Sector Study of Financial Technology in the Philippines

Industry of Financial Technologies
This report on the Study of the Financial Technologies was submitted on May 3,
2016 as part of the Requirements in TM 206 Technology Marketing and
Commercialization
This Industry Study was conducted by
Alexis Dogwe
Camille Eusebio
Maurice Gonzales
Leslee May Tandoc
Al Marie Tating
under the supervision of Prof. Edison D. Cruz
Masters in Technology Management
Technology Management Center
University of the Philippines, Diliman,
Quezon City

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Contents
Executive Summary................................................................................................................... 2
Industrial Structure.................................................................................................................... 6
What is the Fintech Sector?.................................................................................................... 6
Why the sudden growth in Fintech? ...................................................................................... 7
How fast is the Fintech sector growing? ............................................................................... 7
What are the subsectors under the Fintech sector? ........................................................... 9
Who are the global market players in the Fintech sector?............................................... 10
Notable Fintech Startups in the Philippines........................................................................ 11
FinTech Sector and Financial Inclusion .............................................................................. 12
Macro-environmental trends ................................................................................................. 14
Social, Cultural, Demographic and Environmental Forces............................................... 14
Political, Governmental and Legal Forces.......................................................................... 15
Technological Forces............................................................................................................. 16
Economic Forces.................................................................................................................... 18
Task Environment .................................................................................................................... 20
Value Chain ............................................................................................................................. 20
1. Traditional Value Transfer......................................................................................... 20
2. Decentralized Payment Schemes............................................................................ 21
3. Non-traditional Payment Schemes .......................................................................... 23
Porter’s Five Forces – Payments Industry.......................................................................... 24
Market Segments...................................................................................................................... 28
Market Segment of Digital Payments According to Usage .............................................. 28
Market Segment Based on End Users (Consumers)........................................................ 32
Market Segment Based on End Users (Merchants/Enterprises) .................................... 35
Conclusion ................................................................................................................................. 37
Recommendations ................................................................................................................... 41
References ................................................................................................................................. 45

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Executive Summary
FinTech is an application of technology in the financial industry. It covers a
wide range of activities from payments to financial data and analyses, credit
scoring, digitized processes and payment platforms. The services provided by
FinTech companies can either be delivered to financial institution or directly to end-
customers. What started as a business-to-business services (B2B) provider,
FinTech has expanded its services to business-to-consumer (B2C) catering to
customers’ financial transactions. The emergence of peer-to-peer (P2P)
transactions have also gained significant attention in the FinTech arena as an
alternative lending platform. P2P platforms is an efficient way of lending money
because it presents less risk to both lender and borrower.
The financial sector relies on new technology to bring new products to the
market. Investments are expected to be tripled by 2018. The boom of the FinTech
sector can be explained by its extensive funding and support from the US and
Europe. The opportunity to maximize the existing technology of FinTech will also
enhance operational efficiency for companies and firms. Millenials are credited for
the rise of the industry. These individuals have explored the possibilities of
expanding the opportunities of the sector by exploring different segments like
mobile and online payments, lending, retail banking, big data analytics and so on.
The FinTech industry has been gaining attention because of its disruptive
approach to financial services. Several factors contribute to its rising popularity,
however, may also be detrimental to its future success. The rise in smartphone
subscription and mobile data traffic globally presents a great opportunity for FinTech
startups to flourish. In fact, in the Philippines, mobile penetration is about 74% as of
2015. Dubbed as the social media capital of the world with over 40% of the
population as active social media users. Yet, there is still low penetration rate when
it comes to mobile payments. In a 2012 study, MasterCard's own Mobile Payment
Readiness Index (MPRI) score showed that 26 % of Filipino consumers were familiar
with mobile payments at the point of sale and 35 % were willing to try them. However,
only about 11% are actually using them. According to USAID, cash accounts still
comprise 98% of all retail payment transactions in the country. Yet, as previously
mentioned, around the world, there is a growing use of electronic instruments for
payment transactions. In high income countries, for example, people use an
equivalent of five e-payment transactions per week. Without a doubt, the retail
payment system in the Philippines remains highly paper‐based and inefficient. There
is more effort that needs to be done by the government to keep up with global trends
as FinTech poses an opportunity of economic growth through financial inclusion.
50% of the unbanked have mobile phones, of which 60% keep some form of savings
while 30% from informal providers. Serving the base-of-pyramid (BOP) market is one
of the biggest forces that make FinTech a potential game-changer. The Philippine
government has made baby steps towards promoting FinTech with financial inclusion
as a goal in mind. Part of Philippine Development Plan’s vision regarding the financial

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sector is for us to have “a regionally responsive, development, oriented and inclusive
financial system which provides for the evolving needs of its diverse public” and
supports inclusive growth”. As part of this agenda, Bangko Sentral ng Pilipinas (BSP)
is providing the enabling policy and regulatory environment conducive for the
development of an inclusive financial system. With this, it has encouraged the
presence of a wide range of financial services that serve different market segments
utilizing innovative delivery channels towards financial inclusion. The BSP has
drafted a National Strategy for Financial Inclusion and also Circular 649 that provided
guidelines governing issuance of e-money and the operations of e-money issuers in
the Philippines. The emergence of FinTech is also attributed to innovative
technologies that make up this industry. Some of the more popular ones are NFC or
Near-Field Communication, Geo-Tagging, Open API (Application Programming
Interface) and Big Data Analytics. However despite these technological advances, it
has remained to be a challenge for FinTech to navigate in a rapidly-changing
regulatory landscape. It is important that regulatory guidelines are well pointed-out
for these innovations to reach the mass market. Ultimately, FinTech will not only
revolutionize the way we do our finances but also promote economic growth by
serving the BOP markets and empowering small businesses by giving them more
financing options.
Facilitating value transfers in FinTech can be a tedious task in monitoring how
financial institutions use their technology in monitoring transactions. From the
conceptualization of “wire transfers”, these companies intend to receive money for
transfer from a sender and sends it through a telegraph instructing them to give the
equivalent amount of money to the recipient. From this initial concept, FinTech has
improved the process of moving and delivering money regardless of intent. However,
it is also notable that the actual value transfer is not instantaneous and that banks
charge additional costs without accountability to delays in receiving payments.
Clearing payments transacted with banks will still need a turn-around time to
guarantee the authenticity of the transaction. The process of traditional money
transfer is also vulnerable to fraud because of the unfamiliar structure for both firm
and user.
Digital payment schemes have been existing for a long time. There have been
attempts in this sector but only Paypal has survived with the use of a centralized
network. Paypal has established its credibility in ensuring that transactions are
protected from questionable activities. Having this idea in mind, Satoshi Nakamoto
created a transparent ledger that we now know as Bitcoins.
Bitcoins are the digital currency being used by some FinTech startups for
transactions. Adaption to Bitcoins through payments have garnered acceptance in
the FinTech buying and selling universe through the entrance of different startups
with decentralized schemes. Coins.ph and PawnHero are some startups that use
Bitcoin as their currency.

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The adaption of non-traditional payment schemes through the use of mobile
money and P2P lending is proof that FinTech has garnered significant attention from
its target market. Through the use of mobile money and P2P transfers, transactions
are done efficiently with transparency for both sender and recipient. It is also more
efficient because the operational costs for transfer are very low.
FinTech development in Africa has been proven effective because users can
easily transfer money to their relatives through their mobile phones via SMS
messaging. This has been a proper exercise of strategy development for the startup
because of its effectiveness in different developing countries.
Engaging Porter’s Five Forces in this sector will enable the reader to have a
better understanding of innovations for the competitive environment regardless of
unfamiliarization in the FinTech arena. Understanding what is convenient for the
target customer, SMS messaging has been seen as one of the channels that enables
individuals to communicate. This idea gives the customers the bargaining power for
startups to develop a FinTech solution related to a simple SMS message. However,
it should also be noted that mobile phones can disrupt the payment industry by being
a platform in itself.
Mobile phones have the capability to replace cash and checks. This alone can
be used as leverage vs. traditional payment structures of over-the-counter
transactions. With the aid of different FinTech applications and the Internet, mobile
phones can access the funds of the user and facilitate payments instantaneously. Do
take note that only 2% of mobile phone users use their devices for payments. The
room to maximize opportunities can be an endless source of revenue and profit.
Peer-to-peer transactions are one of the threatening substitutes to the current
platform of digital payments. By using the recipients e-mail address or mobile
number, money can be easily transferred. Dominant P2P players are Google Wallet,
ClearXchange, etc. The use of mobile wallets also has the potential to replace
physical wallets because of the value-added service it offers. By maximizing different
trade marketing channels, users can now have access to loyalty programmes,
couponing, payments and even banking services. By launching the mobile wallet,
Starbucks for instance, firms have already secured revenues prior to the customers’
receipt of purchase.
The evidence of technological infrastructures have been questionable
because of the opacity of the traditional value transfer process. Having this in mind,
FinTech stakeholders are searching for improvements in the current payment
system. This innovation gives suppliers an opportunity to offer a more efficient
service to build alternatives to the current service provider.
Innovating the payments industry is very fast-paced because of the threat of
new and emerging FinTech offerings. By addressing the immediate challenges, new
entrants have the leverage in gaining more customers by offering a simpler yet more

