Mamerto Tangonan, deputy governor of the Bangko Sentral ng Pilipinas (BSP), and head of the Payment and Currency Management Sector (PCMS), is tasked to address the interplay between digital money and physical currency, and support the digital transformation of the Philippines’ financial services industry. He leads PCMS in maintaining and strengthening the Philippine Peso, as well as ensuring a well-functioning payments and cash ecosystem that fosters long-term economic growth. He brings with him over 28 years of experience in digital and traditional financial services, telecommunications, technology, financial inclusion and consulting services.

The following key points were discussed:

• BSP aims to have 70% of Philippine adults banked, and 50% of total retail payments volume done digitally by 2023
• Providing a secure and reliable payments network throughout the Philippine archipelago
• Future plans for a CBDC
• Shifting the country to a cash-light economy

Below is the transcript of the interview:

BSP aims to have 70% of Philippine adults banked, and 50% of total retail payments volume done digitally by 2023

Foo Boon Ping (FBP): We are very excited today to be speaking with the Deputy Governor of the Bangko Sentral ng Pilipinas or BSP in short. We are speaking with Deputy Governor, Mamerto Tangonan, who is also heading the digitalisation agenda for the domestic financial services industry. We view the BSP as one of the most progressive regulators in the region today. It has been very proactive in introducing important measures to promote financial inclusion, nurture industry innovation, and accelerate the digitalisation of the financial sector, including facilitating the industry adoption of emerging technology and latest technologies such as cloud, eKYC, as well as the entry of non-bank participants.

One of the things that BSP has done as part of its digital payment transformation roadmap, and the national retail payment system to priority payment scheme is the PESONet and InstaPay that deliver speedy, convenient and secure retail payment options. With the majority of population still unbanked or underbanked, BSP is also licensing new digital banks to serve them, as well as more lucrative segments. And today very happy to be speaking with the deputy governor. And the first question is really to kind of ask about the latest in terms of milestone of the digitalisation roadmap for the industry, if you can give us an overview.

Mamerto Tangonan (MT): Yeah, thank you Boon Ping, I think you mentioned it earlier, we have the digital payments transformation roadmap that has two key goals. One is financial inclusion, and the other is of course, increasing the share of digital payments over total retail payments volume in the Philippines. So for the first, our objective is to have at least 70% of the adults owning a formal transaction account. And the second one is also to have at least 50% of total retail payments volume done digitally. Both objectives are to be reached by 2023.

And we are very confident that we are going to reach that Boon Ping. Just looking back a few years ago, the BSP has targeted to hit 20% by the year 2020. And we're very happy to let you know that that target was hit with a 20.1% share of digital payments by volume over total retail payments in the country. So recently Boon Ping, last October we launched the QR PH P2M (Person-to-Merchant Payments). So there is a QR code-based merchant payment where customers can use their mobile phones to scan the QR codes of the merchants whether they are on site, meaning they are face to face, or online and then they could complete the payment. So we are expecting that that will further drive our growth of digital payments because merchant payments alone constitute about 71% of the total retail payments volume in the country. And out of that, about 24% is digitalised. So it's a very fertile ground for growing digital payment. So that's one area that will drive our growth of digital payments.

FBP: Okay, now we know around the industry, not just in the Philippines, but around the region. One of the factors that has accelerated the adoption of digital has been COVID-19 and the social distancing measures that came along with that, and it spawned the growth of e-commerce, and even e-commerce cross border. We hear from the banks in the Philippines that it spawned a growth of local, or domestic entrepreneurs, how that has driven usage? Could you give us an update of e-payments, digital payments usage during this period?

MT: Boon Ping just as I've mentioned earlier, in the year 2020, we hit 20.1%. And that growth was driven largely by merchant payments, as well as P2P, (person to person payments). But as you've mentioned, with the mobility restrictions, to contain the pandemic, as well as safety reasons, people really tried digital payments. And I'm happy to let you know, Boon Ping that even now, with the opening up in a safe way of the economy, we can see the stickiness of digital payments. And the growth is not stopping, it continues to rise.

