Corporate and SME Experiences of Digitizing Business Payments in the Philippines

BTCA case study no. 5 BETTERTHANCASH EVIDENCE PAPER ALLIANCE Empowering People Through Electronic Payments July 2015

Leaving money on the table: Corporate and SME experiences of digitizing business payments in the Philippines

by James Hokans, Bankable Frontier Associates ABOUT BTCA The Better Than Cash Alliance (BTCA) is an alliance of governments and private sector and development organizations committed to replacing the use of cash payments with electronic payments, where appropriate, and to promoting a “cash-lite” economy.

Shifting payment of salaries, social welfare and relief payments, payments to suppliers, remittances, etc. from cash to electronic has the potential to improve the lives of low-income people, particularly women, while giving governments, the private sector and the development community a more transparent, time- cost-efficient, and often safer means of making and receiving payments.

The Better Than Cash Alliance: 1. advocates for the use of all forms of electronic payments where they provide a preferable payment option to cash; 2. collaborates with program partners to mobilize available technical expertise and resources to identify and implement the most effective approach to make the transition from cash to electronic payments; and 3. conducts research, documents good practices and produces knowledge products to address the barriers to adoption and drive the effective shift from cash to electronic payments globally.

BTCA’s Development Results Focused Research Programme (DRFRP) accelerates the generation and dissemination of knowledge and tools for stakeholders transitioning part of their payments from cash to electronic. The DRFRP has three components: 1) Readiness diagnostics, which compile existing data on the volumes, values, and payment means for each kind of payment made by governments, the private sector, and development community partners, and assess the country’s readiness to replace cash payments with electronic payments; 2) Case studies of on-going shifts; and 3) Toolkits to provide practical steps for BTCA stakeholders to plan, measure and implement shifts.

The DRFRP is managed, on behalf of BTCA, by a consortium led by Bankable Frontier Associates, a Boston- based consulting firm, with advice from experts from the World Bank Payments Group and the CGAP Technology Team, as well as local research staff. BTCA Case Study No. 5 BETTERTHANCASH EVIDENCE PAPER ALLIANCE Empowering People Through Electronic Payments July 2015

Leaving money on the table: Corporate and SME experiences of digitizing business payments in the Philippines by James Hokans, Bankable Frontier Associates BTCA CASE STUDY SERIES The BTCA case study series seeks to highlight specific examples of shifts to electronic payments by government agencies, businesses or development partners. Each case study documents the extent of the shift and the factors that have helped or hindered it, in order to provide insights which are relevant to a wide readership interested in how to shift from cash to electronic payments.

AUTHORS James Hokans, Bankable Frontier Associates

ACKNOWLEDGMENTS This case study is the outcome of a recommendation made in the BTCA Country Diagnostic for the Philippines to examine interbank e-payments and their impact on supplier payments by business. For this case study, Abraham Co, President of the Asia United Bank and John Cary Ong, Director from Citi Philippines were generous with their time and assisted in making several of the introductions for interviews with Filipino medium sized businesses. Wajiha Ahmed from BFA oversaw the development and piloting of the survey instrument of small businesses in the National Capital Region, with support from Jay Sandoval from Social Weather Stations and Laura Cojocaru from BFA. Johann Bezuidenhoudt, senior associate with BFA, was invaluable as always in assisting the author with some of the technical details of making inter-bank fund transfers. Consultants Jing Gusto and Jun Perez were of great assistance in helping the author to implement a survey questionnaire with some of the businesses mentioned in this case study. Finally, the author would like to give special thanks to Nestor A. Espenilla, Jr., Deputy Governor, Bangko Sentral ng Pilipinas (BSP) for inspiring this case study, and to the Payments Office of the BSP for providing the author with high level information about the national retail payment system. Special thanks are also extended to the staff members of BancNet, Megalink and the Philippines Clearing House Corporation for their patience in answering the author’s many questions.

Finally, I wish to thank Pia Roman of BSP and John Carey Ong of Citi Philippines for reviewing a draft of this paper.

Every effort has been made to limit the number of technical errors, which are the sole responsibility of the author.

All photos © USAID Digital Development - © Shutterstock.com

ii Leaving money on the table: CORPORATE AND SME EXPERIENCES OF DIGITIZING BUSINESS PAYMENTS IN THE PHILIPPINES TABLE OF CONTENTS

I EXECUTIVE SUMMARY ��1

II INTRODUCTION �� 5 III FILIPINO BUSINESSES HAVE FEW DIGITAL PAYMENT OPTIONS �� 9 IV FACED WITH THESE OPTIONS, MEDIUM TO LARGE-SIZED BUSINESSES DEVISE COMPLEX PAYMENT ARRANGEMENTS ��15 1 4. A von Cosmetics, Inc. utilizes intra-bank digital payment facilities for payroll ��15 4.2 SME franchisee in pharma painstakingly manages its multiple account balances ��17 4.3 Global Restaurant Concepts, Inc struggles to convince suppliers to take interbank electronic payments ��18

V THE AVAILABLE OPTIONS ALL CARRY COSTS FOR BUSINESSES, BUT AUTOMATING CHECKS OFFERS AN ATTRACTIVE HALF-WAY STAGE ��21

VI BUT BANKS MAINLY BEAR THE COST OF CHECKS AND SHOULD HAVE REASON TO CHANGE �� 25

VII THE WORLD OF DIGITAL PAYMENTS HAS YET TO SIGNIFICANTLY TOUCH SMALLER BUSINESSES ��29 7.1 E ven where access is not a challenge, most small businesses are unbanked ��29 7.2 E ven banked businesses are not using electronic payments ��30 7.3 Small businesses are not shopping around for lower fees or better products ��31

VIII LESSONS FOR REGULATORS AND BUSINESSES �� 33 1 8. Aligning banks’ interests with those of businesses and consumers may require incentives or even penalties ��33 8.2 Busines ses should study the costs they face in making payments, and then shop around for better bank services ��34

ANNEXES...... 35 ANNEX A: LIST OF ACRONYMS ��35 ANNEX B: SOURCES ��36 ANNEX C: CALCULATOR DETAILED ASSUMPTIONS (SHOWING 100% DIGITAL SHIFT) ��38 ANNEX D: ECONOMETRIC ANALYSIS �� 40 Endnotes ��41

Note: Exchange rate conversions made at the rate of 1 USD to 45 PHP (as of 26 September 2014).