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stimulating understanding of the process. Encouraging mobile payments in the
Philippines has been evident through GCash and Smart Money Padala. Both are
from rival telecommunications companies but both deliver the purpose of cashless
transactions.
Engaging the customer is one of the important tasks a firm has to address.
The payments industry has strengthened its partnership with the different
stakeholders to ensure retention of customers. Banks have recognized the
importance of FinTech to address the millennial market. Card companies continue to
seek alternatives in capturing consumers that completely address the need for pre-
paid cards, mobile wallets, bitcoins, digital payments, retail banking, etc.
Leading the market segment is the “digital payments” market segment that
include products and services made over the internet, mobile payments and the like
between private users. However, there are also limitations in B2B bank transfers
initiated online and point-of-sale payment transactions (Statista, 2016). Digital
payments have different sub-segments but there are products that have the tendency
to overlap. Seeing this opportunity in the Philippine setting, there will be a significant
growth in the online B2C commercial that is valued at USD 4.8 Billion.
This document also introduces the different players in the country that use
different gateways of FinTech. These technologies enable online marketplaces to
transact with various payment options. There is also a segment that has a contactless
interaction of the smartphone app with an appropriate terminal for a specific
merchant. The Mobile Wallet POS is estimated at USD4.7 million with a forecasted
value of USD97.3 million by 2020. Another notable segment are the peer-to-peer
money transfers that use digital infrastructures between private firms. The practice of
P2P money transfer is active on the dominant use of the mobile phones.
The online exchange of goods and services are integral in the FinTech
ecosystems particularly in the B2C commerce. Some of the big players are Lazada,
Zalora and Amazon who are getting significant attention in the digital space. The use
of websites as a revenue stream are rampant in airline companies, online stores and
other commercial portals. Retail chains are also seeing the opportunities of FinTech
through the availability of mobile wallets and reloadable credit cards.
An overview of the different players will also be featured in this document
giving the reader an overview of the current state of FinTech in the Philippines.

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Industrial Structure
What is the Fintech Sector?
“They are out to eat our lunch” – this is how the Banking sector views the
rise of the Financial Technology (Fintech) sector, as it is growing rapidly with more
start-ups transforming the way money is managed by making financial services
more efficient, flexible and accessible to customers. The term Fintech was
originally coined as a business-to-business (B2B) business providing software and
services for financial institutions. It has now expanded to business-to-consumer
(B2C) applications catering to consumers’ financial transactions. These Fintech
companies are mainly
start-up companies that
develop innovative
alternative financial
technological solutions
built upon mobile and
online technology. These
startup companies gain
profit by extracting the
most profitable banking
models and delivering
them with the least cost
thru the use of
technology.
Fig 1: The Fintech Ecosystem
Source: PWC Fintech Global Report
On the other hand, the Banking sector is perceived as the traditional sector
in charge of holding account deposits for its customers and investing these
financial assets to create more wealth in the forms of consumer/corporate loans
and other investments. Customers’ perception of Banking is usually limited to the
traditional brick and mortar where dealings are accomplished by lining up at the
branch and transacting personally with the Teller or with the ATM machine. The
banking industry has started adopting the digital evolution by introducing online
banking and mobile apps, but it still has a long way to go to achieve the high tech
state of the Fintech sector, which has changed the game of conducting financial
matters.

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Banks have an unending source of funding from its depositors wherein they
earn money from loans and mortgages from its customers. It is also good to note
that the banking sector is one of the oldest industries while Fintech is an emerging
industry in today’s digital age. Fintech on the other hand, can be a subset of the
banking sector because it can focus on different financial services.
Some notable differences:
 Traditional retail banks vs. online-only banks:
o Traditional banks provide value-added service while online-only
banks provide the same services with higher rates of returns and
lower fees
 Traditional lenders vs. Peer-to-peer marketplaces (P2P):
o P2P is rapidly growing while banks offer loans, the interest rates for
short-term loans is relatively high vs. P2P
Why the sudden growth in Fintech?
The rise of the Fintech sector started after the global financial crisis in 2008.
This crisis spurred a widespread lack of trust of the market with the Banking
industry as the Banks stopped lending to businesses and individuals. New
regulations were imposed on Banks requiring more liquid assets and capital, thus,
Banks shifted their focus to spend more on compliance and risk management
programs. This was complemented by the widespread accessibility of the internet
and its popularity in changing the way we do things, which was leveraged by the
Fintechs to provide faster and cheaper services. Along with this, the introduction
of the smart phone and its rapid adoption in the market gave Fintechs the
playground they can experiment with. Smart phones became the window to
accessing myriads of apps just by a click of the finger. The rise of the millenials
also is a reason for the sudden growth of this sector. Millenials are the largest wave
of new consumers entering the work force and demanding a different financial
relationship because they are comfortable with digital technology – they grew up
with it and can’t live without it. They do not like transacting with the traditional
Banks, and this is the opportunity that the Fintech sector exploited.
How fast is the Fintech sector growing?
The total number of Fintech startups is difficult to ascertain because they
are sprouting everywhere and anytime, and not all are documented especially
those who haven’t received funding yet. An estimate is that Asia has approximately
2,500 startups while the UK and US have a total of 4,000 startups.
Total global investment in the Fintech sector from the years 2010 to 2015
amounted to a total of $49.7 billion. In just a year, global investment into Fintech

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tripled from $3B to $12B from 2013 to 2014. This growth continues to rise
drastically in 2015 with $22.3B investments, and 2016 where $5.3B was invested
just in the first quarter. Zooming into the Asia Pacific region, Fintech investment
more than quadrupled in 2015 to $4.5B covering 130 deals where majority was
invested in China and India.
Fig 2: Global Investments for FinTech
Source: Accenture analysis on CB Insights data
The key success to China’s FinTech sector is they are focused on their
domestic market with no aspirations to expand internationally. Moreover,
Singapore and Hong Kong are now considered as Asia’s Fintech Hubs, and Japan
and Taiwan are starting to adopt the Fintech revolution.
Silicon Valley is the global FinTech capital where 1/3 of all the Fintech
startups emerged. It is growing at 23% year on year. This is closely followed by
London due to its welcoming regulatory environment, with a growth rate of 51%
year on year.

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What are the subsectors under the Fintech sector?
Fig 3: The Fintech Ecosystem featuring subsets and applications
Source: Business Insider, 2016
(http://www.businessinsider.com/fintech-ecosystem-financial-technology-report-and-data-2016-4-
25)
The Fintech sector can be divided into the following subsectors:
Lending – Firms providing peer-to-peer lending platforms and lending
technologies/algorithms to easily assess credit worthiness of consumers.
Payments – Firms providing payments processing gateways and devices such as
mobile POS.
Big Data – Firms providing systems that collect and analyze customer information
and transactional data and transform these into customer insights.
Money Transfer/Remittance – Firms providing peer-to-peer platforms to process
transfer between individuals and across countries.
Personal Finance – Firms providing systems for managing personal bills,
accounts, assets and investment.
Electronic Currency – Firms utilizing the Bitcoin and Blockchain technologies.

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Equity Crowdfunding – Firms providing platforms to allow individuals to pool
monetary contributions to fund projects.
Insurance – Firms creating new online brokerage and distributional platforms.
Institutional/Capital Market – Firms providing tools to financial institutions on
alternative trading systems and financial modeling/analysis software.
Today, majority of total investments (around 42%) were allotted to the Lending
segment, followed by the Payments segment (around 32%).
Who are the global market players in the Fintech sector?
The Fintech sector is not dominated by a few large firms, but instead is
composed of a huge number of startup companies who are nimble in adopting new
trends and technological advancements in the market. Listed below are the top 26
Fintech Startups based on their funding. The second diagram lists down the top
19 Fintech Unicorns whose current value has already grown to at least $1 Billion.
These startups are distributed worldwide, and are mostly catering the Lending and
Payments space.
Fig 4: Notable Fintech Startups and Investments on a Global Scale
Source: The Pulse of Fintech, 2015 in Review, Global Analysis of Fintech Venture Funding,
KPMG International and CB Insights (data provided by CB Insights) March 9th, 2016.