So we would like to capitalise on these shifting consumer preference for digital because, as you know Boon Ping, many experts say that this this pandemic, or it's the health risks is not going away soon.

And some even say that we need to move from pandemic towards endemic mode, or living with this virus. It is very important to really leverage on digital payments to not only sustain the economic activity, but to drive further its growth despite the constraints posed by this virus.

FBP: And as you’ve mentioned, hitting the 20.1% usage, a lot of it is merchant driven. And with QR code, it's facilitated the acceptance of micro payments, even among small merchants or micro merchants with the introduction of QR code, and I think many countries around the region as they introduced mobile wallets, digital wallets, there's the need for interoperability, common standards, and so on so forth. Tell us more in terms of facilitating the adoption of a common QR code standard, and the use of QR code for peer-to-peer payments, and also corporate payments, especially request to pay and so on and so forth that drives volume.

MT: Yes. So as I've mentioned, we have launched the QR PH P2M. And you mentioned request to pay Boon Ping. That is in our pipeline. The industry together with the BSP, we will make that available in the market by middle of next year. So really, there's a lot of excitement in the market over here Boon Ping, because of these developments. You must have heard also last Monday, we signed a cooperation agreement with the Monetary Authority of Singapore to embark on make available in the market, a cross border instant payment system. We're very excited.

FBP: Okay, with that interoperable kind of mobile digital real-time payments with MAS. Now, there's a potential of also joining an existing agreement with PromptPay and Bank of Thailand and Singapore, and now BSP and potentially Indonesia, and Malaysia as well.

MT: Yes, so in our discussions with our counterparts, we had a meeting of the minds in terms of endeavouring to have an arrangement that makes it easy for other countries to join that. It could be a multilateral arrangement, although we will start bilaterally between Singapore and the Philippines. But we are in agreement that we should make it easy for other countries to just connect or plug in.

FBP: Okay, because among the countries within the region, the Philippines is on a multilateral basis, being one of the big destinations for remittance flows.

MT: And it continues to grow. Despite all these travel restrictions, our inbound remittances continue to grow. And this is an important part of our economy. So, we would like to facilitate those remittances. Singapore is one of our top sources of tourism in the Philippines, among the ASEAN countries, so we would also like to (make it possible) when you come visit us Boon Ping, that you could use your mobile phone to shop around and get yourself the things that you need.

FBP: Business investments as well, commerce. You’re a big destination for business process outsourcing. The Asian Banker has based our editorial and research capability in Manila.

MT: I'm glad to hear that Yeah.

Providing a secure and reliable payments network throughout the Philippine archipelago

FBP: And now the other aspect. As we go digital as more and more payments become digitalised, through instant payment network, and through what we call digital wallet, or mobile wallet, the increasing incidence of fraud, especially in terms of cyber fraud, payments fraud so on so forth. How is BSP looking at that area of fraud prevention? And obviously, one of the things that have been tested during this COVID-19 is operational resilience of the industry.

MT: Thanks Boon Ping for that question. Actually, the cybersecurity in the banking system falls within the purview of my colleague, Deputy Governor Fonacier. But, what I can say is that we have a team in the BSP that looks at cyber resilience of the of the financial sector. And our current regulations are aligned with the global principles and standards. So it's been holding up very well. And of course, with rising transaction volume, you would probably see also some increase in the number of attempts, but what's important is to have a resilient system that can prevent and withstand all these.

FBP: Okay. And in terms of digitalisation, or digital transformation of institutions within the sector, as they go digital, there's greater adoption of open API's that facilitate connectivity between institutions as well as between third party service provider, right? So the industry is talking about building ecosystem around customer needs, whether they are individual consumers or they are SME corporates and so on. For that API is very important in terms of creating common standards as well, right? Common standards to ensure safety and security and so on, so forth. The industry must be wary of connectivity standards, as well as going to the cloud. You are one of the jurisdictions to facilitate the industry. So you have banks like UnionBank has gone fully cloud and so on and so forth. And also. in terms of introducing eKYC, and allowing for digital onboarding and so on and so forth. Tell us more about those.