TABLE OF CONTENTS iii EVIDENCE PAPER

iv Leaving money on the table: CORPORATE AND SME EXPERIENCES OF DIGITIZING BUSINESS PAYMENTS IN THE PHILIPPINES PHILIPPINES CASE STUDY

1 Executive summary

1. The BTCA Country Diagnostic (BancNet) does offer low value for the Philippines, completed credit transfers in real time in 2013, found that while many between payment card accounts, medium and large businesses paid but these are little used. their employees digitally, very few 4. From interviews with Filipino business-to-business payments corporates across sectors, it were made digitally. appears they are looking for 2. This case study builds the evidence the following characteristics base regarding business payments in payment instruments: in the Philippines, the incentives • Acceptance from the payee businesses face, and what it would (which implies convenience and low take to shift corporates decisively or no cost structure for recipient); to digital payments. The case draws on in-depth interviews with • Clear rules on recourse and liability; commercial banks and Filipino and corporates, complemented by a • The ability to provide information survey of 400 small businesses with the payment to ease employing between 2 and 25 reconciliation. people in Metro Manila in 2014. These characteristics are no different 3. While the Philippines payments from those found in other surveys of system offers digital payment businesses around the world, such instruments like inter-bank as in Canada and the US. Filipino electronic credit and debit businesses understand the high transfers, checks remain by far the administrative costs they face but are most widely used interoperable unable to make the switch today. In payment instrument. Instead this regard, they differ from Nigerian of using electronic inter-bank corporates of equivalent size, which transfers, businesses tend to have largely accepted the need to open multiple bank accounts with shift, and the inevitability of shifting, different banks and then initiate and are making steps in this direction on-us payments to suppliers — albeit in an environment where at their own banks. One of the policy and costs promote Philippines payment networks their doing so.

SECTION 1: EXECUTIVE SUMMARY 1 EVIDENCE PAPER

5. A typical medium to large Filipino the position of individual banks business drawing 1,000 checks per would vary with market share and month to suppliers could save 25% customer base, this level of savings of its invoice handling costs if it would suggest that the sector as a shifted half of those payments to whole has an incentive to revise its electronic transfers (direct credits) digital fee structures to persuade on current terms. A full shift to corporate customers to switch digital payment and processing away from checks. would save 46%. However, a large portion of the savings may come 7. At a level below the corporates simply from eliminating manual interviewed, a survey of small but checks: adopting auto-check largely formal businesses (turning payments, authorized online, may over $2,900 per day on average) give as much as 41% cost savings. shows that a high proportion of And this would let businesses them function almost entirely in keep the check float without the cash economy, not even able having to persuade suppliers to to use checks: 70% have neither a accept electronic payments, for corporate nor an owner’s personal which the payer and especially bank account. This high unbanked the payee would have to pay level translates to very low levels high and often non-transparent of electronic payments. Only 1% fees. The incentives in the current of the businesses paid employees environment for corporates to electronically; the same low level move away from checks as a of digital payments was true in payment instrument are other categories of payments. not strong. 8. Three key factors impede a 6. Even if corporates do not fully transition to more digital perceive the costs of the checks payments in the Philippines: they use, banks bear high costs from this system. There are no • The need for a value proposition accurate figures for the costs for businesses to have an account; of payment instruments in the • The need for banks to market Philippines today. However, electronic payments convincingly estimates from Europe and and play an active role in on- Australia, adjusted for PPP, boarding a wider SME customer suggest that a switch from check base; and to direct credit would save the • The need for more transparent banking sector $1.52 per payment. pricing for both payer and payee. If all the checks cleared in 2013 were to switch to the lower cost 9. Although the Philippines has instrument, the sector could been a world innovator in certain save $272 million or 8.5% of the categories of payments (such net profit after tax of the entire as mobile), the state of digital banking sector in 2013. Even if corporate payments reflects a low

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level equilibrium trap: the level improve the interoperability of of digital payments is low; and electronic instruments. This case the incentives to change are not study suggests that this action yet aligned among many banks will help but alone is unlikely to be and their customers. As a result, major energy is required to shift corporate payments from this state. The government, through the Central Bank, is already playing a coordinating role to

