With great challenges always come promising opportunities. How will the Philippines react to another wave of innovation in the financial technologies space and the industries surrounding it in 2021 and the immediately succeeding years?

Fintech in the Philippines

Innovations in the realm of Financial Technology (“Fintech”) started in the Philippines roughly in 2018. However, it was only in 2020 when significant strides were made in the market, accelerated most especially by the COVID-19 pandemic. Analysts are of the opinion that the Philippines, if not already, is one of the hotbeds for the Fintech Industry and is projected to continue its upward growth in 2021 and beyond.[1]

Despite the pandemic, our internet-fueled economy or e-conomy stands at a strong $7.5 billion, which is projected to reach $28 billion in five years’ time. Its growth rate is at a resilient 55%.”[2]

Furthermore, Fintech’s transaction value is predicted to grow at an annual rate of 16.4% to reach $10.5 billion dollars by 2022.” [3]

Our government agencies – the Bangko Sentral ng Pilipinas (“BSP”), Department of Trade and Industry (DTI) and the Securities and Exchange Commission (SEC) – have been very supportive and vocal about the bullish growth of Fintech innovation and the financial sector’s digitalization.[4]

At the helm of this movement is the BSP as it has been aggressively pushing its initiatives aimed at financial digitization to accelerate inclusive growth, the progress of the overall economy, and in making the Philippine market globally competitive.[5] Governor Benjamin Diokno (“Governor Diokno”) has said that “Fintechs could offer turnkey loan origination and underwriting platforms for the government’s direct lending programs as well as digital solutions for MSMEs pivoting to e-commerce, among others.”[6]

To exhibit this support, the Monetary Board of the BSP approved the Digital Payments Transformation Roadmap for 2020-2023, which charts the BSP’s current initiatives and strategies in advancing an efficient, inclusive, safe and secure digital payments ecosystem.[7]  This includes the Open Banking initiatives of BSP.

Open Banking

Two months ago, the BSP circulated a proposal for an open finance framework[8] to its stakeholders as part of the three-year digital payments transformation program to boost financial inclusion and to transform the country to a cash-lite from a cash-heavy economy. [9]

The central bank released for public consultation the first version of the draft circular on open finance to show its regulatory strategy and collaboration with industry players in supporting the development and improving access to new financial products toward fostering broad-based and inclusive economic development.”[10]

The proposed circular will cover technology, products and policies that will enable customers to “securely compare” financial services from qualified third-party service providers that are either account information service providers and/or payment initiation service providers.[11]

Aside from the support from the BSP, House Bill 5913 was also submitted to Congress[12] which was authored by House Ways and Means Chairman Joey Sarte Salceda. The bill seeks to establish a separate regulatory and industry development regime for virtual-only banks in the country.[13] This was well-received by the BSP Governor in a letter to Congressman Salceda where he mentioned that House Bill 5913, or the Virtual Banking Act, will open “the creation of a regulatory framework for digital banks [and] promote a level playing field by allowing new entrants to credibly compete with existing banks, as well as prevents regulatory arbitrage.”[14]

House Bill 5913 introduces digital banks as a new bank classification. It also outlines the minimum macro-prudential standards for virtual-only banks and opens the virtual banking sector to some degree of foreign ownership to attract some of the financial technology know-how already developed in other countries and to ensure adequate capitalization of the industry.[15] Governor Diokno, in his letter affirms that the proposed changes in the House Bill is within the provisions of the General Banking Law.

However, we note that Open Banking is not devoid of risks and must consider the relevant issues that may come up when the Philippines makes the eventual transition.

Ways Forward

Open Banking is a form of open finance. It is a secure way to give service providers access to a consumer’s financial information and allows third parties to create applications and build services around financial institution such as banks.[16] The objective is to create a one-stop-shop for customers to pay for products and services through the application wherever that person is in the world without the traditional red tape and limitations brought about by traditional and stringent banking methods.

The pillars that are essential to Open Banking are the following:

1. Banks give access to third-party service providers, typically technology startups and online financial service vendors, the personal and financial data of its customers.
2. Customers are required to give some form of consent to let the banks give these third-providers access, such as checking a box on a terms-of-service screen in an online application, among others.
3. Third-party providers can then use the customer’s shared data (and data about the customer’s financial counterparties).
4. Use might include comparing the customer’s accounts and transaction history to a range of financial service options, aggregating data across participating financial institutions and customers to create marketing profiles or suggest new transactions and account changes on the customer’s behalf.   