MT: On the on the cloud computing Boon Ping, we also have a rural bank that's actually on the cloud. It's Cantilan Bank, it's a rural bank that has put its core banking system in the cloud. And you're right. Many of the existing banks have adopted digital onboarding. They've leveraged electronic KYC. And so we are looking at these components to really drive even low income, or informal, or small, and micro enterprises to really get on board digitalisation. I'm happy to share with you that in 2019, based on our financial inclusion survey, there was an increase in the account ownership base among the Filipino adults. I'm happy to share with you that that growth was also driven by a growth in the account ownership in the social economic class E. So that is the base of our pyramid, the target segment. And so people are getting on board, and we're happy that they're realising the advantages and benefits. And with this QR PH P2M Boon Ping, we're working with the industry to really onboard even informal intrapreneurs. So that, number one, we will be helping or will be contributing in the effort to formalize this sector and number two, they will have deeper financial inclusion. They will have better access to the financial tools that will help them not only grow their businesses, but also their quality of lives.

FBP: Okay, talking about rural banks that serve regions outside of Metro Manila, Philippines is an archipelago and one of the challenges is last mile delivery of financial services and key challenge has always been infrastructure in terms of telecommunication, in terms of mobile connectivity. In that aspect, the availability of 3g, 4g, potentially 5g could you tell us about how that fit into the overall roadmap in terms of facilitation of greater broadband connectivity?

MT: Thank you for that. We believe that digitalisation is really a key driver towards financial inclusion and also broader based economic growth. And that's why our financial sector is very well positioned to achieve these objectives through digitalisation. One way we are addressing the digital coverage concern is, we are supporting government policies that will result to better connectivity and more efficient services. For one, we supported the executive order allowing internet service providers to access satellites. As you said, we are an archipelago and one cost efficient way of connecting would be through the use of satellites. We're very glad that the President has signed the executive order for internet service providers to access satellite services to provide internet to the customers. And I believe that with implementing rules and regulations, if not yet out, is about to be released. And the second is BSP has been strongly advocating for the open access to data transmission policy of the government. This will allow internet service providers, even those without franchises, to provide internet and digital coverage to the public.

With these impending reforms, we hope to further expand the connectivity. And it's not just connectivity. Before, for you to open an account you need proper identification, and previously, we were lacking in that. A large portion of our unbanked population, they cite the lack of documentation as their constraint. And so the government has started the digital ID programme, the national identity programme based on digital IDs. The BSP is very happy to contribute to that by producing the plastic cards that will be used by our population. Nevertheless (even without the cards), for as long as people know their ID number, then they should be able to register because it's digital. Okay. So that's one way of really even driving financial inclusion and broad-based economic growth through digitalisation.

FBP: Could you share with us the timeline for both the satellite internet connectivity, and the digital national ID. The national ID include not just ID numbers, but also biometric information?

FBP: You’re right Boon Ping, it includes the capture of the biometric information of the citizen by way of facial recognition, iris scan, and also the fingerprint scan. So these are used to know if there's a match with the ID number that the customer in front of the service provider is claiming to have. So you're right, it's got those features. And for this year, as we speak, there have already been 40 million Filipinos who have registered in the national ID system. And I'm very happy to share with you Boon Ping, that we have a parallel programme offering bank accounts to those who register and do not have yet a bank account. So we co-located at least one bank, in those registration sites, so that people may choose to open an account. Very happy to share with you that more than 5 million have opened accounts for the first time because of this arrangement.

FBP: That is very exciting.

MT: Yes. Because we have a target, 70% Filipino adults by 2023.

Future plans for a CBDC

FBP: Now moving beyond digitalisation and eKYC onboarding for financial inclusion and around digital payments, one of the new innovations around the world involving central banks is the evolution of money right e-money and central bank digital currencies. What are the plans and thinking of BSP right now, a lot of central banks are experimenting. Tell us a little bit about what BSP is doing in this area.