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2 Introduction

Despite the concerted interest of the for inter-bank transfers that is Bangko Sentral ng Philipinas (BSP) increasingly used by businesses in the promotion of digital payments, to accept payments. In Nigeria, the the current payments ecosystem government’s “Cashless” policy has, in the Philippines constrains the in part through a system of penalties options of businesses, in particular, on cash handling imposed through to digitize their payments. Many banks, changed large businesses’ large and medium-sized businesses incentives and encouraged them already pay salaries electronically to innovate in how they make and but have to open accounts at many receive payments. banks to avoid the high fees and other disincentives associated with In the Philippines, though, the inter-bank digital payments. In achievements by the BSP in the case of suppliers, the lack of implementing the real time gross a suitable, widely used inter-bank settlement system for large value transfer solution means businesses payments have yet to be matched overwhelmingly still use checks by policies that drive real change and manual processes to pay their in retail payments. “Our vision is suppliers. This situation is a major to see the rapid development of drain on corporates: BTCA estimates a widespread, efficient, and low- that it costs medium-sized Filipino cost e-money ecosystem that links companies US$6.11 (PPP adjusted) government, businesses and people per invoice to process these payments efficiently in a ‘cash-lite’ world of manually and pay by manual check. financial transactions,” BSP Deputy Governor Nestor Espenilla has said. The lack of movement in digital “Cash will always be around but it will payments for businesses in the become increasingly less important Philippines stands in contrast to in commercial and governmental recent developments in Colombia financial transactions.”1 and Nigeria, described in two recent BTCA case studies. In Colombia, the According to the BTCA Country banks (with the encouragement and Diagnostic of the Philippines, contribution of the government) business-to-business payments jointly developed an online platform represent the largest single pool

SECTION 2: INTRODUCTION 5 EVIDENCE PAPER

of non-digital transactions by Banks do not market electronic value. Business payments are still payments convincingly to their overwhelmingly conducted in cash corporate clients, and small and checks, due in part to the businesses do not see a value incentives, or lack of incentives, proposition in opening an account provided by the banking system or using electronic payments. to adapt. Some banks offer their corporate clients check- As Figure 1 below shows, this case processing services that track and study focuses on payments from print Creditable Withholding Tax businesses to their suppliers of certificates. These certificates are goods and services, as well as from given to the suppliers together with businesses to their employees. the check payments. Suppliers need the certificates as evidence of taxes paid when audited by the Bureau FIGURE 1 Payment grid and of Internal Revenue. Banks also offer focus of case study2 intra-bank digital salary payment services. These services preserve banks’ existing, profitable business PAYEE lines but are likely inefficient for many corporate clients, as well as G B P for employees who may not opt out of opening an account in a bank G specified by their employer.

This case study about business B payments in the Philippines draws on interviews with three medium-sized PAYER businesses that all face high costs for P making payments, especially to their suppliers, because of the lack of clear policy or a push by banks to change. D Information obtained from these sources has enabled the calibration of a calculator that estimates payment Focus of case study costs under different scenarios. Referred to in case study The case also uses data from a survey of 400 small, retail-facing businesses G = Government; B = Business; P = Individuals; D = Devlopment partners in Manila. Most of these businesses function almost entirely in cash and do not use either a business or a personal bank account.

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The first section presents the current results of the small business survey methods available for large and and the factors limiting the usage of medium-sized businesses to make digital payments. The final section payments to employees and suppliers. draws implications for governments The next section examines three ‘ interested in strategically supporting mini-cases’ of medium size businesses businesses to digitize their payments, in the Philippines, each of which and for businesses that operate in this is seeking to digitize its payment kind of payments ecosystem. streams, but with little or no success. The third section calculates the costs As a guide to reading the case, a stylized Filipino business faces in Table 1 below maps how this case the current system and the potential study extends the information base savings of digitizing part or all of its regarding each of the potential invoice payment process. In the fourth benefits of digital inter-bank payments from the perspective FIGURE 1 Payment grid and section, the case study uses cost focus of case study2 findings from high-income countries of businesses. to estimate the cost of the reliance on checks to banks in the Philippines. Then the case study looks at the

SECTION 2: INTRODUCTION 7 EVIDENCE PAPER

TABLE 1 Benefits of electronic payments discussed in this case study

Cost Savings Transparency Speed & Security

The businesses interviewed report The Department of Budget and Medium size formal businesses report costs they believe they could save Management (DBM), which oversees that they seek to reduce their security with access to electronic inter-bank government payments, has made risks when making and collecting payment systems from their main bank, significant strides in enabling the payments, and for the most part they and reducing the number of checks adoption of electronic payments, trust checks which may take several written and accounts maintained. with gains for transparency. days to clear. However, they seek The invoice calculator suggests that However, transparency is not a major greater speed and convenience to make the saving could be 25-46% of invoice factor for the businesses interviewed payments to suppliers. They have been processing per annum. in this case study, though each said less able to incentivize their payees Most businesses are also seeking they supported government’s goal of to accept real time (IBFT) payments greater control and efficiency to increased transparency. because the service is unknown, release management time to be unavailable or expensive for payer focused on core business. and payee. The current electronic inter-bank options are hugely inconvenient and costly for payees and payers alike.

Economic Financial Inclusion Development Changing Lives

This case study suggests that financial Businesses are not adopting a wide To date, digital payments have not had inclusion and inter-bank electronic range of innovative approaches to a substantial impact on the lives of the payments are linked. The survey results payments, but remain tied to checks owners of the small and medium sized of small businesses suggest that if in spite of erosion of legal protections. businesses interviewed for this case policymakers want to reduce the cost Banks continue to “wall off” their study. An unclear value proposition of cash on the financial system, they corporate and medium size businesses across a fragmented IBFT value chain can encourage financial inclusion from efficient cross payment systems for business and consumers hinders by ensuring greater ability to make to capture business and protect their developing, delivering, and promoting convenient and affordable third party intra-bank remittance services. useful “many-to-many” e-payments account-to-account payments from Businesses are required to maintain by the underserved and women using any device by small businesses high float balances and therefore lack whatever device at their disposal, and their clients. access to locked-up capital to invest such as mobile, to make deposits in core business. and payments.

