BSP Deputy Governor Tangonan on the Philippines' digital finance ambitions

The national ID system, QR payment system are expected to push up financial inclusion.

The Philippines has less than two years to achieve its goal of getting 70% of Filipinos banked by 2023, and 50% of its financial transactions done digitally. But as of 2020, more than one in seven Filipinos remain unbanked, according to the Federal Reserve Bank of San Francisco. Despite the odds, local regulator Bangko Sentral ng Pilipinas (BSP) is optimistic that they would achieve this goal.

“It’s indeed daunting, but not impossible. In fact, we're optimistic of achieving that coverage of financially included adults in the Philippines,” BSP Deputy Governor Mamerto Tangonan told Asian Banking & Finance in an interview. 

Two things are driving Tangonan’s optimism: the launch of PhilSys national ID system, which thanks to a partnership with local lender Landbank of the Philippines saw millions of new accounts added to their system; and the rollout of new services over the next months, including a comprehensive QR payment system that should complement the increased uptake of digital financial services, driven by the pandemic.

“For 2021, we’re set to introduce to the market the “QR Php to M” service for merchants’ digital payments. This will involve supermarkets, groceries, and eventually down to the even sari-sari stores and stalls in the public markets,” shared Tangonan, who was appointed one of four deputy governors of the BSP last March, and heads the newly-formed Payments and Currency Management Sector.

Tangonan knows what he’s talking about: he previously served as chief of the United States Agency for International Development (USAID), where he led the E-PESO project meant to find ways to boost digital payments in the Philippines. As deputy governor, Tangonan heads the department in charge of the InstaPay and PESONet clearing houses for digital fund transfers, according to BSP Deputy Governor Chuchi Fonacier. 

ABF spoke to Deputy Governor Tangonan to know more about the state of digitalization of financial services in the Philippines, well as BSP’s plans and goals in pushing for the country’s financial inclusion.

You have been given the daunting task of getting 70% of Filipinos banked by 2023. How do you plan to achieve this goal?

You see many of our people who were not able to open transaction accounts were due to lack of documentation. So that is being addressed with our PhilSys' national ID system, which BSP is very much actively supporting, not only in terms of producing the Phil ID cards, but also in mandating our supervisor institutions to rely solely on the Phil ID. Meaning, the presentation of a Phil ID is enough to establish one's identity. 

So that's one. We have also licensed digital banks, and some of the existing banks have also converted to digital banks. And even some who are not yet officially digital banks are offering you know, the digital opening of accounts in digital like deposit or withdrawal, you know, through ease of pain. Funds transfers.

That will reach many of our population and that will attract more people into opening their transaction accounts if they don't have one yet. The BSP also issued recently the open finance framework. So, that would even accelerate, that would even accelerate the digitalization of financial services. By having you know, the banks, the electronic money issuers collaborate with the fintech and other companies in order to deliver really purpose-built digital payments applications and services to the people. 

We're excited about all these. And I think all these factors working together, we can achieve the 70% financial included target by 2023.

The Philippines also aims for 50% of all retail payment transactions done electronically by 2023. Does the country have the digital infrastructure to support this objective?

Yes, we do. And it's being even strengthened and reinforced. First of all, you're right: we have a 50% target in the share of digital payments out of total payments transaction volume in the Philippines. 

To address and achieve this goal, we have the digital payments transformation roadmap, where, among other things, we have identified large volume payments streams that are still being done predominantly through cash due to the absence of digital payments alternatives.

I’ll give an example. Let's talk about merchant payments. If you look at the 2018 data, the total retail payment transaction volume in the Philippines consists of 70% merchant payments: your payments go from groceries, restaurants, pharmacies, even sari-sari stores and public markets.

If we are able to offer a better alternative to our spending public, and a better alternative than cash in the form of digital payments, then that's already a large number of transactions being transitioned to digital. 

And we're not stopping there. After that, we'll be launching, next year, the interoperable digital bills payment system. What this enables is it will allow a customer of one bank or EMI to pay their billers, let's say their utility companies, credit card companies, and so on, even if their biller is with another bank.  So, in effect, what we're doing is strengthening the interconnection of accounts in the Philippines.

What normally happens in a fund transfer is that the payor will initiate the transaction and push the payment to the payee. But with the request to pay service, we kinda reverse that to bring more convenience to the payor.  So it's going to be the payee who's going to initiate a somewhat a collection transaction, or a request to pay transaction, and then all the payor needs to do is just to authorize that.

Banks in the Philippines said that it may be difficult to achieve the target set by BSP in the given time frame of less than two years. What’s your opinion on this?

Yeah, I heard that too. And I don't blame anybody for thinking that. My confidence stems from our [BSP’s] own journey and experience. When BSP launched the NRPS in 2015-2017, we had a target of onboarding 20% of transactions by 2020. At the time, many didn't believe that it’s achievable. But here we are in 2021, and we are just about to release our report covering the full year 2020. I’m very confident that the BSP and the in the payments industry and the Filipino people have achieved that target, which no one believed in 2017.  So I hope you understand where my confidence is coming from the right. 