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Fig 5: Unicorn Companies valued at $1B or more
Source: The Pulse of Fintech, 2015 in Review, Global Analysis of Fintech Venture Funding,
KPMG International and CB Insights (data provided by CB Insights) March 9th, 2016.
Notable Fintech Startups in the Philippines
There are three notable Fintech firms that are present in the Philippines. It
has collaborations with technology companies wherein their services are
strengthened.
Voyager: Landbank Mobile Loan Saver Programme – Pioneering this very
accessible loan saver program, Landbank has partnered with Voyager Innovations
on ensuring that its depositors can have access to loans with just a text message.
It partnered with the government to cater to the needs of farmers and fishermen,
small and medium enterprises and microenterprises, schools, hospitals and other
organizations. Together with Voyager Innovations, it pioneered the paperless
payday loan program, which is a good platform for rural areas that have a hard
time accessing banks.
Lendr: Also launched by Voyager Innovations, is the country’s first online
marketplace platform for consumer loans that is fully digital, multi-channel telco
and bank agnostic. It provides solutions that financial institutions and credit

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providers can use to reach customers who are interested in availing loans.
Through Lendr, the mobile device conveniently secures a transparent overview of
loans at any given time of the day. Consumers have control as they can monitor
their loan application status, payments and amortization schedule. (Source: Manila
Bulletin online, Chino Leyco, November 15, 2015)
Lenddo: Is a lending firm that allows an application to be verified through
the consumer’s online social connections, i.e. Facebook. It uses computer
algorithms to cater the unbanked and links their social profiles to their
creditworthiness in availing loans. (Source: Wikipedia)
FinTech Sector and Financial Inclusion
In the data provided by the World Bank, there is significant growth in
financial inclusion as more adults gain access to bank accounts. These consumers
are the windows of opportunity for Fintech. Over the past three years, there is a
growth of 500 million new accounts for financial institutions. The 2 billion unbanked
customers is also an opportunity for the banks to cater.
Fig 6: Banked individuals in 2011 vs. 2014
Source: World Bank
In developing countries, firms are slowly shifting away from cash payments.
It is also evident that they are exploring other mediums of payment transfers that

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include wages and salaries where receivers are expected to open bank accounts.
The valuation of this can reach up to $280M but 58% of these users access their
bank accounts because of mobile and digital payments. However, it is also good
to note that there are still 1.3B account users who still pay their bills in cash (World
Bank, 2014). Some uses seen in opening bank accounts: Mobile payments and
savings.
Fig 7: Infographic on the purpose of using bank accounts
Source: World Bank
In the Philippine setting, it is notable that 90% of the population remains to
be unbanked. Known as the Facebook capital of the world, it is good to note that
25% of the population has a smart phone but only 2% use it for digital payments
(Source: Sabina Lopez – Vergara, Satoshi Philippines, May 2015). The Philippine
economy relies heavily on remittances from OFW’s but still continues to receive
money manually.

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Macro-environmental trends
Social, Cultural, Demographic and Environmental Forces
The FinTech industry has been gaining attention because of its disruptive
approach to financial services. Several factors contribute to its rising popularity,
however, may also be detrimental to its future success.
According to the Ericsson Mobility Report, total mobile subscriptions around
the world grew by 4% with 46% of it using smartphones. Smartphone subscriptions
globally have risen from 2.6 billion in 2014 to 3.4 billion in 2015 and forecasted to
grow as much as 6.4 billion in 2021. On the average, about 10% compounded annual
growth in smartphone subscriptions is seen for the next 5 years. Also, mobile data
traffic has surged up to 66% compared to previous year and is forecasted to have a
compounded annual growth of 45% in the next five years. Moreover, Ericsson also
forecasted that 64% of total mobile subscriptions will gain access to LTE networks
by 2021 from 14% in 2015. Indeed, it is a global phenomenon that people are
becoming engaged in the mobile world. More importantly, it is interesting to note that
the highest smartphone penetration in Asia is in the Philippines with about 40% and
is projected to be about 70% by 2018. With this upward trend in smartphone use in
the Philippines, total mobile data traffic is projected to increase 14-fold by 2021. This
goes to show that Filipinos are entering a new era of technology where a mobile
lifestyle is becoming a norm. In the concept of network externalities, the value of a
certain technology increases when more users adopt it and this is what is happening
to smartphones. This is the reason why complementary products like mobile phone
applications are becoming more and more innovative, suiting every customer’s
needs.
Smartphones have become platforms for doing all sorts of daily tasks without
the hassle of moving from one place to another. Since more people are becoming
mobile, there is a huge opportunity for service providers to go into the mobile space
and transact with their customers online. Digital payments is one of the by-products
of this trend and the fact that more people are going mobile and more vendors have
allowed digital payments, more customers actually engage in this online activity. This
behaviour is influenced by the luxury of convenience. This type of financial service is
building a large user base by solving a common problem and its vision is to be able
to build a community of users large enough to transition into the same retail spaces
that the tech giants such as Facebook, Apple and Google are tackling head-on. This
global trend is evident in the rise of global mobile payment transaction volume of
USD 450 billion and is still expected to increase up to 1 trillion US dollars in 2019. In
a 2012 study, MasterCard's own Mobile Payment Readiness Index (MPRI) score
showed that 26 % of Filipino consumers were familiar with mobile payments at the
point of sale and 35 % were willing to try them. However, only about 11% are actually
using them. According to USAID, cash accounts still comprise 98% of all retail
payment transactions in the country. Yet, as previously mentioned, around the world,

15
there is a growing use of electronic instruments for payment transactions. In high
income countries, for example, people use an equivalent of five e-payment
transactions per week. Without a doubt, the Philippines’ retail payment system
remains highly paper‐based and inefficient. This presents a huge opportunity for the
Fin Tech industry in the Philippines to catch up with this global trend.
More than making payments more efficient, Fin Tech also allows for the poor
and unbanked to participate more in financial activities. According to the Bangko
Sentral ng Pilipinas, around 80% of Filipinos do not have access to formal financial
channels. Moreover, 50% of the unbanked have mobile phones, of which 60% keep
some form of savings while 30% from informal providers. Serving the base-of-
pyramid (BOP) markets is one of the biggest forces that make FinTech a potential
game-changer. Empowering the people from these untapped markets will not only
create social impact but also stimulate economic performance.
Political, Governmental and Legal Forces
The Philippine Development Plan (2011-2016) vision for the financial sector
states “A regionally responsive, development, oriented and inclusive financial system
which provides for the evolving needs of its diverse public” and supports inclusive
growth”. As part of this agenda, BSP is providing the enabling policy and regulatory
environment conducive for the development of an inclusive financial system. With
this, it has encouraged the presence of a wide range of financial services that serve
different market segments utilizing innovative delivery channels towards financial
inclusion.
The first two digital payment platforms in the Philippines were Smartmoney
and GCash. So to allow for these innovations to start their operations, BSP has
adopted the ‘Test and Learn’ approach, wherein network operators behind these
platforms were provided with a letter of no objection for their proposed mode for
operation and then after a series of risks and benefits assessments and a test period,
regulations are passed. In March 2009, BSP has issued Circular 649 which states
the guidelines governing issuance of e-money and the operations of e-money issuers
in the Philippines. The Circular prescribes the minimum requirements for each EMI
category to ensure that the risks inherent in e-money business are mitigated and that
EMIs adhere to prescribed levels of safety, security and soundness. Provisions
under the circular include the following: EMIs shall put in place a system to maintain
accurate and complete record of e-money transactions and other pertinent
information; E-money shall only be redeemed at face value. It is not considered a
deposit, hence, it is not insured with the Philippine Deposit Insurance Corporation; E-
money instruments shall be subject to aggregate monthly load limit of P100
thousand; and EMIs shall ensure compliance with applicable requirements of the
Anti-Money Laundering laws, rules and regulations.
The Philippine government is adamant in pursuing a ‘cashless society’. In fact,
the the government has launched an initiative to create a single electronic payments

16
platform for all transactions in the country. Dubbed the e-peso, the platform is
envisioned to be a B2B, B2C, and C2C system for e-payments. The initiative is part
of a bilateral agreement between the Philippine and US governments. The USAID
has awarded a US$25-million, five-year project to a company called Chemonics to
support the Philippine government in the promotion and adoption of epayments in
the Philippines. The overarching goal, really, is simple: to eliminate, if not
substantially reduce, the use of cash in financial transactions; turning the Philippines
into a “cash-lite” economy within 20 years.
Also one of the efforts made by BSP on promoting financial inclusion is the
National Strategy for Financial Inclusion. It is a comprehensive public document
developed through a broad-based d consultative process with private and public
sector stakeholders involved in financial sector development to systematically
accelerate the level of financial inclusion. The document states four key areas to
promote inclusive financial systems: 1) policy and regulation which also encompass
products and services as well as financial infrastructure, 2) financial education and
consumer protection, 3) advocacy programs, and 4) data and measurement. This
strategic plan promises to address the challenges that face the Philippines in terms
of having access to a wide range of options to manage their finances.
However, digital payment systems, no matter how innovative they may be and
how efficient they are in delivering financial services, have not really penetrated the
Philippine market. It is undeniable that startups are struggling to navigate a rapidly-
changing regulatory landscape and must scale up quickly with limited resources. The
lack of awareness and education on FinTech in the Philippines and the Filipinos’
inherent resistance to change may be one of the reasons why it has not followed the
trends in other emerging economies. Proper information dissemination in effective
marketing channels are keys to improving awareness. Also, courses on technology,
digitisation and innovation should be encouraged by the education department,
especially in the secondary and tertiary levels of education. The BSP must also
continue promoting FinTech and allow for an environment more inducive for FinTech
startups to rise and penetrate the market. The government can also incentivise these
FinTech startups or even provide venues for funding to help them move from just
being brilliant ideas to being drivers for financial capacity growth of every Filipino.
Technological Forces
Emerging technologies are the driving forces of FinTech in the financial
services sector. In the era of digitization, FinTech is starting to disrupt the banking
industry while it continuously innovates in response to this threat. A few technology
trends that set apart FinTech and push it towards market penetration are NFC or
Near-Field Communication, Geo-Tagging, Open API (Application Programming
Interface) and Big Data Analytics.
NFC powered digital payment systems is fast becoming a fad with Deloitte
predicting that a base of 600-650 billion smartphone users with built-in NFC will use
this technology once a month to make contactless in-store payments at retail outlets.