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3 Filipino businesses have few digital payment options

The predominant way for Filipino FIGURE 2 Intra-bank electronic payment (Model A) businesses to make payments electronically, whether to employees or suppliers, is for both the business Corporation and the recipient to have bank accounts with the same bank. Figure 2 at right shows this approach, Account(s) at each bank called Model A.

Banks have developed payment Bank Bank Bank services and digital channels — 1 2 3 including ATMs, online banking and mobile banking — to help their Intra-bank transfers corporate and retail clients make intra-bank electronic payments, though data on the volume and value of these transactions is not tracked by regulators. Payments on these channels are usually cleared in real Recipients/bank clients time when the payee is at the same bank. A large number of banks today offer these electronic products as shown in Table 2 below.

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TABLE 2 Intra-bank electronic payment products

Electronic Banking Product No. of banks Internet banking 44 Mobile banking 32 Phone banking 16 Mobile/internet intra-bank through ATM consortia 6

Source: BSP and the World Bank as at 30 June 2013

Intra-bank payments may also be or between regions within the bank, made by branch transfers, which are but rather than pass those costs on generated by the business issuing directly to clients, banks typically written instructions to the branch require higher minimum balances to make payment, and of course to be held in accounts. by checks. Banks also typically do not charge Banks do not charge fees for corporates per check issued, provided intra-bank transfers to their clients. balance levels are maintained. Checks Banks do have internal costs for are de facto interoperable instruments making transfers between branches in that a check issued on any bank can be deposited at another, with the FIGURE 3 Inter-bank electronic payment (Model B) value cleared through the Electronic Check Clearing System operated by the central Philippine Clearing House Corporation Corporation (PCHC), usually within two days depending on location. Account(s) at each bank This interoperability of this paper instrument is one of the reasons most supplier payments are still done this Bank Bank Switch/ way. 1 2 clearing house However, businesses are limited in the degree to which they can make digital payments across banks — that Bank is, from their account at one bank to 3 a recipient’s account at another bank. Figure 3 shows what an inter-bank payment looks like, called Model B. Recipients/bank clients

Intra-bank transfers

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Businesses currently have three but the system only manages options for making these kinds 143,000 transactions per month, of payments: or about 1.7 million transactions per year. This number is only 1% A. The Electronic Peso Clearing and of the volume of checks cleared Settlement System (EPCS) is an as Figure 4 below shows (Note interbank account-to-account that this does not include checks fund transfer system operated from one account to another in the by the PCHC which is primarily same bank.) Figure 4 also shows owned and governed by the main that while digital transfers through commercial banks. The EPCS EPCS are growing, the number supports bulk, recurring, non-time - of checks issued remains stable sensitive payment transactions. contrary to the experience The EPCS is considered a cost- of other countries like Nigeria efficient means of transacting and Colombia. payments but the Bankers Association of the Philippines The transaction fee per transfer has not facilitated rules on debits was raised from PHP 10 to PHP 25 through the EPCS. Nevertheless, per batched transaction.4 it is an important alternative to The receiving banks are also check payments.3 As of 2013, 38 allowed to charge an inward fee commercial banks participate to the payee at whatever rate the in the daily operations of EPCS, market will bear, which according

FIGURE 4 Checks and electronic credit annual transaction volumes

200.0M 180.3M 181.8M 181.1M 180.2M 179.0M 180.0M 160.0M 140.0M 120.0M 100.0M 80.0M 60.0M 40.0M 20.0M 0.9M 1.0M 1.2M 1.5M 1.7M 0M 2009 2010 2011 2012 2013

PCHC cleared checks PCHC EPCS cleared transaction volumes

Source: PCHC 2013 annual report.

SECTION 3: FILIPINO BUSINESSES HAVE FEW DIGITAL PAYMENT OPTIONS 11 EVIDENCE PAPER

to the PCHC could be as high as PhilpaSS charges low fees on a PHP 400 per transaction, a clear tiered basis, but there is a lack disincentive for a supplier to want of transparency on the incoming to be paid through this method. and outgoing fees banks may charge. These fees are on top of B. PhilPaSS, is the real time gross the PhilpaSS fee and apply to even settlement (RTGS) system small retail payments (less than operated and governed by the $ 1 million). While the transaction BSP to manage systemic risks is real time, banks may not credit associated with large value cross the payee’s account real time. payments. At the end of 2013, 38 PhilpaSS works well. The current commercial banks, 3 specialized situation probably reflects the government banks, 43 thrift banks, pent-up demand for smaller retail 53 rural banks and 14 Non-Bank/ cross payments by those banks Quasi-Banks were registered that do not directly influence the with and using the RTGS. rules of governing bodies of the PhilPaSS mainly settles inter-bank PCHC and the national switches. payments stemming from the This situation may be incentivizing sale and purchase of government the use of PhilpaSS by some banks securities and the settlement of for lower value retail payments for the peso leg of foreign (exchange) which the RTGS was not originally transactions, and it also handles developed, and is being monitored closely by the BSP. some Treasury payments. All transactions initiated in PhilPaSS C. BancNet, one of three national are processed and settled on a real ATM switches, offers a real-time time basis. PhilPaSS, however, has fund transfer facility to its member begun to handle the clearing and banks called the Inter-Bank Fund settlement of a share of remittance Transfer (IBFT): from an ATM proceeds from overseas Filipino belonging to any bank in the workers, and it settles the final network, an accountholder at one balances between participants in of the banks can make a transfer to various retail payment systems. a card-linked account at any other Recently, PhilPaSS has also begun bank in the network. The facility clearing and settling customer is also available via BancNet’s funds transfers, in particular for own website or mobile channel corporates through Non Bank or as a facility within certain Quasi-Bank licensed entities, such banks’ internet banking offerings. as leasing, car financing and bank- Unlike “off us” cash withdrawals owned remittance companies, on ATMs, this IBFT facility is not and for smaller banks requiring interoperable with members of the clearing and settlement of Megalink or the other switches. customer payments. (Megalink has a similar inter-bank service available among its member banks.)