Note that this is only one segment of the wide concept of Open Banking – Data and Information Gathering. There are also other transactions available through the Application Programming Interface (“API”), such as extension of loans, payment of services or goods by a foreign bank without need of the usual traditional swiss account numbers, online accounting and fraud detection services for companies, transacting with foreign bodies using universal financial documents, among others.

The data stored in the API can also be used on a much larger scale. This aggregate data, called big data, can be used for macro-prudential oversight by the BSP.

In sum, Open Banking has many facets. It is undeniable that is creates promising economic opportunities for the Philippine economy to thrive into.

The promise of Open Banking is very enticing to various investors, bankers, business owners and all kinds of businessmen, but it is not without stumbling blocks, especially at this early stage.  The following are the possible setbacks we see:

1. Data Privacy concerns;
2. Violations or breaches in confidentiality of depositors as per banking laws in the Philippines;
3. Possibility of segregating, inadvertently or otherwise, the unscorable population or the thin-file population which runs against the goal of financial inclusion as banks may or will heavily rely on tradelines and negative-reporting information only.
4. Regulatory concerns such as use of information by foreign banks or direct transactions through the API; and
5. Misuse of customer’s data.

To avoid the challenges posed above, the following safeguards, we believe, are necessary:

1. Regulatory Framework. There must be a solid regulatory framework for Fintech companies, which would involve a centralized regulatory body that oversees all Fintech companies and its activities. The framework should also include accreditation of the companies and review contracts on specific partnerships and third-party access to uphold Data Privacy and Security.
2. Data Privacy. The centralized regulatory body should also be given the power to oversee the data of the consumers through use of blockchain technology[17]. In addition, there should also be one data code or format across all banks, financial institutions and Fintech companies. While it is understandable that banks, financial institutions and Fintech companies have different software they are partial to, it would be prudent that a uniform and secure data code be implemented so that it can be efficient and seamless for the centralized regulatory body to access/monitor transactions and other data sharing initiatives. This will greatly help as well in early fraud or data breach detection.
3. Digital Identity. The centralized regulatory body must make use of the already existing innovations in the market such as the public key infrastructure[18] or the creation of digital signatures that ensure one’s digital identity and provide digital footprints.
4. Customer Consent. Consent is necessary for Data Privacy and Rules on Confidentiality of Information on Depositors as per Philippine banking laws.[19] Hence, it is necessary to have the depositor/consumer to sign a consent form or waiver that details how the information on his or her accounts will be used and be transmitted to a bigger platform which is available to different banks.
5. Data Storing. The centralized regulatory body must ensure purging of information on the consumer after an allowable period as provided for in the already existing Data Privacy Laws in the Philippines.
6. To combat misuse of data, the regulatory framework of Open Banking must involve utmost and responsible transparency. Consumers should be able to request data on them and what should be furnished is the complete information available on the API.
7. Financial Inclusion. Thin-file segments of the population or the unscorable population consists of individuals with less, if not, no information available on them. These could be the young individuals with only one bank account opened by their parents for them. This is the case for most micro, small and medium enterprises (“MSMEs”) or Start-up MSMEs who want to secure loans or financing but are unable to since banks see them as high-risk. Hence, they are usually excluded or denied loans. This can be resolved through greater data sharing or gathering. The data gathered should go beyond banking information. It should include energy/utility data, telecommunications, receivables, passive business interests, among others. Full-file reporting should instead be imposed. Information on defaults only (negative-file information) does more harm than good as it will only increase risk on these individuals. It can be that what is seen on the API is not necessarily representative of the consumer’s payment/transactional behavior.
8. Direct Transactions of Foreign banks and Local Banks through API. Paving the way for cross-border transaction calls of a uniform or universally accepted financial documents that is agreed to by countries wanting to be part of the Open Banking movement. This could be covered by bilateral treaties similar to our tax treaties.
9. Sandbox Regulation. Similar to what has been proposed by the BSP in their Open Finance Framework, it is suggested and advisable to have a Sandbox Regulation in place to further study and observe the initial stages of Open Banking. This will help and protect the Philippine economy for its eventual improvement and expansion.