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NFC is a technology available on smartphones that enables a user to pay contactless
in-store. According to a study by Deloitte, the core advantage of paying using NFC
enabled smartphone is the potential for greater security. Payments are made with
phones featuring either built-in (via hardware or software) or SIM-based tokenization
capability. The tokenization facility creates a unique code (known as a token) which
is sent from the device to the merchant’s NFC-enabled till. It is important to note that
the credit card number is not transferred which means in the event of a breach, only
card information used for traditional transactions would be exposed. The card
information is either stored with the issuing networks (such as Visa or MasterCard),
or is stored in the cloud (HCE), or in a secure element on the phone. The token is
only good for a single transaction and unusable otherwise so when a fraudster
intercepts the transaction, he would only get access to the single-use token but not
the card details. Among other smartphone technologies are fingerprint, eye-scan and
heart rate sensor which also provide additional layers of security as form of
authentication. The combination of biometric authentication, an embedded secure
element and tokenization may provide more robust security than card swipes or chip
and PIN.
Another technology trend that frames the landscape of the FinTech industry
is Open API. Open API, which stands for, Open Application Programming Interface,
basically means that banks allow third party software developers to create
applications that will widen the bank’s reach to the market. Somehow, the bank
becomes a platform for these developers to innovate and help create a better
customer experience. According to Stefan Weiss, the Head of API for Fidor Bank UK,
banks allowing open APIs have the advantages of allowing the end-user have a
quicker onboarding experience. Also it enables the bank to acquire partners that
specialize in niche FinTech services optimized front-end user interfaces, and most of
all allows for a seamless integration with crowdfunding platforms, payment splitting
apps, and more-which is also great for start-ups with the innovative capability but do
not have the budget or the legal counsel to hold funds and establish their own bank.
In the dawn of FinTech startups disrupting the financial services industry, banks
realize that offering an open API, where developers are able to create very specific
and customized app solutions, is the way to fulfil engagement and retention with their
current customers and those that will be. This might be their only chance of survival
in the digitized and mobile world.
Not only in the financial services sector but across all industries, Big Data
Analytics has been making waves in improving an end-to-end customer experience.
Big Data Analytics has enabled financial services providers to maximize the plethora
of data through innovating their products and services in response to a rapidly-
changing and data-driven world. In almost every function in the financial service
provider, this technology has overhauled a lot of processes from credit-scoring to risk
management. Both banks and FinTech start-ups leverage their expertise through the
use of Big Data Analytics. The following are a few areas wherein Big Data has totally
changed the game: Credit Scoring (gathering customer data from multiple data
sources and customize scoring models iteratively), Marketing (customer acquisition

18
and retention), Risk Management (enhancing fraud and authentication solutions),
and Investment Management (combining multiple data points from social media,
search data, etc. and provide visual insights). As technology evolves, more and more
information have become available and FinTech startups should be able to utilize
this to have a competitive advantage against traditional banks. Ultimately, an
enabling technology like Big Data Analytics should be able to drive profitability
coming from the effectiveness and efficiency brought about by this technology.
Other technology trends in the FinTech space are geo-tagging, which enables
the user to be offered services based on his/her location, and blockchain technology,
the main technological innovation behind Bitcoin. These technology trends have also
revolutionized the way we manage our finances. Although FinTech has not reached
that maturity to take over traditional banks, it will surely have a bright future with these
technologies.
Economic Forces
As previously mentioned, one of the promising effects of the emergence of
FinTech is that it encourages financial inclusion. Financial inclusion enables an
economy to perform better, development goals to be reached faster and the gains
from that development to be more sustainable. Serving the BOP markets is not just
being able to help these people alleviate from their current financial situation but is
also helping to create a more developed economy on a macro level.
Digging deeper, FinTech’s relationship with economic growth is something
that is attributed not only to serving the BOP population but also in financing small
and medium-sized enterprises. These SMEs are usually cited as the major driver of
economies and a force in job creation. However, they still have difficulty securing
proper financing to prosper. The global financial crisis of 2007-2008, coupled with
higher regulation and capital costs for loans to SMEs, has made it even more difficult
for SMEs to secure financing. Yet on the very same crisis did the FinTech scene
come into play. Now, FinTech startups are able to assess credit risk and fund SME
loans. They have provided alternative ways for SMEs to secure funding for their
growth. Building the capabilities of the SMEs is important especially in developing
countries like the Philippines. They are major drivers of economic activity. According
to McKinsey & Company and the IFC, there are approximately 365 million to 445
million micro, small and medium-sized enterprises that exist, out of which 25 million
to 30 million are formal SMEs and 55 million to 70 million are formal microenterprises,
while the rest (285 million to 345 million) are informal enterprises and non-employer
firms, in emerging markets alone. On the other hand, in developed markets,
approximately 100 million formal SMEs exist. Moreover, formally registered SMEs
account for more than half of the GDP of high-income countries according to
Edinburgh Group 2013. Informal small businesses even account for more than 50%
of the GDP in low-income countries. Also, a World Bank analysis across 99 countries
revealed that firms with between 5 and 250 employees accounted for 67% of the total
permanent, full-time employment which means that SMEs are also drivers for

19
employment. One of the Fintech trends are marketplace lending solutions which pose
a hug potential in funding small businesses, as capital is readily available. These
lenders connect small businesses in need of funding with risk-aggressive investors.
Another FinTech trend that helps SMEs is supply chain finance which is an effective
and efficient tool to manage a small business’s supply chain. Although FinTech in
trade finance is still at an early stage, it promises great potential to unlock a global
customer base for small businesses as never before. When small businesses are
able to participate in the FinTech ecosystem and integrate their processes there, they
are provided with many solutions that were only available to large companies before.
Indeed, FinTech has presents an enormous potential for growth for
developing countries. The Philippines should be able to make the best out of this
scenario especially that there are a lot of small businesses such as sari-sari stores
that could benefit from this. Yet this will require more education and regulation for
FinTech to be able to operate seamlessly in our country. The Philippine government
can provide incentives for FinTech startups as support and help them blossom. Also,
regulating bodies like BSP should create a positive and cooperative environment that
promotes innovative solutions and it is good to know that this has been part of BSP’s
change agenda. Time will tell if FinTech will live up to the tremendous hope –and
investment money – it offers. The importance of small businesses and the potential
that FinTech could bring to them allow us to believe it will.

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Task Environment
Value Chain
1. Traditional Value Transfer
How do financial institutions facilitate value transfer today?
The current “rails” for value transfer today between financial institutions are
complex. Though it involves many institutions, a similar process is being used for
all transactions from settlement of retail payments to large institutional transfers.
a. Sender Request - Sender asks their financial institution to transfer an
amount to a specific address (using BIC or IBAN codes)
b. Secure Messaging - Sending bank sends a secure message to the recipient
bank requesting transfer of the specified amount
c. Flow of Funds - The recipient bank responds to the sender bank’s request
for funds via a clearing house or correspondent bank
Fig 8: Value Chain for Mobile Payments
Source: World Economic Forum
Evolution of Money Transfer Schemes
For over 150 years, the basic elements of the current value transfer process
have already been existing. The concept of “wire transfers” was created by
telegraph companies. These companies would receive money intended for
transfer from a sender and send a message through a telegraph to a
correspondent branch instructing them to give to the intended recipient the
equivalent amount of money.
The security of messaging services and the settlement time required for
clearing house activities have been dramatically improved by the digitization of this
process in the second half of the 20th century.

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Disadvantages with today’s schemes
One of the challenges with today’s schemes is that the actual value transfer
is not real-time or instantaneous. The time to complete the transfer from the
sender’s account to the recipient’s varies from several hours to several days.
Additional costs and delays will also be incurred if the sending and recipient
banks do not hold reciprocal accounts because the payment must be sent to a
clearing house or correspondent bank for the guarantee of payment for the
recipient.
The process of the traditional money transfer is also vulnerable to fraud
because of the complex structure of requesting the recipient bank to demand
payment.
2. Decentralized Payment Schemes
What are decentralized payment schemes?
Decentralized networks use a common set of protocols to allocate tasks
across many individual nodes rather than on a single central point.
One example of a decentralized system is Email. It uses a common protocol
(SMTP) in order to distribute mail between numerous servers. Email has already
replaced almost all mail transactions that were once being forwarded to a post
office which act as the central point and delivers the letters to the intended
recipients.
Decentralized payment systems are typically secured by cryptographic
processes and are allowing users to transmit value between them instantaneously
(real-time) and with no intermediaries. They are open source where changes are
being managed by a network of participants. The transparency and traceability of
all transactions that decentralized payment schemes offer are far more superior to
current systems. However, user identification is weak.
Decentralized payment schemes use a single distributed ledger, called the
blockchain, and denominate payments between users in what is called a
cryptocurrency.