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The transfer amount is limited makes a second or subsequent to the maximum of what the IBFT that month, some banks also cardholder is allowed to withdraw charge an outgoing fee on top at ATMs. Of the 60 or so banks of the BancNet charge for a total that are offering the IBFT facility of up to PHP 100 to the payer.5 to their card and accountholders, Despite more than 25 years of only 5 banks have daily limits of development, Inter-Bank Funds up to PHP 100,000 ($2,220); the Transfers today represent less average limit is much lower at PHP than 1% of all ATM, internet and 40,000 ($885). BancNet places mobile-initiated transactions no limits on the number of IBFT at BancNet.6 transactions that a payer can make each month. This facility may be Businesses therefore have limited of use to a smaller cash-based options. Faced with services not business owner who may want to designed for use by business, with make cross payments to suppliers, high or unclear fees, or with limits to but the banks do not actively the transaction size, most large and promote this facility medium-sized businesses get the to these kinds of businesses. message: If you want to pay digitally, Pricing is also a major factor. The use whatever leverage you can to get BancNet fee to the issuer for your employees or suppliers to open each IBFT is P25 per transaction, accounts at your main bank. which is usually passed on to the And if that doesn’t work, use checks. cardholder. Some banks, however, charge an incoming fee to the Table 3 below summarizes the payee (similar to payees of the options businesses have and EPCS). If the same cardholder the costs of each option:

SECTION 3: FILIPINO BUSINESSES HAVE FEW DIGITAL PAYMENT OPTIONS 13 EVIDENCE PAPER

TABLE 3 Payment instruments available and typical costs for businesses

Time for payee to Limits on number or Instrument Offered by Fees to payer Fees to payee receive credit transaction size

Most Cost of check, i.e. Real time in NCR; T +1 Intra-bank commercial No check book charges, No outside Manila banks if any

Checks No: generally waived with minimum balance Inter-bank PCHC T+2 No No or no. of transactions; check book cost, if any

Most commercial banks No: inter-branch fee No direct cost, but Instant generally waived possible account Favored by Intra-bank transfers No involvement of No with minimum balance opening costs if banks with PhilpaSS or number bank chosen by large branch of transactions payer networks and client bases

Most 400 PHP up to 25 PHP up to 0.25% EPCS commercial T+1 No 0.25% per trans- per transaction banks action

Commercial Yes, with the banks, thrifts, Real time to exception of OFW Inter-bank PhilPaSS rural banks the beneficiary bank No 100-500 PHP remittances (as transfers and quasi but not the payee mandated by BSP) banks and top customers.

BancNet Set by bank, usually at member banks Set by bank: up to IBFT Real time ATM withdrawal limits Yes 100 PHP Megalink (up to $2220 per day) member banks

Corporate payment cards (Visa, Depends on credit rating Merchant discount Citi, BPI, BDO T+1 No MC, AMEX) of corporate client rate of 2-5%

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4 Faced with these options, medium to large-sized businesses devise complex payment arrangements

This section describes how three and has tried to take the initiative to medium to large-sized businesses digitize some of its payments but has make payments. These three run into significant challenges. companies were recommended by two different sources: the Asia 4 .1 Avon Cosmetics, Inc. United Bank, which has been trying utilizes intra-bank digital to break down barriers to efficient payment facilities inter-bank digital payments for small for payroll and medium size enterprises; and Avon Cosmetics, Inc makes direct from contacts established during the sales of cosmetics to the mass market. country diagnostic in 2013. It operates from a head office in Manila, with 20 Avon-owned branches They are drawn from three distinct and 148 independent franchises. sectors of the retail industry: direct It has an annual turnover of $375 selling of cosmetics (Avon), drugs and million. Avon maintains 28 corporate health-related products (The Generics accounts to pay and receive cash Pharmacy, an SME franchisee) and revenues from 800,000 direct sales casual dining franchise restaurant representatives; 250 employees are chains (Global Restaurants Concepts, paid monthly from Avon’s main bank Inc). Each of these companies has account to individual ATM the desire to digitize their payments, card accounts.

SECTION 4: FACED WITH THESE OPTIONS, MEDIUM TO LARGE-SIZED BUSINESSES 15 DEVISE COMPLEX PAYMENT ARRANGEMENTS EVIDENCE PAPER

