For decades, enabling payments remained one of the banks' many focus areas. But not the only one. When it comes to payments, Philippines banks are at a crossroad.
The massive digitisation and embracing of the digital economy saw industry players and consumers making digital payments crucial. A Mastercard report showed how much digital payment behaviours and experience impact top and bottom lines. The same expectations are now seeping into the banking industry where customers expect their financial services provider to enable payment convenience.
Local regulators are also expanding their focus. While they have increased their scrutiny of the payment infrastructure for fraud, PEP (politically exposed person) transactions, and illicit trade, they are also pushing banks to adopt these new payment methods and encourage local innovation.
The disruption wrought by digital payment adoption is disrupting the banking model. But it also unearths new opportunities for banks to play a major role in driving payments and becoming a key ecosystem player. But are banks, especially those in the Philippines, ready? A roundtable, organised by Cxociety with fintech behemoth Finastra and an open-source leader Red Hat, invited key banking leaders to share their thoughts.
Digital payments provide a wakeup call
In a highly regulated industry like banking, the bar for entry has been traditionally high. The high compliance effort and stringent guidelines led to a closed system, transfer and collection fees, and close scrutiny of transactions for fraud.
Convenience was not the focus for many banks. For those in the Philippines, there was little infrastructure to support local automated clearing house payments while consumer payments became concentrated with cash and cards.
Meanwhile, merchants faced a high merchant discount rate (MDR). Instead of paying this rate issuing banks for settling payments via major credit card companies, many encouraged cash payments. Three trends changed the status quo. First, the number of locally accessible payment methods exploded, along with the need to support them. From Apple Pay to WeChat Pay, consumers were knocking on the doors of banks to expand the range of payment options, noted Katrina Gonzales, senior manager for innovation and portfolio management at Standard Chartered Bank.
Second, regulators, like Bangko Sentral ng Pilipinas (BSP), expanded their focus from merely protecting the consumers to enabling innovation to empower them. At the same time, BSP, like regulators around the region, lowered the barrier for entry for licensed fintechs and non-bank financial corporations (NBFCs) while encouraging incumbents to shift toward open banking, observed Liz Rogando, head of collections strategies and innovations at Metropolitan Bank & Trust.
Lastly, COVID-19 altered the payment behaviours of Philippine consumers and corporations. With bank branches closed during lockdowns, they shifted focus to digital banking. And this behaviour shift was also not limited to demographics, education levels, or affluence. Most had to change to cope with the healthcare measures, get quick loans and receive cash relief.
As the economies look to recover from the initial lockdown economic pains, the industry's focus on digital payments remained strong. “I think the acceleration [of the payment industry] will continue because consumers are now used to it; they're expecting seamless frictional transactions and their payments embedded in not only their bank apps but other apps as well,” said Paul Snee, managing director, for global solution consulting for payments at Finastra.
Dheeraj Joshi, regional head of solution consulting for payments at Finastra, agreed. “So, once the customer behaviours have changed, you can change the system.”
But as the roundtable participants noted, changing systems is never easy in banking.
Reworking the system
After seeing the positive impact of digital payments, the Philippine Government is strengthening its Digital Payments Transformation Roadmap 2022-2023. In June 2021, BSP launched its Open Finance Framework, which detailed policies for portability, interoperability, and collaborative partnerships between BSP-supervised financial institutions and fintech players.
It saw the entry of significant payment players like GCash and PayMaya. The industry also welcomed digital banks like Overseas Filipino Bank (acquired by Landbank), Tonik Digital Bank, and GOTyme to change the banking landscape.
“I think banks are going to upgrade the infrastructure and system to support, and there will be a lot of demands coming from the consumer side,” said Finastra’s Joshi.
Dennis Sobrepena, tribe lead for financial services & data monetisation at GCash, who sees payments as the “bread and butter” of his company, understands the challenges in building agile, scalable, and robust infrastructures.
“We are still trying to catch up. We are talking to people and partnering with them to look for a solution that will help us go where the market is going,” he explained.
One quick lesson that Sobrepena learned is the importance of finding the right partner. “The enormity of volumes daily and the transaction per second is an enormous task for all the tech guys,” he noted.
However, he noted that some partners were suitable for supporting the first 1 million customers. But to scale to 10 million, you may need to look for a different partner. It is one reason why GCash is using a multi-cloud platform to optimise its payments and transaction workload performance.
Arvind Swami, director for financial services in the Asia Pacific at Red Hat, pointed out that this call for better agility, openness, and scalability is changing how banks approach technology.
