Challenges and Policy Interpretation in the Philippine Payments Industry

The Philippine payments industry has grown rapidly in recent years, but also faces multiple challenges. The following is a professional analysis of the current state of the industry, core challenges and the policy environment:

I. Industry Status and Growth Drivers

1. Digital payment penetration: 40 million e-wallet users in 2023 (36% of the population), but cash still accounts for 70% of retail payments
2. Key Player Landscape::
   • Traditional banks: BDO Unibank, Landbank
   • E-wallets: GCash (60% market share), Maya (formerly PayMaya)
   • Cross-border payments: Western Union, Ria
3. Infrastructure bottlenecks::
   • Bank account penetration is only 56% (BSP data)
   • Less than 20,000 ATMs nationwide

II. Core operational challenges

1. Compliance Costs Surge::

   • AMLC anti-money laundering regulations require reporting of every transaction over P500,000
   • Bangko Sentral ng Pilipinas (BSP) imposes a "three-tier licensing system" for payment institutions, with minimum capital requirements ranging from P1 million to P100 million

2. The issue of the technological divide::
   4G coverage in rural areas is less than 40%, leading to a blockage in the promotion of QR code payment

3. Cross-border Settlement Pain Points::
   PHP-USD settlement through the Philippine Clearing House (PCHC) takes 48 hours on average, slower than ASEAN neighbours30%

III. Analysis of key policy developments

1. Regulatory framework for digital banking(2020):

   • Separate categorisation of digital banking as a subcategory of commercial banking
   • Requirement to maintain a capital adequacy ratio of 121 TP3T (higher than 101 TP3T for conventional banks)

2. National Retail Payment System (NRPS) Progress:
   Government mandates access to InstaPay and PESONet for all public institutions, but actual access is only 62% (as of 2023Q2)

3.Exchange Control Special Provisions::
In accordance with the Foreign Exchange Transactions Act, non-bank payment institutions handling cross-border remittances are required to hold an additional reserve in US dollars equivalent to 15% of average monthly transaction volume

[Strategic recommendations]

For companies planning to enter the Philippine market should focus on.

• Changes to the Financial Inclusion Index (FII) assessment indicators being introduced by the BSP
• Special provisions on biometric payments in the FinTech Sandbox Regulation
• Potential Impact of the SEC's Upcoming STO (Security Based Token) Regulatory Framework on Crypto Payments

Under the current window, it is recommended to prioritise the establishment of a joint venture entity with a local licensee such as Voyager Innovations to circumvent the foreign equity restrictions (currently a maximum of 40% is allowed)

In-depth analysis and strategic recommendations for the Philippine payments industry (continued)

IV. Emerging trends and market opportunities

1. The Rise of BNPL (Buy Now Pay Later)

   • Market size reaches $2.5B by 2023, growing at a CAGR of 45% (Key Players: GCash GGives, Maya Credit)
   • BSP requires BNPL providers to hold a finance company licence and comply with the 30% maximum interest rate restrictions

2. CBDC (Central Bank Digital Currency) Trial

   • BSP launches "Project CBDCPh" pilot with two-tier architecture (wholesale interbank + limited retail scenario)
   • Participation in testing cross-border remittance applications is currently limited to Landbank and DBP.

3. Breakthrough Points in Embedded Finance

   • Grab Financial and CIMB Bank Launch Joint Accounts with 'Direct Account Opening in Super App' Model
   • New SEC rules require such services to be approved through the Hybrid Financial Licence

V. Analysis of critical compliance paths for foreign capital entry

[Live Case] GCash's Anti-fraud System Borrowing

• AI wind control system "FraudMark" real-time interception rate of 98%, key elements:
  1. SIM card binding biometrics (mandatory face + voice authentication)
  2. GIS geolocation tracking of anomalous logins
     3) Cooperation with the US anti-fraud agency Feedzai to establish a blacklist library

[Regulatory red line warning]

Recently the BSP has focused on combating the following behaviours:

• Over-limit operation of "Agency Top-up Shop" (maximum aggregate amount of PHP1 million in a single day)
• Undeclared OTC exchanges for stablecoins such as USDT
• Mismanagement of "Sleeping Accounts" (no trading account for 12 months must be re-KYC'd)

[Key policy windsocks for 2024]

1. Launch of the second phase of the Open Banking Framework: mandatory sharing of customer data through APIs by all commercial banks (subject to ISO 20022 compliance)
2. NRPS upgrade programme: targeting PESONet clearing from T+1 to T0 by 2025
3. FATF assessment follow-up: Philippines failure to move off grey list could trigger stricter CTR (Cash Transaction Reporting) threshold cuts

For those already operating in the Philippines, it is recommended that this be done immediately:
✓ Annual compliance audit deadline for EMI licensees is 31 March each year
✓ Completion of technical modifications for NRPS system interfacing by Q3
✓ Reserve liquidity in United States dollars equivalent to three months of operating costs to cope with possible exchange rate interventions

The need for operational details in a specific area can be further explored.

In-depth strategic layout and implementation programme for the Philippine payments industry

VI. Breakthrough Strategies in Segmented Markets

1. The last-mile attack on rural financial inclusion

   • The Barangay Pay Hubs programme (Village Agent Points) is being implemented in conjunction with the local government and each site is required:
     ✓ Equipped with BSP-certified Biometric POS terminals
     ✓ Agents complete 80 hours of financial compliance training
   • Policy bonus: 21 TP3T VAT relief on rural digital transactions (until end 2025)

2. Cross-border e-commerce payment solution design

   • For the special needs of Lazada/Shopee sellers:
     - PHP-CNY direct connection settlement channel (avoid SWIFT, save 1.8% exchange loss)
     - Dynamic Margin Mechanism (Freeze 20% when the transaction volume exceeds $500,000 in a single month)

3. OFW (Overseas Labour Remittance) Ecological Reconstruction
   | traditional model pain points | innovative solutions |
   |————–|————–|
   | Western Union averages 6% fee | Stablecoin Corridor Network (PHP-USDT-HKD, cost suppressed to 1.2%)|
   | KYC Duplicate Verification Takes More Than 3 Days | MyInfo Philippines' National Digital ID Automated Verification System Docking|

VII. List of technical architecture compliance points (based on BSP Circular No. 1088)

• ☑️ must be deployed in a co-located dual-active data centre, with a primary and backup centre ≥ 50 km apart
• ☑️ All sensitive data encryption is required to be FIPS 140-2 Level 3 compliant
• ☑️ automatically reports all-day trading heatmap data to BSP at 3:00am daily.

[Cost Structure Optimisation Example] Maya Wallet's Operational Model Demolition

Customer acquisition cost per user (PHP):

- Facebook Ads 85 pesos 

- OTC agent commission 120 pesos 

- GrabApp infusion 60 pesos 



Profitability balance point analysis:

→ Requires an average of 23 transactions >200 pesos per year by a single user

→ Government subsidies can cover the O&M costs of 151 TP3T rural users

[Recommendations for RegTech tools]

1️⃣ Chainalysis Reactor for virtual asset monitoring (meets BSP AML Circular 942 requirements)
2️⃣ SAS AML enables real-time risk scoring of millions of transactions scanned every 10 minutes
3️⃣ Jumio KYX platform offers eKYC process in compliance with the Philippine Identification Act

[Crisis Response Plan] When the following scenarios are encountered:

🛑 BSP unannounced inspection of IT systems → Immediate initiation of ISO22301 Business Continuity Plan BCP's Chapter 7 process
🛑 PCHC clearing system down → automatically switch to BAHTNET Thailand as emergency channel (500 million baht pre-deposit required)
🛑 USDT rate fluctuates dramatically → triggers algorithmic hedging instruction to open a reverse position in Binance PH contract market

[Timeline of key landing steps for 2024]

gantt

    title Payment Licence Application Timeline (EMI Category)

    dateFormat YYYY-MM-DD

    

    section Pre-Application Phase    

    Feasibility study :done, des1,2024-01-01,30d    

    Registration of Local Legal Entities :active,des2,2024-02