MT: Thanks, Boon Ping. So BSP has completed our research on this subject based on literature from experts and multilateral agencies on CBDCs as well as those published by other central banks who have done their own research. And we have collaborated with some of them especially those who have started their pilots of CBDC and on our part we had to look where CBDC could really help us achieve our objectives. So, what use cases for CBDC do we start with, I mean what should be the purpose of the CBDC.

FBP: Retail or wholesale.

MT: Yeah, retail or wholesale and we have various use cases also over there, we have things like equity security settlement, debt security settlement, and intraday liquidity facility, and domestic foreign exchange transaction. So, out of that mix, we have identified the use cases where CBDC could really drive a huge impact given our market conditions, and also the current payments infrastructure.

So we will be focusing our research and collaboration with other central banks and work with collateral agencies to zero in on these use cases that we have identified, because we want to bring it towards experimentation. They say that the test of the pudding is in the eating, so a lot will be learned once we start our own pilots.

FBP: Okay. And potentially from what I'm hearing is that that it will tend to kind of be more focused on the wholesale side, on developing the financial markets, capital markets, in terms of efficiency. And also from a central bank and monetary policy wise, it gives the central bank greater control over exchange rate, potentially interest rates, and so on and so forth. And potentially as you explore all this collaboration, the possibility of involving in existing around the region, multi-CBDCs project, like in Hong Kong. And Hong Kong has got a joint project with Thailand as well. The Inthanon-LionRock project.

MT: Yes. We would like to really collaborate with those central banks because much has to be learned and it's great to know what can work in our markets. And you're right, the potential use case we're looking at Boon Ping. One of them would be the equity settlement market, because right now our equity settlement market is not yet settling with the central bank money. And so we think that is one area where CBDC can really do a lot of benefit.

And we see that, let's say, Canada, and even MAS is also about to pilot or have agreements to collaborate in that use case. So as I've mentioned earlier, we want to do our second round of assessment, because we really want to make sure Boon Ping that we maintain price stability and financial stability as well as the safety of our payment system.

Shifting the country to a cash-light economy

FBP: So you mentioned the use cases for security settlements, and we know for security processing, it's been a more than 50 years legacy system. The industry is moving towards new settlement capability, real-time settlement for example, or near real-time using blockchain based settlement processes, or the use of smart contract. Are you also potentially looking at those areas in terms of transforming? It is a global business, security, investment and processing and so on. So the wider industry seems to be moving in that direction as well.

MT: Yeah, those examples I mentioned to you earlier, they are all, DLT based, distributed ledger technology based, so we will certainly consider that and we will be in very close consultation and coordination with the financial industry and the market, the equities market, so that together we can accomplish this reform or make our equities settlement market more efficient and safer.

FBP: One of the areas that is very interesting that has got a nexus to financial inclusion is the whole decentralised finance area. Is that one of the areas that potentially you're looking at? Philippines is one of the first to allow, bitcoin based remittance right? You have a fintech, coin.ph, and others as well. Could you maybe, although this may not be directly under your purview, would you be able to comment on that?

MT: Thanks Boon Ping, you're right. This area is more under the purview of my colleague, DG Fonacier, but what I can share with you is that, yes, you're right BSP is regulating the virtual asset exchanges, where they exchange virtual assets to fiat and vice versa. So that's being supervised and regulated, to ensure safety, while allowing also, not only us, but the industry and the market to learn more about it. So that's what I can say about that. And yes, we're looking closely into these developments, like decentralised finance and just like how we started with CBDC, I'm sure it will go through the same process of diligence, study, assessment, prior to adoption.

FBP: There's a lot of innovation that is available. Although a lot of central banks are also concerned about investor protection in terms of these assets. Are they utility tokens, or are they medium of exchange, or are they storage of value? Right. So I think is interesting what Congress in the US is doing with the passage of the infrastructure bill. And they have also defined certain definition of digital assets going forward. So I think it is an area that the rest of us are kind of keeping our eyes and ears peeled, in terms of development impact on the greater financial sector.

MT: Yes. As you know, we're leveraging on digitalisation to really reach our higher-level objectives of financial inclusion and broader base economic growth. It's why we are open to looking at these things, how they develop study them, and also leading towards adoption, if it can prove to be beneficial and they can bring us to the goals that I've mentioned to you earlier.

