Letters to the Editor

Redefining financial inclusion with FinTech

The Philippine Star

Exciting new developments in Philippine FinTech are reshaping consumer attitudes and redefining financial inclusion.

Last month, for instance, CIMB Philippines celebrated its 500,000th customer in its partnership with GCash as a digital-only bank, a stunning achievement considering it only launched six months prior. Meanwhile, UnionBank is partnering with OCBC Bank to pioneer a remittance platform powered by blockchain technology. Perhaps most interestingly, an end-August report from Visa found that the appeal of cashless transactions is growing fast, with “3 out of 4 Filipinos” now preferring cashless payments than cash, up from 42 percent a year ago. Apps that have transformed the way we live and consume – from transport to media – are facilitating this uptrend.

The Bangko Sentral ng Pilipinas (BSP) is confident that the country will reach its goal of increasing digital payments to 20 percent of total transactions by 2020, and perhaps 50 percent by 2024. The central bank’s proactive approach to FinTech regulation, along with its own initiatives like the National Retail Payment System (NRSP), make for a potent combination in concert with private sector-driven innovations.

Overall, these developments signal that things are changing in a country that has, by traditional measures, lagged behind in financial inclusion. In 2018, the World Bank Findex found that only 34 percent of Filipino adults have a formal financial account. In Indonesia, by comparison, 49 percent of adults have a formal account, and in Thailand, where the government made a significant push for inclusion, 82 percent of adults are account holders.

Earlier this year, the Milken Institute, a US-based think tank, gathered a roundtable of policymakers, development partners, banking executives, and FinTech innovators to assess the state of Philippine FinTech and chart a path forward. The report capturing this discussion is now published here: https://www.milkeninstitute.org/reports/framing-issues-expanding-digital-financial-inclusion-philippines

Four major takeaways from the report are worth highlighting.

First, there is a growing consensus that the very definition of “financial inclusion” needs to change. Traditionally, inclusion has meant access to a formal financial account. However, a more responsive definition of financial inclusion grounded in the daily lives of Filipinos would include a variety of financial services beyond just a deposit account. For some people, these services would need to include insurance to reduce losses in unexpected events. For others, they would include access to credit to invest in education or to build a small business.

FinTech can help deliver this wider, more dynamic definition of financial inclusion, one that offers individuals a full suite of financial products to help meet personal financial objectives, enabling them to more fully participate in the rapidly growing Philippine economy. This is the second takeaway from the roundtable. Through advanced applications of data analytics and artificial intelligence, FinTechs and FinTech-savvy banks can capture and leverage the information generated by daily mobile phone usage, for instance, as the foundation for offering customized financial products to millions of individuals. In other words, FinTech has turned the definition of financial inclusion on its head: individuals can now attain financial inclusion without even having a bank account.

The third takeaway from the Milken Institute roundtable is that creating an enabling environment for FinTech to flourish will likely require building what might be called a “Philippine Stack.” The term refers to an architecture of public policy, biometric national identity enrollment, and open application programming interfaces (APIs) developed by government to facilitate participation in the online economy, including FinTech. The model for this type of comprehensive approach is India, where the government built the “India Stack” and the famous Aadhaar national ID, which I had discussed in a previous piece.

What should a “Philippine Stack” include? At the roundtable, stakeholders identified several fundamental features they hoped to see developed:

• Foremost among them is making the PhilSys national ID “digital-ready.” Ideally, this includes biometric data such as fingerprints in the database as well as data standardization and storage procedures so permissioned external parties are able to access the PhilSys platform via APIs.

• The second key feature is a fast, accurate, and secure e-KYC compliance system, which would dramatically lower the cost of onboarding new account holders and FinTech app users while ensuring compliance with international standards designed to impede money laundering and other forms of fraud.

• Third, the overall policy framework should ideally empower citizens to consent to the collection and use of their data. Unless citizens have a certain control over how their data are stored and shared, expanding the use of open APIs for government data could introduce controversial issues of privacy, corrode public trust, and delegitimize the system.

This issue of consent raises the importance of trust, which is the fourth major takeaway. For Philippine FinTech to further expand, consumers need to be able to trust digital solutions as readily as they do brick-and-mortar banks. Sumitomo Mitsui Banking Corporation related to us in one instance how trust was a huge challenge with digitizing the older generation in Japan who prefer the experience of transacting in brick-and-mortar branches, especially as they make up the bulk of the savings. Lessons from their experience suggest the need for more digital financial literacy education, strengthening anti-fraud and other security measures, and for more use-cases integrating both offline and online experiences to transition the population towards the digital world.

We now know expanding financial inclusion means more than expanding access to deposit bank accounts. It means Filipinos ought to have the freedom to access a variety of financial products – savings, payments, credit, and insurance – whenever relevant to their daily lives. FinTech solutions can help deliver these various financial tools to more and more Filipinos. But expanding the FinTech sector will likely require engendering more trust among consumers, and most critically, a policy architecture that might be called the “Philippine Stack,” built on the foundation of a digital-ready national ID, strong e-KYC, and citizen consent.

Building such a stack will require the active collaboration of players in the public and private sectors, as well as ongoing consultation and trust-building with the ultimate end-users of these services: the Filipino people. — Cesar Purisima founding partner, Ikhlas Capital and former secretary of Finance – 2005, 2010-2016

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