The head office does not require sales — 1000 per month to suppliers representatives to open accounts in — it will not have to pay a fee per the same bank as Avon headquarters, check for processing; rather, it must as the geographical spread of the maintain a minimum daily balance business would render it impossible at its main bank. While Avon will not in any event. experience a direct cost per check, it may experience opportunity costs Tina Samoy, Finance Operations from maintaining a higher balance Manager, says the biggest obstacle than it might otherwise do; however, in using the intra-bank digital the marginal cost for the check payment facilities of the banks is processing service is difficult that the electronic receipts do not to quantify. include sufficient information for easy reconciliation. This situation creates Avon also makes use of a corporate considerable delay and problems, credit card and cash advances for and absorbs substantial accounting travel and a fleet payment card for time. The lack of transparent and fuel. However, all subcontractors, timely messaging drives the company especially professional service towards using checks. Ms. Samoy says providers, are paid by check. this situation is much different than her experience in other East Asian Avon does not use any inter-bank countries, such as Singapore, digital payment facilities as they do Malaysia and Korea. in other countries, because in the Philippines they are too expensive The business uses checks to pay for and inconvenient for both payers rent, telephone and utilities, as well and payees, according to Ms. Declar. as to pay other vendors. The business With access to affordable and reliable pays all of its suppliers and vendors inter-bank transfers, Ms. Declar said, with checks, which Ms. Samoy said is “There will be huge savings in admin unnecessarily costly. Avon currently work as well as time spent on the road writes checks manually. Suppliers in making withdrawals and deposits must come and pick up their physically in the branches, while checks, a process that requires three on-line is more comfortable, clerks alone. Staff must spend time quicker and safe.” preparing and processing invoices and chasing people for approvals, as well as pay for check preparation, paper usage, and “not to mention the benefit of less printing on the environment.”

By the end of the year Avon expects to outsource its check payments. Because Avon writes so many checks

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4.2 SME franchisee in pharma passbook in person at the nearest painstakingly manages its branch of each of the franchisee’s multiple account balances banks —a process that takes three hours for all banks combined and Outlets of the Generics Pharmacy are that the franchisee does about spread across Luzon and Mindanao. once per week. A Manila-based franchisee, with 21 outlets, has an annual turnover of Accounts generally had a low $2.5 million and employs 100 people, minimum balance at the outset, but of whom 90 are paid on-line through all the banks increased the minimum electronic intra-bank facilities. One over time as a fee for one service out of eight suppliers or service or another, such as waiving the providers is paid from time-to-time interregional branch transaction fees through an electronic intra-bank or providing a cash pick-up service. facility, with the rest in check. The franchisee (who wished to remain The franchisee said he would ideally anonymous) uses a corporate credit like to keep just $700 as a float card to cover travel expenses and in each bank account so he could some small purchases; he uses a make more productive use of the fleet payment card to pay for fuel. money and use it to make purchases. All regular monthly bills, including However, in exchange for cash taxes, rent, utilities and telephone handling services, his banks typically are paid by check. require that the business maintain average daily balances ranging The franchisee has opened seven from $22,000 to $67,000. banks accounts in five different banks so there is a branch close to each Though he is aware that at least outlet. The manager of each of the three of his banks offer an interbank outlets makes daily deposits to the electronic payment service, the bank from the previous day’s sales franchisee has not tried it due to for tracking and to avoid having too perceived high fees; he has also heard much cash on hand. that the rejection rates can be high, and data for reconciliation is hard to To avoid paying the high fees that fathom without better massaging. would result from transferring the He has also not asked his banks for balances in each of these bank help with check processing, nor has accounts into one account at he been offered check outsourcing one bank, the franchisee makes services. payments out of all of the accounts simultaneously. This requires knowing In his experience, some banks do how much is in each account before provide better service than others and he writes checks. And since he require lower average daily balances. does not have online banking, the However, those banks tend to lack the franchisee updates each account’s branch and ATM networks that would

SECTION 4: FACED WITH THESE OPTIONS, MEDIUM TO LARGE-SIZED BUSINESSES 17 DEVISE COMPLEX PAYMENT ARRANGEMENTS EVIDENCE PAPER

make it feasible to use them for more “gives us a bit of a recording function,” of his business. Mr. Go said. Another 10 checks are written each month for other 4.3 Global Restaurant professional service providers, such Concepts, Inc struggles as legal, accounting and security to convince suppliers vendors. GRCI’s suppliers and vendors to take interbank do not want to receive electronic electronic payments inter-bank payments due to the risk of being charged unexpected high Global Restaurant Concepts Inc. fees for receiving transfers. GRCI has (GRCI) has exclusive rights to develop attempted to convince suppliers to restaurant chains for such brands as open accounts in its main bank in California Pizza, PF Chang’s, Morelli’s order to accept intra-bank payments Gelato and at least four other global on which there would be no fee, but or Filipino brands. GRCI still maintains accounts at 5 other banks for both supplier payments and According to President and CEO for cash management purposes. Archie Rodriguez and CFO Griffith Go, GRCI has 800 employees and Today, when a restaurant needs to almost all are paid via an intra- place an order, it sends a purchase bank fund transfer from its main requisition by email to the Head corporate account to individual ATM Office/Restaurant Support Center, accounts. Mr. Go estimates that 80% which then prepares and faxes a of employees cash out completely purchase order to the supplier. The upon receipt of their bi-monthly salary supplier then delivers the goods to payments. GRCI used to make salary the restaurant. The restaurant then payments by check that took two needs to prepare a receiving report, days to process. Instead, intra-bank an invoice, and the original purchase transfers take 20 minutes to process. requisition and send them back to the Head Office. Afterwards, the GRCI makes at least 100 regular Accounting Department processes monthly payments for bills, all by the check for the supplier to be signed check. GRCI is leasing space for 21 by either the CEO or the CFO. restaurants, and most of utility bills are covered by rental agreements. Mr Rodriguez said, “It not only takes time…it wastes time. We would prefer Each quarter GRCI pays its withholding not to be chased around to sign taxes electronically; all other taxes are checks.” Mr. Go added, “If we were paid by check and delivered manually able to do IBFTs, it would definitely to local or national government offices. reduce costs. We now have 30 people in accounting; it could probably be cut GRCI makes at least 1,000 payments down to 12.” each month to about 200 restaurant suppliers, 100% by checks, which

18 Leaving money on the table: CORPORATE AND SME EXPERIENCES OF DIGITIZING BUSINESS PAYMENTS IN THE PHILIPPINES PHILIPPINESEVIDENCE CASE PAPERSTUDY

Instead, GRCI seeks to maximize the “For instance, once the supplier efficiency of using checks. GRCI is in completes the delivery, the store can the middle of launching an enterprise just pull up the window to check the resource planning (ERP) solution. purchase requisition order and convert it to a receiving report. Said action “With the ERP, the Head Office and can be readily seen by the accounting respective stores need to just pull up department so it can start processing the appropriate window to see the the check payment for the supplier.” transaction progress,” Mr. Go said.