He explained that it took “six to nine months” with legacy technology infrastructure to add new feature functionality. The new architecture built on microservices and containers that leverage DevOps and the continuous integration/continuous development (CI/CD) pipelines is allowing companies to launch services and features much faster.
“This means you are giving your business the agility to move faster. This also means you’ll be able to pivot to a certain business situation quickly and easily,” continued Swami.
Growth by spikes
In the Philippines, digital payments are hitting a new crescendo. In its Forging Pathways to a Cash-Lite Society, BSP noted that the volume of digital payments hit 20.1% of total average monthly payments; in 2019, it was 14%.
Now the organisation is looking to achieve a 50% target by 2023, which is aligned with its Digital Payments Transformation Roadmap. Banks must also work with fintechs and platform providers to meet this target.
One big challenge is that payment growth does not come in waves or gentle curves; it comes as sudden spikes. “This is why you want to leverage the hybrid cloud because you might not have all the infrastructure needed in your data centre to cater for [these spikes],” said Red Hat’s Swami.
He also urged banks to use embedded APIs “to expose yourself and your capabilities to the market.”
The roundtable participants agreed that proper infrastructure was vital for enabling payments. But, for Christopher Go, country fraud manager at Union Bank of the Philippines, it also meant addressing the other question: rampant digital fraud.
“Your systems need to be equipped for a [payments] initiative. Otherwise, you'd be exposed to a lot of fraud. One of the top drivers of fraud in the country is scams,” he added.
To scale fast and handle spikes better, one of the routes that banks can take is to build a hybrid cloud architecture. Companies like GCash are also exploring multi-cloud options.
“Much of the reengineering is going around building API factories within the bank. So that they can take advantage of our banking and banking as a service, which is now emerging trends."
Paul Snee
He offered one example where companies could embed the HSBC FX service for cross-border payments. Finastra also recently signed a global agreement with Visa to use their direct network for cross-border payments by embedding APIs within banks.
Red Hat’s Swami added that banks should not stop embedding APIs. They should also examine their core services and be ready to re-engineer them for payment growth spikes and other services.
“We have seen a huge surge of things like buy now pay later (BNPL) low value, high volume transactions that can be enabled using APIs. But the core engine [of the bank system] needs to be able to cope with those types of volumes."
Arvind Swami
Banks also need to understand the role of payments will only evolve — and quickly. One delegate to the roundtable commented: “we have to have them make the collections earliest as possible, but for the one making the payment, allow them to make the payment at the latest. This is where technology comes in.”
“All these technologies enable banks to have better scalability and go quickly to the market. And of course, all these technologies combined with a solution is helping to push the digital transformation, especially on the payment side,” added Joshi.
New opportunities on the horizon
2022 introduced fresh headwinds. A new European conflict, new supply chain shocks, high inflationary pressures, and a possible recession looming on the horizon are adding additional stress to the traditional banking system. All these challenges demand a banking system that is agile and flexible to the diverse demands on the industry.
It’s clear that the days of banks working within closed and mutually exclusive ecosystems are coming to an end. On the digital payment side, Philippine banks have an opportunity to redefine their role in the customer banking journey and rebuild new open ecosystems with other fintech players. It even allows them to consider digital payment as a service or pivot to offering API-driven payment services to different platforms.
But to maximise these opportunities, Philippine banks need to make some hard decisions. “The factors are how to do the interoperability, how to remove the dependency on the legacy system, and how to bring this new API economy to your game,” said Finastra’s Joshi.
"They also can’t do all of this alone. Instead of trying to play catch-up, it becomes more sensible to work with partners. “Because they can't do it alone, they need to have a partnership. So what we are seeing right now in the market, more partnership-driven or ecosystem-driven use cases."
Dheeraj Joshi
New regulations on the horizon are also adding a new level of urgency to transforming the payments infrastructure. “COVID-19 has brought the acceleration and the digitalisation of the economy of the Philippines, and that will only continue and accelerate driven by the central banks and their policies. The existing players need to look at how to modernise the payments, architecture, the payment landscape so that they can take advantage of new revenue streams and those new partnerships as they go,” added Snee.
For example, the new ISO 20022 standard looks at a single standardisation approach for all financial standards initiatives. Meanwhile, the E.U. is looking to introduce the Digital Operational Resilience Act (DORA), which Red Hat’s Swami thinks will also be deployed in some form across the region. The retail payment strategy is a vital part of DORA.
“I think, based on this conversation, it is very clear there's a massive digital transformation going on in the Philippines. They need the right infrastructure and be native-cloud and microservices-ready to support the open banking and open APIs,” said Finastra’s Joshi.