22
Fig 9: Decentralised Payment Scheme
How have decentralized schemes developed?
Digital payment schemes are not new and have already been existent since
the birth of the Internet. Notable failures in the past of this scheme include Beenz,
Flooz, and Digicash while the most notable successful player is Paypal. All of these
payment schemes used a centralized network which requires trust by users that
made them vulnerable to fraudulent activities.
In 2009, a pseudonymous whitepaper by Satoshi Nakamoto proposed the
creation of a public distributed ledger where transactions between users are
transparent, traceable and are processed in a trustless environment with the use
of cryptographic protocols. Bitcoin Network is the implementation of this distributed
payment process and Bitcoins are the native currency of the said ledger.
Since 2009, a wide range of service providers have adapted to fully support
the acceptance of payments through the Bitcoin network. At the same time, many
new competing entrants have launched to use the same underlying concepts but
employing different encryption technology or focusing on different use cases.
What are some of the emerging decentralized schemes?
Fig. 10: Notable Emerging Decentralized Schemes

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3. Non-traditional Payment Schemes
What are non-traditional payment schemes?
Mobile money and P2P transfers are considered as non-traditional payment
schemes.
Mobile money refers to a network that supports payment from one
consumer to another using a mobile device. Any firm can launch a mobile money
service which is not exclusive to financial institutions only. In fact, mobile money
services have already been launched by many firms such as network operators
and online retailers.
In P2P payments, money transfers are made using just the receiver’s email
address or mobile number after registering with a bank or a trusted third-party
organization.
Through mobile money and P2P transfers, transactions are completed
quickly and are highly transparent to both senders and recipients. Transfer costs
are also very low. Many schemes are progressing towards open systems, as they
build in interoperability with other schemes and traditional outlets such as ATM.
Transactions in this type of scheme may be denominated in a fiat currency
or in a form of value issued by the central intermediary.
In developing countries mobile payment solutions have been launched with
the intention of extending financial services to the "unbanked". These non-
traditional payment schemes do not necessarily require a traditional bank account
or well established financial infrastructure which makes them well suited for
financial inclusion objectives.
Fig 10: Process of Non-Traditional Payment Schemes

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How have non-traditional schemes developed?
In 2002, researchers noted that individuals in some countries in Africa like
Uganda, Botswana and Ghana were spontaneously using mobile airtime as a
substitute for money transfer. People would transfer mobile airtime to their relatives
or friends who would then use or resell it.
In April 2007, Safaricom, which is Kenya’s dominant mobile network
operator, deployed M-Pesa - a new mobile phone-based payment and money
transfer service. M-Pesa allows users to deposit money into an account that can
be accessed using their cell phones and send balances using SMS messaging.
In January 2011, a P2P cross-border money transfer service was launched
by Transferwise to aggregate and facilitate exchange of foreign currency and
transfer needs at the interbank rate.
What are some of the emerging non-traditional schemes?
Fig 11: Emerging Non-Traditional Fintech Providers
Source: Google Images
Porter’s Five Forces – Payments Industry
The Five Forces theory from Harvard professor Michael E. Porter is a useful
framework for industry analysis and strategy development. The Five Forces theory
states that the attractiveness of an industry can be determined by looking at five
factors. These factors are the bargaining power of customers, threat of substitute
products or services, the bargaining power of suppliers, the threat of new entrants
and rivalry among existing competitors. Using these five forces in the payments
industry will give us a clearer and better understanding of its competitive
environment and how the current innovations will collectively and separately
impact its future.
1. Bargaining power of customers
With the help of technology, consumers are now living in a world that is always
connected, from SMS messaging to social networks. Everybody can send
messages or communicate with each other instantaneously. Banks are expected

25
to work in a similar situation. With transactions being more convenient going
online, consumers are fast in adapting to the new digital-led banking experience.
With this, all the unsatisfying experience and inconvenience that comes with the
detailed paperwork, manual interventions, longer processing time and excessive
fees from traditional banking can now be prevented. Consumers can now also
enjoy 24/7 banking experience.
The way financial institutions are dealing with payments today have become
expensive, time-consuming and often, not transparent. Innovation brings
substitute solutions from numerous alternate providers and are now attracting
consumers to switch to these new entrants who can provide them with an alternate
and more satisfying digital experience.
With very low switching costs and a bunch of competing alternate providers,
bargaining power of buyers is very high.
2. Threat of substitute products or services
The mobile phone has been disrupting the payments industry by becoming a
new payments platform and has a huge potential to replace cash and checks.
Other recently launched products that have the potential to disrupt the payments
industry arethe P2P payments, mobile wallets, mobile check deposits, pre-loaded
cards, digital currencies, and smart ATMs among others.
P2P payments: In this payment scheme, money can be transferred just by
using the recipients e-mail address or mobile number, after registering with a bank
or a trusted third-party organization. Some of the dominant players include PayPal,
Square, Google Wallet, Ribbon, Dwolla and ClearXchange. In the UK, Paym was
deployed recently with nine participating banks to make money transfers just by
using a mobile phone number. In Kenya, the mobile money system M-Pesa by
Vodafone had a spectacular success for the unbanked. M-Pesa lets customers
pay bills, transfer money without making bank accounts or any bank involvement.
Mobile wallets: Mobile wallets are digital wallets that has the potential to replace
physical wallets. It also provides add-on services like ticketing, couponing, loyalty
offers, payments and banking. Some of big companies like Google, PayPal,
Square, Starbucks, enjoys a joint venture with AT&T, T-Mobile and Verizon among
others, and have taken the lead in launching the mobile wallet.
Mobile check deposits: Mobile check deposit is a technology that replaces the
inefficiencies commonly seen in the world of paper checks. Customers can deposit
a check into their bank accounts just by taking a photo of it using a smartphone.
This results to a huge savings by both consumers and the banks. Around 11% of
US consumers have already used mobile check deposits.

26
Pre-loaded cards: Retailers and banks sell these reloadable prepaid cards
which functions like debit cards without the checking account. The target of this
product are the unbanked people and those who would like to avoid high bank
fees. These cards can be used in many functions such as withdrawing cash at
ATMs, purchasing online and at supermarkets, with lower fees than that of bank
accounts.
Digital currencies: The use of digital currency is a decentralized payment
scheme which allows the exchange of money between users in real time without
any additional charges and which behaves literally like cash. Bitcoin is the most
popular digital currency. It is without any physical borders, intermediaries and is
an internet-wide payment system where transactions either happen with no fees
or very low fees. Digital currencies are now disrupting the expensive world of
banking through new ways of paying for goods and services.
The above innovations provide an alternative solution to the current
inefficiencies in the payments marketplace and can provide a superior digital
experience to consumers.
With a lot choices for the consumers, the threat from the substitute products is
high.
3. Bargaining power of suppliers
Infrastructures in advanced countries that have been existent for decades are
being an obstacle to supporting real-time payments. There is a lack of
transparency with the traditional value transfer process. Because of this, various
stakeholders are finding different ways to improve the current payment system.
Without a modern payments infrastructure at banks, new players enter the
market for greater disruption, while also rapidly making the current systems
redundant and saturated with service providers. Numerous players are already
innovating in this area such as Dwolla, Square, PayPal, ClearXchange and virtual
currencies like Bitcoin, all with the capability to build an alternative to the traditional
payments infrastructure.
With a lot of competing players and with the redundant systems, the bargaining
power of suppliers is high.
4. Threat of new entrants
With the inconvenience and challenges that traditional payments pose, the
payments industry has become a focus for innovation. New entrants are
addressing these challenges to another level and are trying to dominate the market
quickly. These new entrants come from different industries ranging from startups,
telecommunications companies, card companies, supermarket chains and

27
technology companies and are offering an exciting digital experience with a much
simpler functionality. In addtition to this, there is also a lot of opportunities for
advertisements in the payments data to generate revenues.
Square, Stripe, YapStone, Xoom and PayNearMe are some of the leading
startups. Many of them aim to simplify how money is being transferred from one
hand to another. Big companies that already have significant and vast payments
operations include giants such as Paypal, Apple, Amazon and Google, while
Facebook is recently applying to obtain e-money license to enter the remittance
business.
Mobile phone companies are pushing very hard into mobile payments as one
of their additional services. GCash from Globe and Smart Money Padala are some
of the examples in the Philippines.
Supermarket chains are also now becoming providers of financial services
which offers products such as credit cards, saving accounts, personal loans and
insurance that before, are offered only by financial institutions.
Retail giants such as Wal-Mart, Target, Home Depot, 7-Eleven, Best Buy, and
Shell formed a consortium, MCX, which will bypass the traditional payment
networks altogether. Starbuck’s opened the eyes of many big companies with the
remarkable success of its mobile payment solutions. Bitcoin and other similar
schemes that make use of distributed ledger are still improving on new ways of
settling money globally and on a larger scale.
Barriers to entry are low so the threat of new entrants is very high.
5. Rivalry amongst existing competitors
The intensity of competition in the payments industry strengthened recently
with banks, fintechs, card companies, telecommunications companies,
supermarket chains and large technology companies which are all trying to engage
the consumer. Traditional players still try to retain their customers despite the
challenges of better offerings from the new entrants.
Card companies such as Visa and MasterCard are finding new ways to attract
consumers by opening up their market using pre-paid cards, mobile wallets and
many others. PayPal is still the dominant player in payments settlement business.
Networks of banks operate P2P payments for their customers while Western Union
and MoneyGram are still the most favored players in the remittance business.
The intensity of competition is very high.

