Keeping the fintech explosion under control

While the country’s supervisory agencies – notably the Bangko Sentral ng Pilipinas, the Department of Trade and Industry, the Securities and Exchange Commission, and a few economic zone authorities – are bullish about the growth of fintech innovation and the financial sector’s digitalization, an air of caution continues to permeate.

This is well and good, given the risks that come in dealing with financial transactions on digital platforms. Already, Filipinos are taking to digital wallets like ducks to water, with the estimated business transactions in 2018 already worth over P36 billion.

Even if this represents participation of less than a third of the population, the growth in recent years has been by leaps and bounds coming from the explosion of commercial services that offer digital transactions – from buying products online to having food delivered to hailing a ride or subscribing to media.

Admittedly, the Philippines is still a laggard compared to other countries in Asia when it comes to embracing fintech despite the laws and regulations passed in recent years to encourage the formal banking system and startups to introduce innovative digital financial systems.

The BSP has been at the forefront of introducing initiatives aimed at encouraging financial digitization in the belief that this would hasten inclusive growth. Surveys have shown that the Philippines has still one of the biggest unbanked sectors in the world, pointing to an underutilization of financial resources by small and medium enterprises.

Still, some marked improvements have been seen, and if we are to believe projections made by fintech watchers, transactions through digital wallets alone in the Philippines could reach as much as P88 trillion by 2021.

Opaque operations

The problem with fintech, especially these days when innovation continuously renovates the landscape, is the opaqueness of its operations. Whereas before, brick-and-mortar banks would personally scrutinize their clients, digital banking today uses scores of third party intermediaries and linkages. 

These transaction intermediaries have been responsible for bank customers’ rising satisfaction in the banking system, allowing them to open an account with ease, monitoring their bank wallets real time, and even enjoying lower fees on and faster cross-border and cross-currency dealings.

All these endearing conveniences, however, have opened up new risks for the financial system, something that the BSP as the primary guardian of all matters regarding banking in both traditional and emerging sectors is too aware of.

It is doing the best it can, though, to keep up with the times when balancing consumer safety with the insatiable demand for better banking ways. Managing risks, however, is not always 100 percent successful even with the slow and measured pace of regulatory interventions.

‘Sandbox’ learning

If there is one area where the BSP has been able to pull off the right balance of digitalization without unduly magnifying risks in financial dealings, it is with e-money system that innovators wanted to introduce in the country at a time when there were no comparable systems in place in other countries.

This was in 2004, and it took five years before the BSP was able to pass regulatory statutes that would guide the e-money ecosystem. Since then, there has been a marked increase in the number of players in the e-money ecosystem, but avoiding any marked risks.

The successful implementation of e-money purses is the result of the BSP adopting what it calls as its “sandbox” learning environment. Here, fintech innovators are allowed to operate on a pilot basis while the regulator closely monitors and identifies strengths and weaknesses critical to drafting a regulatory framework.

However, using pilot testing and the sandbox environment may only be successful during those years when fintech was almost unheard of, and banking regulators had only to primarily think of formal banks as their only wards.

Changing times

Today, the fintech explosion is imminent for the Philippines, and its new entrants will likely not be as polite as e-money innovators who had willingly accepted a pilot test period and patiently waited for years before being given the green light to commercially operate.

Government financial regulators around the world are running after hundreds of new ideas that thrive on digitization when handling money via cyberspace. And these are definitely not confined to the currently tame digital payment schemes available through apps on mobile phones.

The Philippines has been enjoying sustained economic growth now for two decades, and with all the laws passed in recent years, new doors are opening that would bring the unbanked underground economy to desperately seek lending sources to expand their businesses and keep up with consumer appetite.

Microentrepreneurs will be exposed to more risks as online peer-to-peer (P2P) lending channels, for example, sprout out to provide access to loans that the formal banking system cannot readily give.

While the government supports the empowerment of micro, small, and medium enterprises (MSMEs), it has not been able to open up the traditional lending channels to support entrepreneurship growth.

MSMEs are a sleeping force just about ready to wake up to take advantage of new and emerging fintech innovations. Fintech startups, on the other hand, are hungry for a user base. Both may not be able to wait out the government’s testing and prototyping cycles, especially if there will be extreme demand pressures.

Our government regulators, even the conservative and cautionary central bank, may find their hands too full to react and respond to avert a crisis should a fintech explosion become unwieldy. Hopefully, by staying several steps ahead, they will be able to set up barriers to undermine risks.

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