FBP: Okay. Maybe a final comment, we talked about economic growth, and we are potentially getting COVID under control with wider vaccination. And now with news of potential treatment, with our very effective treatment for those infected by the COVID, that will reduce mortality significantly, the prospect of reopening, and being able to resume again trade and commerce, being able to resume pre pandemic. How is your sense of growth going forward?

MT: Well, as you know, the Philippines is really on the road to economic recovery. Last second quarter of this year, our economy grew by 12%. And the government recently released the third quarter GDP growth and it's 7.1%. So, we're really on the way towards, not only hitting, but most likely exceeding the previously set growth target for this year. And we see that digitalisation is very much a key part of this, because number one, as we talked about earlier, the many experts say that this virus is not going away soon. Hence, we need to drive productivity, we need to drive trade and then commerce, even with the constraints that it is imposing. The public has already seen how e-commerce can work and many of our households have joined the business and started selling online. So this will only grow, it’s not going to go away. So that's why we are doing our part to really support it and one key component of it is digital payments, which we are continuously seeking to drive by providing the digital payment streams that the individuals, businesses, and even government can use for various payments.

For use case, next year we will be having what we call multiple batch settlement for PESONet. Currently PESONet settles once a day, at the end of the banking day; such that people and businesses that do PESONet transactions, the payee's funds will be credited at the end of the banking day. So, there is a need to make that more frequent, so that you could even drive more productive use of the funds by having a settlement. One in the morning around noon time, and by the end of banking day. This will allow people and businesses to turn their funds around and make it to a more productive use after they settle in the morning. So that's one, and then we will also be launching next year direct debits. So this will even help businesses to make their collections more efficient, even allowing, monthly rental payments, insurance bills and, similar subscription based payments to be collected by debiting the accounts of the customer. So we're really expanding that. And alongside that we're setting the infrastructure to support. Last July we upgraded our Peso real-time gross settlement system, from a legacy system to a more advanced system based on ISO 20022, which also enables us to do cross border payments more effectively, because it is a global standard for financial transactions.

So that's our so that's our PhiPass Plus. We are on it now. And it's been running very smoothly. It's able to not only cater to larger volumes of settlement transactions, but also to even more advanced and sophisticated types of transactions given the messaging flexibility that you have provided by ISO 20022

FBP: Rich data and the like.

MT: Yes, so we also established standards, like the QR PH Code. That standardised our whole QR code system, which is very important to us, because one barrier that customers had with sharing account numbers and bank accounts or bank account information is the account number is out there. So with QR code, the users feel more secure that they can collect, or they can pay even without exchanging bank details.

Plus, of course, that's on top of the convenience that QR offers. Instead of typing, and sometimes even making a mistake, you just scan a QR code, then you can make your payment. Last year we launched the QR PH P2P, so I can send you money, you just give me a QR code. I won't know your account number. Just give me a QR code and I'll send you funds. So after it was introduced, the growth has been remarkable. That's why we know that the same, if not higher, level of success will be achieved with merchant payments using QR codes.

FBP: Okay, with all these initiatives, payment will be more secure, more efficient. Obviously, the challenge for greater usage is also removing friction and then reducing costs as well. So all of this will add to it. And with the support of the local financial institutions that will pave the way for meeting your greater targets for financial inclusion, and for digital payments, and also ultimately replacing cash.

MT: Yes, that's our direction Boon Ping. Going from cash-heavy to cash-light.

FBP: Thank you so much Deputy Governor Tangonan for spending time with us to give us an update on the progress of digitalisation of the financial sector. Specifically on digital payments in the Philippines. It's been a pleasure. And we hope to have a catch up as some of these initiatives that you are planning forward get launched, so that the Asian banker can continue to cover those.

MT: Let's watch out for the cross border instant payment between our countries, that's going to be impactful.

FBP: Yes, we look forward to that.

MT: Thank you very much for having me Boon Ping.

FBP: Thank you. It's been a pleasure.