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Market Segments
This sector study will focus on the digital payments segment of the Fintech
industry and will be limited to the Philippines. To further understand the segment
of the digital payments, it will be categorized according to usage, segments of the
consumers, and segments of the merchants and enterprises using digital
payments.
Market Segment of Digital Payments According to Usage
The “Digital Payments” market segment is led by consumer transactions
and includes payments for products and services which are made over the internet,
mobile payments at Point-of-Sale (POS) via smartphone applications as well as
cross-border Peer-to-Peer transfers between private users (Statista 2016).The
following are not included in this segment: transactions between businesses
(Business-to-Business payments), bank transfers initiated online (that are not in
connection with products and services purchased online), and payment
transactions at the Point-of-Sale where mobile card readers (terminals) are used.
The “Digital Payments” is comprised of the following sub segments: Online
B2C Commerce, Mobile Wallet POS Payments and P2P Money Transfers. Some
products might overlap and be used for all market segments while some products
might be available only for a particular use.
In 2016, Statista forecasted that the total transaction value in the Digital
payment segment (excluding P2P domestic transfers) will amount to USD 4.9
billion in the Philippines, most of which will come from the Online B2C Commerce
with a total transaction value of USD 4.8 billion.
1. Online B2C Commerce
The “Online B2C Commerce” segment covers all consumer transactions made
via the Internet which are directly related to online shopping for products and
services. Online transactions can be made via various payment methods (credit
cards, direct debit, invoice, or online payment providers, such as PayPal and
AliPay). However, a distinction is made concerning the nature of the device or
terminal via which the payment is processed (e.g. desktop vs smartphone, tablet
or wearable). Transactions that are exclusively between businesses (Business-to-
Business) or private individuals (Peer-to-Peer) are not included in this segment;
online payments relating to the purchase of goods or services that trigger a bank
transfer are also not included.

29
According to Statista, transaction value in this segment for the Philippines
amounts to USD 4.87 billion in 2016. This is expected to show an annual growth
rate of 19.94% resulting in the total amount of mUSD 10,080.3 in 2020. In this
segment, the number of users is expected to amount to 49.2 million in 2020. As
forecasted by Statista, the average transaction value per user amounts to USD
153.70 in 2016 with the majority of the users belonging to the 25-34 age group with
a relatively equal distribution between male and female.
Fig 12: Age Demographics of FinTech users
Source: Statista, 2015
Key Players in the Country
Some key players of payment gateways using the online B2C commerce
are Paynamics technologies and Paymaya Checkout. These technologies allow
online marketplace and online sellers to accept payment through credit card,
PayPal and other major online payment options. Paynamics Technologies is a
company founded by a group of Filipino entrepreneurs. A number of online Filipino
sellers are using Paynamics as their payment service (Paynamics, 2016).
Paymaya Checkout, on the other hand, is one of the business solutions of
Paymaya Business by the Smart and PLDT Group in partnership with Rocket
Internet. It provides payment options such as debit, credit and atm payments to an
online store.

30
Fig 13: FinTech Providers in the Philippines
Source: Voyager Innovations, 2016
2. Mobile Wallet POS Payments
According to Statista (2016), the “Mobile Wallet POS Payments” segment
includes transactions at Point-of-Sale that are processed via smartphone
applications (so-called “mobile wallets”). Internationally, well-known providers of
mobile wallets are ApplePay, Google Wallet and Samsung Pay. The payment in
this case is made by a contactless interaction of the smartphone app with a suitable
payment terminal belonging to the merchant. The data transfer can be made, for
example, via wireless standard NFC (Near Field Communication) or by scanning
a QR code to initiate the payment. A user pays for a purchase via a “Mobile Wallet”
application by triggering an online bank transfer or by using a digitally stored credit
or debit card (Host Card Emulation).
According to Statista (2016), the forecasted transaction value in the “Mobile
Wallet POS Payments” segment will amount to USD 4.7 million in 2016.
Transaction value is expected to show an annual growth of 113.04% resulting in
the total amount of USD 97.3 million in 2020. The number of users is expected to
amount to 3.3 million by 2020 with the average transaction value of USD 5.06 in
2016. Majority of the users come from the 25 to 34 age group with a total of
300,000 in 2016.
Fig 14: Forecasted value in “Mobile Wallet” POS Payments
Source: Statista, 2016

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Examples of these are the Paymaya wallet. It is a free app that allows
anyone to shop online even without a credit card (Paymaya, 2016). It requires the
user to download the app, load up on partner centers and shop. It can be used to
shop online or use it for stores that accept Visa or Paymaya as payment centers.
Paymaya is the FinTech subsidiary of Smart and PLDT.
Another player would be Coins.ph. It is a mobile wallet that makes money
transfer frictionless and available through the use of mobile devices (Coins.ph,
2016). Coins.ph is from the same company that created bitcoins.
Another new product is Citibank’s Charge2phone sticker. Charge2Phone
(C2P) is the country's first sticker-based innovative card feature that allows
contactless payments for over-the-counter purchases, and online payments using
your Smart or Sun mobile number (Citibank, 2016). For face to face transactions,
the user simply needs to look for the Visa PayWave symbol at the merchant's store
façade and/or checkout counters. The user simply needs to tap the card on the
terminal. Plus, it uses a newer chip technology that gives you enhanced protection
against fraud due to cloning.
For online transactions, the user simply needs to enter the mobile number
on the merchant website's check-out page instead of the card number. For
additional security, user will need to input the MPIN, the One-Time-Pin (OTP) that
they will receive and the card CVV.
GCash also provides a virtual pay account that is powered by American
Express (Globe, 2016). It also allows the user to pay bills online and buy goods
from participating merchants using a QR code.
Fig 15: Charge2Phone card powered by Citibank and Visa
Source: Citibank, 2016

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3. P2P Money Transfers
Online Peer-to-Peer (P2P) money transfers are defined as money transfers
made using digital infrastructures between private individuals. Cross-border
payments and remittances are the most relevant segments for the FinTech market.
Internationally, classic providers in this segment are credit institutions (banks), post
offices and specialized money transfer services such as WesternUnion and
Moneygram (Statista, 2016).
In the Philippines, the P2P money transfer is relatively unique compared in the
international landscape. Unlike in other countries where banks and remittance
companies are leading, Telcos are dominating the P2P transfer leveraging on the
high usage of mobile phones in the country. In 2012, the Bangko Sentral ng
Pilipinas (2013), reported that there are 8 million active e-money subscribers and
188 million e-money transactions (total of inflow and outflow). In the diagram below
(BSP, 2013), there is currently an increased competition that results to lower cost
of services.
Table 1: Remittance Fees
Source: BSP, 2013
For telephone companies, Smart Money, Paymaya and GCash are
dominating the money transfers as the country is one of the top mobile phone
users in the world. The transfer of money has been made easy through these telco
apps that it has made some banks irrelevant for money transfers.
Market Segment Based on End Users (Consumers)
In the Philippines, the segmentation of the digital payment users can be
categorized into the following group of people: those who have access to funds,
the debt averse, the digital natives and the underbanked. The first two groups have
easy access to financial services and are already tapped by the traditional banks.
The latter two are the untapped markets by the banks, a mismatched infrastructure

33
and market opportunity that are being addressed by the digital payments of the
Fintech industry.
First would be the group who has access to funds or more known to the
FinTech industry as the mP2P Consumer (BaiPayments Connect 2016). The
‘mP2P’ consumers are usually the group with the high purchase capacity that
strongly embraces online and mobile. This group usually owns and actively uses
a smart phone and has engaged in person to person transfers. On average, this
group is young but is not necessarily millennial. The group’s median age would be
around 33+.
This group is an avid multi-channel user. While this group is digital savvy, it
still continues to use the branch and contacts banking officers especially for
important transactions. These are the market consumers who actively transact at
the branch and atm but uses FinTech to pay bills and shop online. This group
usually has an existing bank account and at least one credit card.
Fig 16: mP2P Consumers
Source: BaiPayments Connect, 2016
Although the mP2P consumers have high purchase capacity and average
amount transaction, they comprises only of a small number of the population. It is
also a shared market of both FinTech and traditional banks. This group is part of
the 2% of the population that has credit cards.