SECTION 4: FACED WITH THESE OPTIONS, MEDIUM TO LARGE-SIZED BUSINESSES 19 DEVISE COMPLEX PAYMENT ARRANGEMENTS EVIDENCE PAPER

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5 The available options all carry costs for businesses, but automating checks offers an attractive half-way stage

So what would a typical medium However, with data gathered for this to large Filipino business like those case, it is possible to make a first in this case study save by shifting estimate of the costs and possible its invoice payments from paper to savings involved, excluding the digital? It turns out that none of the one-off costs of time spent businesses interviewed has yet made persuading suppliers to accept the calculation themselves, in part electronic. We used the BTCA Invoice because this can be complex to do. Calculator from the BTCA Business They may not even find such an analysis Toolkit to create a stylized profile persuasive, as they see other barriers to shifting: The difficulty of persuading for a representative business. Some suppliers to receive payments digitally of the data are too sensitive for any when checks are so entrenched and particular business to disclose, hence offer tangible proof of payment, the use of a stylized profile to and when there are opaque fees for provide anonymity. receiving EFTs and the value is not posted to their account in real time; as The detailed assumptions used in the well as payers’ own incentive to pay by calculator can be found in Annex C. check from the float income they earn The core assumptions are summarized before the check clears. in Table 4 below.

SECTION 5: THE AVAILABLE OPTIONS ALL CARRY COSTS FOR BUSINESSES, BUT 21 AUTOMATING CHECKS OFFERS AN ATTRACTIVE HALF-WAY STAGE EVIDENCE PAPER

TABLE 4 Core Assumptions

A. Company supplier profile

Number of suppliers Number 250

Total number of invoices received per month Number 1000

Total average value of payments USD 4,400,000 to suppliers per month

Of the above invoices:

% paid by check % 100%

B. Costs

Bank charge per check processed USD 0

Bank charge per EFT processed USD 0.5

Bank monthly charge for EFT service if any USD 0

Monthly employment cost per AP clerk USD 550

Monthly employment cost USD 5500 per accounting manager

Float interest rate on funds % 1%

22 Leaving money on the table: CORPORATE AND SME EXPERIENCES OF DIGITIZING BUSINESS PAYMENTS IN THE PHILIPPINES PHILIPPINESEVIDENCE CASE PAPERSTUDY

One observation from the above then transitioning in steps, first to table is that checks are essentially 50% digital on the basis that not all free for most businesses (subject to suppliers would be ready or able to maintaining balances with the bank shift, and then ultimately to 100% as discussed earlier), whereas digital digital. There are in fact additional payments via EPCS cost around costs associated with transitioning $0.50 each, so businesses perceive to digital, such as setting up and an immediate extra cost to shifting. testing suppliers’ bank profiles and In addition, the calculator takes into scanning invoices to digitize the account the value of the float on process, quite apart from the added checks to this business, using 1% as an cost of the electronic transfers over indicative rate based on current rates checks in the current environment. for special deposit accounts. This float However, the main savings come value is of course lost to the payer from reducing the time spent by (but gained by the payee) with digital management and staff in preparing, payments since the value is debited signing and then distributing checks. immediately on issuing the credit While administrative staff salaries are transfer instruction.7 relatively low today in the Philippines, these savings would become more The outcomes clearly depend both significant as these costs rise over on how far the business shifts to time. The result is that total costs of digital, and on how it shifts. Table 5 invoice processing and payment could below shows the total annual costs fall by 25% (for shifting half) or 46% of processing invoices, starting with (shifting all). the status quo (100% paper) and

TABLE 5 The cost savings to a business from shifting invoice payments to digital

TODAY: FUTURE 1: FUTURE 2: HALF STEP Scenario 100% paper 50% digital 100% digital E-check TOTAL COSTS PER $52,035 $38,378 $27,513 $30,496 YEAR % CHANGE -25% -46% -41% RELATIVE TO TODAY

Made up of: Supplier setup costs - 192 383 - Invoice processing costs 3,807 5,376 6,945 3,807 Payment costs 42,975 29,884 18,693 21,436 Post payment costs 4,936 2,767 1,332 4,936 Supplier maintenance costs 317 159 159 159

Source: Invoice calculator, calibrated as per Table 4

SECTION 5: THE AVAILABLE OPTIONS ALL CARRY COSTS FOR BUSINESSES, BUT 23 AUTOMATING CHECKS OFFERS AN ATTRACTIVE HALF-WAY STAGE EVIDENCE PAPER

Note that these calculations are likely function since it provided incentive to be conservative since they do not for the business to keep its deposit include any benefit from reduced float with the bank. This outsourcing risk of fraud: bankers report that the would have substantially similar incidence of fraud is lower today on time effect as moving all suppliers electronic transfers than on checks in to digital payments, resulting in cost the Philippines but the numbers were savings of 41% relative to the current not available to calibrate this benefit situation, but without having to at the level of a single business. undergo the time consuming process of persuading any suppliers to change Much of the savings comes from their means of receipt. taking the time out of paper check preparation and signature. What this means is that, while there As noted earlier, one of the businesses is strong incentive for a business to interviewed (Avon) was recently take advantage of this function as a offered the chance to outsource half step to digitizing its payments, check issuance to their bank via an the underlying payment instrument e-check function, whereby they would remains the paper check. As long enter and authorize payee amounts as checks remain ‘free’ to use while via a web portal and the bank would digital payments are charged (for issue, sign and send the checks.8 the recipient as well), the case for Provided the business maintained businesses to make the effort to sufficient balance, the bank would shift supplier payments will always not even charge for the added be harder to make.