Taking Fintech On

To end, we are of the position that Fintech provides so many benefits. However, until a solid regulatory and reportorial framework is in place, it is understandable that consumers will be extremely cautious and prudent in entering and/or transacting with Fintech companies and the like due to the opaqueness of its operations. Unlike the traditional banks, digital banking and Open Banking uses third party intermediaries and linkages which open up new risks for the financial system. But every innovation comes with risks. This should, however, not deter Fintech companies in investing in the Philippines as the market is proving to be extremely promising.

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[1] Business Mirror, E-money transactions to grow until 2021 – Fintech, 12 November 2020, available at https://businessmirror.com.ph/2020/11/12/e-money-transactions-to-grow-until-2021-fintech/ (last accessed 07 Feb 2021).

Philippine Information Agency, Banks’ optimism eases based on latest outlook survey, 09 January 2021, available at https://pia.gov.ph/news/articles/1063407 (last accessed 07 Feb 2021).

[2] Manila Standard, Huawei paves new economic boom in 2021 with fintech, cloud innovations, 14 December 2020, available at https://manilastandard.net/mobile/article/341996 (last accessed 07 Feb 2021).

[3] Inquirer, Gearing Up to become the next hotbed for FinTech, 11 Feb 2020, available at  https://business.inquirer.net/290279/gearing-to-become-next-hotbed-for-fintech (last accessed 07 Feb 2021).

[4] KMC, The Emerging Fintech Sector in the Philippines, 03 May 2020, available at https://kmc.solutions/blogs/the-emerging-fintech-sector-in-the-philippines/ (last accessed 07 Feb 2021).

[5] Philstar Global, Fintech Play Crucial Role Post-COVID, 21 May 2020, available at https://www.philstar.com/business/2020/05/21/2015360/fintech-play-crucial-role-post-covid-bsp (last access 07 Feb 2021).

[6]  Id.

[7] Banko Sentral ng Pilipinas, BSP Unveils Digital Payments Transformation Roadmap, 12 October 2020, available at bsp.gov.ph/SitePages/MediaAndResearch/MediaDisp.aspx?ItemId=5573 (last accessed 07 Feb 2021).

[8] Bangko Sentral ng Pilipinas, Open Finance Circular, available at https://www.bsp.gov.ph/Regulations/Issuances%20of%20Policy%20ExposAure%20Drafts/Open%20Finance%20Circular_Final%20Draft_%20120720.pdf (last accessed 07 Feb 2021).

[9] PhilStar, BSP Circulates Open Banking Framework, 14 December 2020, available at https://www.philstar.com/business/2020/12/14/2063546/bsp-circulates-open-banking-framework-stakeholders (last accessed 07 Feb 2021).

[10] Id.

[11] Manila Bulletin, BSP Proposes self-governing finance body, 10 December 2020, available at https://mb.com.ph/2020/12/10/bsp-proposes-self-governing-open-finance-body/ (last accessed 07 Feb 2021).

[12] House of Representatives, House Bill 05913, available at https://www.congress.gov.ph/legisdocs/basic_18/HB05913.pdf (last accessed 07 Feb 2021).

[13] Manila Standard.net, BSP backs Salceda’s virtual banking, 15 September 2020, available at https://manilastandard.net/mobile/article/334244 (last accessed 07 Feb 2021).

[14] Id.

[15] Id.

[16] Investopia, Open Banking, available at https://www.investopedia.com/terms/o/open-banking.asp (last accessed 07 Feb 2021).

[17] Blockchain is an open, distributed ledger that records transactions safely, permanently, and very efficiently. For instance, while the transfer of a share of stock can now take up to a week, with blockchain it could happen in seconds. Blockchain could slash the cost of transactions and eliminate intermediaries like lawyers and bankers, and that could transform the economy. (Harvard Business Review, Truth About Blockchain, Jan 2017, available at https://hbr.org/2017/01/the-truth-about-blockchain (last accessed 10 February 2021).  

[18] Public Key Infrastructure (PKI) allows users of public networks like the Internet to exchange private data securely. PKI is essentially a set of hardware, software, policies, personnel and procedures needed to create, manage, distribute, use, store and revoke digital certificates. ( Department of Information and Communications Technology, Philippine National Public Key Infrastructure (PNPKI), available at https://dict.gov.ph/pnpki/ https://hbr.org/2017/01/the-truth-about-blockchain (last accessed 10 February 2021). 

[19]  Amending Republic Act No. 1405, Presidential Decree No. 1792, § 2 and 3; and New Central Bank Act, Republic Act No. 7653, § 135.