34
Another interesting market segment of the consumers are the debt-averse
group. The debts-averse are similar to the mP2P group in their financial access
but are hesitant on getting credit cards. These people would be on the same
median age of 33 from the mP2P and prefers to use the banks for most of their
financial transactions.
However, as part of necessity, this group needs credit cards to pay for
airfare and other online B2C transactions. The use of reloadable debit cards such
as Paymaya and Yazz or virtual wallet such as Paymaya, Smartmoney and GCash
benefits them as they only need to reload the app or debit card as necessary. This
group is also part of the shared market of both FinTech and traditional banks.
One of the untapped market of the banks and underutilized market of
Fintech are the digital natives. The digital natives are the millennials which are
usually 18 to 29 years old, approximately 24 million users. This age group has the
highest ownership of mobile ready devices and is very digital savvy. What’s ironic
though, this group has limited to no access to financial services. Banks don’t like
them for their job unstability and high credit risks. This group is not also fond of
using bank. The traditional usage of banks, the long queues for every transaction
and other inconveniences do not attract them.
However, this group is a good target for the “viral” base as they have the
largest social media appetite. Tapping and reaching out to the digital natives
correctly can cross the chasm because of their virality in social media.
All three segments of digital payments (Online B2C Commerce, Mobile
Wallet POS Payments and P2P Money Transfers) would appeal to this group as it
shouts convenience and easy application on their end. Moreover, it is still easy to
groom their usage and influence their buying behavior as they have minimal
obligations.
The last group is the Underbanked. This is the untapped market with the
largest potential. This refers to the group of people who do not own credit cards,
and do not have an existing bank account. This comprises a huge chunk of the
Philippine population. As of 2015, only 2% of the entire Philippine population has
credit cards (TechniAsia, 2016). This means that majority of Filipinos still transact
using cash and may not be part of the base that uses online B2C commerce.
According to Bangko Sentral ng Pilipinas (2013), only 2 out of every 10
Filipino households have a deposit account. Of this number, 43% of the total
number of deposit accounts and 68% of the total amount of deposits are
concentrated in NCR. A lot of Filipinos residing in provinces as of 2013 has no
access to bank accounts. In fact, 37% of the 1,634 cities and municipalities in the

35
Philippines do not have a banking office. This is a huge base and can be tapped
to use digital payments since majority of these people owns a mobile phone. As of
2013, BSP report shows that there are over 100 million mobile phone subscribers
in the Philippines and it is growing at 3.5% per annum. Of the huge population of
unbanked with mobile phones, 60% of them keep some form of savings and 13%
borrow from informal providers which we normally know as five-six.
The unbanked market is normally using P2P transfers. Smart Money and
GCash are the dominant players on this segment. Both of these digital payments
brand are available even on convenience stores and small sari-sari stores in the
province. The main benefits of the mobile P2P transfers are safety, convenience,
time saving and speedy value transfers. Furthermore, the remittance fees of Telco
subsidiary is very low compared to other traditional remittance centers
encouraging majority of the population to use this financial technology.
Fig 17: Virtual Payment Cards
Source: Techniasia.com
a. Credit Card and Bank Account Penetration in the Philippines
With a mere 27 percent banking penetration and two percent credit card
penetration, the prospect of increasing ecommerce transactions doesn’t
look promising. (https://www.techinasia.com/10-alternative-online-
payments-consumers-merchants-philippines)
Market Segment Based on End Users (Merchants/Enterprises)
Other than the consumers, the merchants and enterprises are another set
of end users of the financial technologies. We can categorize them into 2 groups:
online and offline merchants / enterprises.
The online stores and marketplaces are important part in the FinTech
ecosystems particularly in the online B2C commerce. As discussed earlier, the
online B2C commerce is forecasted to reach USD 4.87 billion transaction amount.
Some of the big and major players in this industry are e-commerce giants like
Lazada, Zalora and Amazon. Belonging in this segment are online travel agencies

36
such as Travelbook.ph, Agoda.com and Booking.com. Philippine Airlines, Cebu
Pacific and SM online stores are examples of companies who are also starting to
use their websites as another sales channel. With the emergence of online store
builders and creators like Shopify and TackThis!, small and medium enterprises
are starting to be an important part of this segments. SMEs can now choose to
receive payments other than bank deposits and cash on delivery with the use of
the financial technologies such as Paymaya Checkout and Paynamics.
Digital payments are not only available for the online merchants and
enterprises but for brick and mortar stores as well. Big players in the retail industry
such as Robinsons Malls and and 7-11 are now being used as top up stations for
mobile wallets and reloadable credit cards of Paymaya. Yazz, a reloadable prepaid
card of Metrobank is using Family Mart as one of its reload kiosk. Furthermore,
they are also started accepting these cashless payment methods for their
transactions. Some other technologies that emerged are Paymaya Swipe that
serves as a tool to accept payments from Visa, Mastercard and American Express.
Some merchants have also integrated Smart, GCASH and Paymaya in their POS
device. They do not only offer cashless option for consumers but can also avoid 0
to 3% merchant fee from banks and credit card providers.
On the Peer to Peer transfers, small players like Sari Sari stores and
pawnshops are acting as the cash in/cash out centers for Smart Money and
GCASH. This is more popular in rural areas where banks have poor coverage.

37
Conclusion
The FinTech revolution will improve and change the way we do finance:
1. Thru the use of advanced technology, the FinTech sector was able to cut
down costs but at the same time improve the quality of financial services.
The sector focuses on customer centricity, so they are able to create more
relevant product features that the market wants and needs, which are
delivered digitally thus incurs minimal variable costs.
2. FinTech has provided financial access to majority of Filipinos who were
underserved by traditional banks. The digital natives or millennials who are
seen as high risks by traditional financial institutions can now enjoy the
benefits of the credit cards without the need of having one. The
underbanked families in the rural areas can now send and transfer money
through the different applications from the telco subsidiaries. It has become
convenient and easy to do financial transactions with the use of your mobile
phones.
3. FinTech acts as an enabler for other industries such as ecommerce and
eservices. With only 2% credit card penetration in the Philippines, FinTech
can aid in bridging the gap to reach the 98% of the population who cannot
purchase online. The presence of reloadable prepaid cards gives chance to
the unbanked to be part of the ecommerce and eservices ecosystem.
Through TinTech, SMEs can now sell their products online and market to a
wider range of customers. New FinTech companies have made it easier to
access online payment gateways.
4. Government can also take advantage of the use of e-money in order to
minimize leakages and fraud. Payrolls can be done through mobile based
e-money or e-banking. Digital payments to suppliers and the public will
promote transparency of government and business transactions.
5. FinTech in the Philippines has promoted “co-opetition” between private
companies. Partnership between Fintech companies and banks is usual as
FinTech try to engage with the existing ecosystem of banks. An example of
which is the partnership between Landbank and Voyager Innovations on
the Landbank mobile loan saver.

38
6. They utilize clever new ways of assessing risk – thru the use of big data.
The FinTech sector realized the importance of the information that the
Financial Service providers have had from the beginning of their service. By
analyzing the transactions - both inflows and outflows – of the consumers,
they are able to gauge the risk exposure of providing credit to the consumer.
Besides this, they have also started to conduct credit scoring based on the
profile of the consumer on social media.
7. They create a more diverse credit landscape. Now, lending is not just limited
to the Banks, but every individual who has excess money can now lend. In
effect, they “formalized” the pautang practice by matching borrowers and
savers directly. This somehow adds a layer of guarantee to the saver and
promotes the cycle of funds in the economy.
The FinTech Sector brings a lot of benefits and advancements even though it is
still under the growth stage as more startup firms exploit technology and join the
industry. There are a lot of opportunities the sector can take advantage of starting
with the lack of regulation imposed on the industry - the BSP only regulates the
Banks and not the FinTech sector. This allows for innovation to flourish and gives
room for FinTechs to explore and experiment with different technologies. Harping
on the FinTechs’ strength of being nimble, they can quickly create a prototype and
test it in the market, and iterate along the way. They are also not restricted to
legacy IT systems and brick and mortar that limit the functionalities they are able
to develop and provide to the market.
Another opportunity is the shift in mindset from traditional to digital. Thru the
widespread smart phone adoption, it now becomes easier for the Fintech sector to
introduce their products in the market and induce customer trials. Along with this
is the dominance of the millennials in the workforce. This tech savvy generation is
the key to the adoption of the Fintech sector as their preference is on-demand
servicing thru their mobile phone or gadget.
The continuous growth of ecommerce and eservices can pave the way for the
faster adoption of the digital payments in the Philippines. More and more Filipinos
are hooked into online shopping and “piso fare” promos of Cebu Pacific. People
are seeing the importance of having an online mode of payment. Peer to peer
transfer have flourished with the fast adaptation of people for their domestic
remittance. The presence of padala outlets in sari-sari stores plus the cheaper
rates had made it easy and convenient for Filipinos to understand and learn the
usage of GCASH and Smart Money. The current usage of “beep” cards and
integrating it to reloadable prepaid cards is also a good starting point to introduce
FinTech products to majority of the population. The mobile wallet still needs a lot