The pandemic is bringing in additional adoption and stickiness to digital payments. So, that also helps, although, of course, no one likes [being in a] pandemic.

What are the biggest challenges in getting Filipinos to start using digital payments?

Digital payments, as the name connotes, rely on connectivity. Right now our digital connectivity infrastructure is in the process of still improving. So connectivity is one.

Working or collaborating with the industry is another. We need to be able to hear what works best for them and balance that with what the public needs. So that balancing act, the role of BSP there is very critical. For digital payments to succeed in a market, you need to adequately incentivize providers and also offer a very good value proposition to the consumers.  It’s BSP’s role to ask each side and avoid that which tends to dilute the reason for using the service, or tend to dilute the value proposition.

What else has BSP done to encourage more Filipinos to adopt digital financial services?

For one, we’re supporting the rollout of the PhilSys ID. Its registration process requires Filipino citizens to really go physically to a registration site to have their biometrics captured. With this, we will work with banks, principally the Land Bank of the Philippines, to co-locate, and put some staff in those registration sites.  Since you've already given your data and information to the one capturing the ID, that same information can be used by the bank to open an account. 

And because of this, under the PhilSys ID registration, Landbank now has close to 5 million digital account owners, most of the new account owners. 

Recently, the government has also transitioned the payout of their social security pensions and retirement benefits straight to the accounts of our retirees and then the beneficiary. If we can continue to work with other government financial institutions to do the same, the government can save money from digitalizing these payouts. 

And apart from your partnership with Landbank, how is BSP working with other banks in order to drive digital transformation in the banking and payment sector?

The banks and the electronic money issuers are all very supportive of the digital payments transformation roadmap, and we have been working closely together with them. We'll see another milestone of that when the industry launches the QR PHP to M. 

We are also enhancing PesoNet payments by doing multiple batch settlements in a day. Right now, we only do one settlement in a day that's around four o'clock. PesoNet transactions that you perform with your bank, by their cutoff time will be credited to your payee that same day, around six. What we're doing is we're going to have another settlement batch to process another batch of settlement, around midday, so that people who make transactions earlier in the day, can already see it completed by around lunch. And those that do it in the afternoon can complete it by early evening or late in the afternoon.  This would encourage even more usage because the waiting time to credit the amount to the payee's account gets shorter. 

We're also looking at what we tentatively call the proxy identifier. Right now, when you transfer an account, you have to select the bank, and then you have to key in the account number. Sometimes people are not comfortable disclosing account numbers to other entities they're not familiar with. But with a proxy, we can just use our mobile numbers or in some countries even like email addresses, in order to do this. 

How has COVID-19 helped accelerate financial inclusion in the Philippines?

I wouldn't be jumping up and down that we have a pandemic, but in terms of financial inclusion, it has helped. Number one, because of the restricted mobility in various levels of community quarantine. Sometimes the only safe and possible option is digital payments. Safe, because you don't want to touch cash that may have the virus, and because it is the only way to pay anything because you cannot leave home, right. But with digital payment methods, you can buy food, you can even buy groceries, you can buy medicines, through online purchases and then paying digitally. That resulted in an even larger number of people being encouraged to open accounts. So that's one.

Second is when the government gave the SAP2 cash assistance to Filipinos. The distribution of those social grants was done by sending the ayuda (cash assistance) directly to the accounts of the beneficiaries. So the beneficiaries would have to open accounts. The last time I checked the entities who participated in SAP2 opened around 9 million new accounts.

BSP has also recently given out licenses for digital-only banks. What has been the reception of traditional banks to this development?

Well, I believe that each bank or financial institution would have their own strategies depending on their target markets, right. So, it may threaten some, but those with solid strategies may or may not feel threatened at all. 

Nevertheless, we would want to encourage all financial institutions for as long as it also serves their interests, their strategies, to use digital payments, and for them to encourage their customers to use this. We have larger public policy objectives, like, broader-based economic growth, and digital payments can drive GDP growth. It facilitates the buying and selling of goods and services. So when you do that you increase spending, and then you boost growth. And you also enable newer business models to succeed, like the ride-hailing apps, or online stores— stores that could previously not afford to have a location in malls, but can now sell online. With digital payments, you can increase participation in the economy to a wider segment of the population. 

And of course, digital payments bring about financial inclusion. Digital payment platforms now offer a sort of savings account, and then you can access credit, then you are even offered insurance to protect your family and yourself. With digital finance platforms, you can even now do investments. Some banks and EMIs are now offering investment for tickets as small as 5,000 pesos (around US$20). See how we can bring down the benefits to more people?\

What are BSP's goals beyond 2023?

Beyond 2023, we would like to go beyond having 70% of financially included adults and bring the digital payments penetration journey closer to 100%, like where some advanced economies are at present. There are also other things that we are also working on. We are continuing work with CBDCs and cross-border real-time payments.