has already made some inroads in financial inclusion through innovative measures. For instance, the presence of financial services providers like pawnshops, e-money issuers, money changers, mobile banking agents, non-stock savings and loan associations, and micro-banking offices have helped a number of rural and remote areas of the country enjoy financial services even in the absence of regular banks. 36% of municipalities in this country, which is composed of over 7000 islands, do not have banks; but only 12% actually still do not have access to financial services because of the presence of alternative financial service providers. We have a goal of making financial products and services accessible to even more Filipinos. And with this goal in mind, properly guided technological innovations are welcome.
How can further liberalisation boost the domestic banking sector and position it to compete on a regional level?
TETANGCO: Now that the Philippines’ banking system is fully liberalised, i.e., foreigners are now allowed to own a 100% stake in a bank from the previous cap of 40%, more foreign investors want to do business in the country’s banking sector. Since the implementation of Republic Act 10641 in July 2014, six foreign banks have already entered the country: two Korean banks, two Taiwanese, one Japanese and one Singaporean. More banking license applicants are in line. The law liberalising the banking sector is complemented by ASEAN integration.
With ASEAN member economies having started the formal process of integration with the launch of the ASEAN Economic Community (AEC) in December 2015, we expect more foreign banks to come in. On the other hand, Philippine banks will have access to the entire ASEAN market of about 600m people.
Consistent with regional integration, the Bangko Sentral ng Pilipinas and Bank Negara Malaysia have entered into a bilateral agreement, signed on March 14, allowing the entry of qualified ASEAN banks (QABs) from the Philippines to Malaysia and the entry of QABs from Malaysia to the Philippines (banks placed in QAB status by the regulators in their home countries are strong and well-managed banks, headquartered in an ASEAN economy and majority owned by ASEAN nationals). The bilateral agreement signed by the central banks of the Philippines and Malaysia is expected to facilitate more trade and investments between the two economies. We expect more bilateral agreements of such nature within ASEAN in the near future. We expect to generate the benefits of investment and job generation from these developments.
Foreign banks entering the Philippines are expected to take with them multinational corporate clients who are in search of investment opportunities. Moreover, heightened competition resulting from liberalisation complements efforts toward financial inclusion, where people from all segments are able to easily access financial products and services, including credit, insurance, and savings and investments products.
Philippine banks are seen as capable of facing the challenge of tougher competition. Their rising resources, low-exposure to bad debts (average non-performing loans ratio of universal and commercial banks stood at a mere 1.77% in October 2015), and above-requirement capital adequacy ratios (average CARs of UKBs were at 15.48% on a solo basis and 16.42% on a consolidated basis in June 2015) allow them to engage in more credit and investment activities within and outside the country.
Together with the BSP’s financial inclusion initiatives – such as appropriate regulations and advocacy programs – the more liberalised domestic and regional environment are seen to help more people understand, appreciate, and access a wide range of financial products and services.
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