Benel D. Lagua l June 30, 2023 l Business World
One of the many lessons of travel is exposure to how other economies embrace the need for interoperability of their payment systems. The Philippines has always been parochial with the seeming unwillingness of the big boys to make their programs, cards, and payment systems talk to each other in a seamless interface.
Consider the smart card systems of places like Hong Kong, South Korea, and Taiwan. The extensive rail network in Hong Kong makes use of smart cards that are interoperable in all railway routes and even in buses. Its Octopus Card is one of the world’s most extensive contactless stored value smart card used by 98% of HK population with 15 million transactions daily worth approximately HK$220 million. It has over 3,000 service providers like convenience stores, supermarkets, fastfood restaurants, petrol stations and vending machines. It even has non-payment purposes like school attendance and access control.
The same is true in South Korea with their T-Money Smart Cards usable in all Korean railways system around the country making traveling a breeze. Interestingly, the T-Money System is being operated by Korea Smart Card Co., Ltd, of which is 34.4% owned by Seoul Metropolitan City Government. The Easycard or Yoyo card used in the Taipei MRT system can also be used in convenience stores, department stores, supermarkets, taxis and other retailers. One of the major shareholders includes the Taipei City Government.
The jeepney modernization program requires the installation of an electronic stored value system for payments. We need an interoperable smart card system that will work in whatever form of conveyance one uses. Most franchise operators, however, want their own system in play. We need one big consolidator. And it should be a card that works with MRT, LRT, Carousel buses, etc. Should government play a major role?
In the payment field, The Economist recently wrote about the “digital payment revolution in India”. The Unified Payments Interface (UPI) is a platform that allows free and fast account-to-account transfers using fintech apps such as PhonePe or Google Pay. Unlike Alipay in China, it is open, so users are not locked into a single company and can take their financial history to competitors. And it is facilitated by QR codes or easy-to-remember virtual IDs.
Overall, it processed over $1 trillion in transactions in 2022, equivalent to a third of India’s GDP. UPI also benefited by the need to transact without cash during the pandemic. It has grown from around 17% of 31 billion digital transactions in 2019 to 52% of 88.4 billion transactions by 2022. India leads the world in real-time digital payments.
In the Philippines, the BSP has pronounced its 2023 target of converting 50% of the total volume of retails payments into digital form. It also aims to expand the financially included to 70% of Filipino adults by on boarding them using payments or transactions account. The Philippines reportedly made one of the highest digital payment transactions in Southeast Asia in 2022, next to Indonesia and Thailand. The future looks bright especially since 74% of our population is estimated to own a smart phone. According to statistics.com, however the volume of digital payments made remains 20% short of the BSP goal.
An open payment system is a model that works best for low-value payments in developing countries. It is an alternative to both the bank/card model of rich countries and the closed fintech systems now operating in this country. State support is critical to open platform success, as demonstrated by India’s central bank.
Given the desire of the present top companies to defend their turf, a Philippine open system seems out of reach. However, some type of exchange and interoperability must nonetheless be put in place. Otherwise, the bigger ones will end with huge market power which may result to downsides whenever there is economic domination.
To be fair, the BSP has launched an open finance framework to enable portability, interoperability, and collaborative partnerships between BSP supervised financial institutions and fintech players. Yet, cursory research reveals no less than 12 payment gateways and almost 200 fintech companies operating in the country, aiming to provide alternative facilities in terms of electronic payments.
Our system with many players may eventually be cornered by a few. When this happens, we will be mirroring the China duopoly of Alipay and WeChat which has led to nervousness by the Chinese government. Our regulators must be constantly reviewing the landscape. The payment models need not be either/or choices. There must be a middle ground between the open system and what we have right now.
*** Benel Dela Paz Lagua was previously EVP and chief development officer at the Development Bank of the Philippines. He is an active FINEX member and an advocate of risk-based lending for SMEs. Today, he is independent director in progressive banks and in some NGOs. The views expressed herein are his own and does not necessarily reflect the opinion of his office as well as FINEX.