39
of improvement in order to penetrate to the early majority and cross the chasm.
The presence of digital natives because of their “viral” nature can help in bridging
the gap. However, a lot of improvement in communication should be devised to
make it easier to grasp for Filipinos.
Big data is an opportunity to further segment the target market and communicate
more effectively. FinTech companies should start designing segmented and
integrated customer experience, rather than having a one size fits all mode of
marketing. Mass personalization is now happening for e-commerce and e-
services, and it will most likely be the trend for the financial technology sector.
Although, digital marketing is an integral part in the marketing channels and
strategies of the FinTech industry, utilization of the existing relationship of sari-sari
store owners should be taken into consideration. They are an important part of the
ecosystem as they can be head pin in the bowling alley that will cross the chasm
to get the early majority.
The experience of the government in implementing the rules for Smart Money and
GCASH can be capitalized for the new set of FinTech applications in the market.
Although still struggling to penetrate the market, BSP can help the FinTech sector
by proper information dissemination. The existing infrastructure of Telco
companies is also being capitalized in tapping the market base who first adopted
the P2P transfers in the last decade.
Moreover, access to financial services empowers the poor to manage their
finances and reduce their vulnerability to financial distress, debt and poverty.
Inclusive finance supports especially in the lending segment of financial technology
supports broad based economic development that can contribute to inclusive
growth in the country. Fintech as a sub-product of internet has also paved way in
selling the products that we have developed locally to be also introduced to other
developing countries like Indonesia and Pakistan. More and more developers and
engineers are working for local companies in the Philippines instead of going
abroad or working remotely for foreign firms.
The Fintech sector is viewed as a threat by the financial services sector since they
are providing similar services, and are catering to the same market – thus the
opening quote in the Industrial Structure section that “They (Fintechs) are out to
eat our lunch”. The Fintechs are suitable alternatives to Banking transactions
especially in the lending, payments and remittance space. In the lending space,
consumers are now not limited to the stringent application and qualification
process of the Banks, but have other options to obtain their needed money. In the
payments space, both merchants and consumers can now enjoy different ways of
completing payment transactions in the comforts of their home and with just a click

40
of their finger. Lastly, in the remittance space, consumers can now easily transfer
funds electronically around the globe with minimal fees compared to the fees
charged by the Bank, and without the hassle of coursing it through the Bank.
In the government, digitizing the payments to all transactions can be a threat to
people who are benefitting in transactions through cash. Although the use of
FinTech can help in the financial inclusion of the underserved, it may be stopped
and unsupported. The government should also be more agile in implementing new
policies to support startups and enable them to test products and applications
quickly. Currently, existing policies and the tax schemes are seen as barriers by
startups and SMEs.
Fintech is also a double edged sword; the unsettling issue on possibility of frauds
serves as a threat for both end consumers and the merchants and enterprises that
are using it. Many can claim that Fintech is a safer way to transact money than
doing it offline; however knowledge in computer science and in this industry by
certain individuals poses high risk of fraud. The government should be
knowledgeable in this industry in order to come up with policies that can mitigate
potential fraud and data leak. The recent data leak in COMELEC, for example,
poses negative publicity and can hinder in promoting FinTech as a safe way to
transact.

41
Recommendations
The Philippines still has a long way to go in letting the Fintech sector flourish
in the country and enjoy its benefits. A lot has to be done in terms of ease of doing
business, education, awareness, and regulation among others.
First of all, the government should devise programs and set
budgets/incentives to welcome Fintech startups to consider the country as their
playground and to entice local companies to start adopting the FinTech revolution.
This would encourage a culture of innovation in the FinTech space, with these
startups knowing the Philippines as a technology progressive country.
At the same time, regulations need to be relaxed to allow ease of entry of
these foreign Fintech firms into the country. So far the BSP has only provided
guidelines for the use of e-money. However, the regulatory environment for all
other FinTech segments to flourish is found lacking. As the technology advances,
needs change and the government should be able to keep up with the call of the
times so that the Philippines will be able to use these technologies to the people’s
advantage.
Second, the educational system of the country needs to be revamped to
highlight the importance and the impact of digitization and globalization.
Technology should be understood in its full capacity, and not just be seen as
gadgets for personal use or entertainment. Programs such as the MTM should be
adopted by all schools/universities in the country as this is how the world is
evolving and we need to catch up and gear ourselves. Without the foundation of
education, innovations like FinTech will remain as foreign concepts to the common
Filipino which will only serve the upper classes of society.
In this light, it is also important to emphasize the enabling nature of FinTech.
People must be aware that these services strive to become agents of financial
inclusion and that the base-of –the-pyramid markets are the main beneficiaries of
the FinTech industry. What FinTech companies can do is to improve their
marketing and distribution channels so that micro small medium enterprises
(MSMEs), as well as provinces with low access to financial services can be
reached. Through this, information will be disseminated in the proper channels and
to the appropriate customers / target market.
Third, for the Fintech sector to cross the chasm, it should identify its weak
points and work quickly to address them. The “cash is king” mindset is still very
much prevalent in developing countries. The market is still wary of going digital in
conducting their financial transactions, and still prefers going to the Bank and

42
transacting with a teller. The main reason for this is the concern on the security of
transactions if it is done electronically, especially since fraud and hacking is not a
new thing anymore. The Fintech sector needs to address this security issue
immediately and find ways in making this known and believed by the market.
Next, the Fintech sector should capitalize on the millennials as their target
market since they are the digital natives. This can be called as the beachhead
strategy where a firm targets a specific population from the mass market to
conquer. Once they have been converted, they can then try to persuade the
traditional markets to at least try the Fintech service.
Fourth, since the Fintech sector is characterized by cut throat competition
composed of tons of startup firms, the probability of success may come or go at
any time. Therefore, FinTechs need to come up with an exit strategy at the same
time that they are building their products and services. They have a number of
options from joining forces with a stable and bigger company thru joint ventures or
mergers, to selling the entire start up business as a drastic exit strategy measure.
Also one of the things that FinTech startups can focus on to reach the mass
market is to encourage partnerships and alliances with network service providers.
These tech giants who already have a large customer base can help the prop up
these startups towards market penetration. FinTechs can start building their own
market base when their services are offered complementary to the products of
network providers. Network providers may also be of help in terms of funding the
innovation projects of FinTech startups so this could be another reason to partner
with them.
FinTechs must also make the most out of existing technologies such as Big
Data analytics to know more about their customers and then be able to create
sound strategies in acquiring them. Tons of information become available when
transactions are made online. With the proper tools and the right people who can
extract insights out trends and figures, Big Data Analytics can be a game-changer
for FinTech. Ultimately, firms, no matter what industry, must strengthen their
market research techniques. This means that FinTech, being a tech-based
industry, should be more advanced and forward-thinking when it comes to market
research.
In line with this intensive market research technique, segment-specific
propositions should be created. The success of FinTech does not rely on
revolutionizing all of banking or credit. Partnered with discipline and focus,
successful FinTech startups are able to cherry-pick those customer segments
most likely to be receptive to what they offer. As previously mentioned, choosing

43
millennials as a target market has been a template for successful Fintech startups.
Another example is Lending Home which targets motivated investment property
buyers looking for cost-effective mortgages with an accelerated cycle time. Across
FinTech, as emphasized throughout this paper three segments – Millennials, small
businesses and the underbanked – are particularly susceptible to this kind of
cherry picking. With their sensitivity to cost, openness to remote delivery and
distribution, and large size, these segments pose a major opportunity for FinTech
hopefuls to build and scale up sustainable businesses which add and create more
value. Within these target markets, many customers are open to innovative,
remote FinTech approaches not offered by traditional banks.
Another tactic FinTech startups can do is to shift from business model
innovation to technology innovation. Surprisingly, innovations that were brought
about by successful FinTech startups were not made by payments experts, but by
technology experts. These people are passionate about using technology to create
a better customer experience. Nowadays, innovation is coming from techies rather
than business professionals. These disruptors come from a tech background. This
goes to show that there is no need to be a payments expert to become an innovator
in the space; tech professionals passionate about innovation can disrupt the
industries they previously had very little to do with.
Lastly, the Fintech sector should be viewed not as a threat, but instead as
an opportunity for growth for the Banking industry. Fintechs have the advanced
technology and the agility to adapt to rapid changes in the environment and needs
of the market, but lack the customer base because they still need to enhance their
security and prove this to the market. On the other hand, Banks are the experts on
security and confidentiality, and they already have a loyal customer base who
gained their trust, however due to legacy IT systems, they are not able to provide
high tech products in the market to adopt to digitization. Fintechs and Banks should
marry their capabilities together and co-create better offerings in the market that
would then yield mutualism for both parties, and ultimately for the market. With
these partnerships, FinTech can do so much better. Leverage in the existing
infrastructure of banks and embracing “co-opetition” will be beneficial to both
parties. Lending Club’s credit supplier is Web Bank, and PayPal’s merchant
acquirer is Wells Fargo. Just like how Apple did not seek to restructure the telco
industry from scratch but cleverly leveraged what already existed, successful
FinTechs will find ways to partner with banks, that is, acquire underbanked
customers that banks cannot serve. Apple Pay is a great example for this with its
tokenization capabilities supplied by the payment networks. It aims to provide an
enhanced digital wallet customer experience in partnership with banks. As a
response, Banks should start moving away from legacy IT systems and move

44
towards the platformification of Banking to enable it to adopt new technology
easily. Open API is a major move that Banks need to adopt to enable them to plug-
and-play to the different Fintech products available in the market. Banks should
also learn from the Fintech sector on the importance of big data in analyzing their
customer data and spot trends in the market. This big data should also trigger the
shift in the outlook and risk appetite of the Banks based on the new insights and
data sets gathered. Thru this, Banks will be able to provide more relevant offerings
that consumers want at the right place and at the right time.

45
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