FIGURE 5 Total annual costs of invoice processing: medium to large Filipino corporation

Total costs of invoice processing p.a.: medium to large Filipino corporation

60 000

50 000 -25% -41% 40 000 -46% 30 000 USD 20 000 10 000 - TODAY: E-check 50% digital 100% new 100% paper

Setup cost Invoice processing cost Payment costs

Post payment costs Supplier maintenance costs

24 Leaving money on the table: CORPORATE AND SME EXPERIENCES OF DIGITIZING BUSINESS PAYMENTS IN THE PHILIPPINES PHILIPPINESEVIDENCE CASE PAPERSTUDY

6 Banks mainly bear the cost of checks and should have reason to change

So far we have seen that Filipino rapidly between banks as payments businesses do have some incentive were settled faster. to digitize part of their invoice Just how high is the cost of checks processes, but not necessarily to to the Filipino banking sector? It shift away from checks as the main turns out that there is no sector wide underlying payment instrument. review of the costs to banks of check However, in common with other processing that is recent and publicly payment instruments like cash, available. Undertaking this complex the costs and benefits of using the exercise would be worthwhile both instrument are often distributed for the banking sector and the BSP, unevenly. In particular, Filipino banks in line with similar exercises largely bear the costs of issuing undertaken by central banks in a and processing the check, without range of high-income countries receiving fee income for the service. in Europe and in Australia. In the To be sure, they do hold the corporate absence of such an exercise in the check float in deposit, potentially at Philippines, it is nonetheless possible a higher level than otherwise may be at least to estimate the likely order of required, but even in a digital world, magnitude of these costs using the they would continue to hold the same data from the other countries. float in aggregate at the banking sector level, even if it moved more

SECTION 6: BUT BANKS MAINLY BEAR THE COST OF CHECKS 25 AND SHOULD HAVE REASON TO CHANGE EVIDENCE PAPER

Specifically, the cost estimates banking sector in 2013; or 6.3% of the prepared by the European Central total non-financial operating costs of Bank (ECB) (2012), based on the sector.11 questionnaires from country central banks, and the Reserve Bank of Of course, shifting away from Australia (RBA) (2007), based on checks does not mean that all costs underlying information collected from disappear— and certainly not at banks there, suggest that, for the once. The inter-bank transactions average financial institution, checks carried out by check such as those cost from US$2.56 (in EU)9 to US$3.71 to corporate suppliers would have to (in Australia)10 per check. In order shift to a digital instrument such as a to allow for the difference in labor credit transfer, for which banks also costs and cost structures between incur costs issuing and processing. these countries and the Philippines No reliable cost numbers are available in the absence of a detailed cost across the Philippines today for these study, we can apply the World Bank payments either, and even if they GDP PPP adjustment of 42% in 2013, were, the low volumes of current implying that goods and services usage today (equivalent to only 1% there are cheaper in US$ terms. This of the number of checks cleared) suggests that actual costs in effective may distort the costs per transaction local currency terms are more in the upwards, relative to what they would effective range of US$1.48 to $2.14. be if the entire large number of Taking a simple average between checks were to shift onto these two figures yields an estimated this platform. average cost to banks of $1.81 Hence, again, it may be more reliable per check in the Philippines. to infer a cost per credit transfer Clearly, many checks are processed from the estimates of the ECB and intra-bank, especially within larger the RBA. The ECB weighted average banks. However, there are no estimate for banks across reporting aggregate figures for these payments, member banks (splitting total social though clearly intra-bank checks cost by the overall ratio) is $1.32. would cost less to process than This average number reflects the wide inter-bank checks. Using only the range of sizes of European banks and 2013 number of 179 million inter- diversity of usage levels in different bank checks cleared through PCHC, country payment systems; hence the the banking sector as a whole may median is much lower, at $0.91, or therefore have incurred costs related in PPP terms $0.52. And this figure to check clearing and processing of is much higher than the Australian some $324 million in that year. weighted average financial institution To put this in perspective, this number cost for each direct credit of $0.07, or represents some 10.2% of the total net in Filipino PPP terms, $0.04. However, profit after tax of the entire Filipino the RBA makes the point that if

26 Leaving money on the table: CORPORATE AND SME EXPERIENCES OF DIGITIZING BUSINESS PAYMENTS IN THE PHILIPPINES PHILIPPINESEVIDENCE CASE PAPERSTUDY

a proportion of costs for internet revenue, the level of revenue which banking were properly absorbed would be earned is uncertain. into the direct entry products, since To get to the high volumes of digital internet banking is the front-end for usage from a complete switch over, entry, the costs per transaction would banks would likely have to reduce double to $0.08. So the PPP-adjusted substantially their current levels financial institution resource cost for of fees on credit transfers for the direct credits may lie between $0.08 payer and certainly for the payee. (in a large, active system) and $0.50 (which is biased towards smaller Clearly, this analysis can only be systems in which the instrument is indicative of the orders of magnitude less used). To be conservative for involved, in the absence of clear, the Philippines, let us again take the credible local cost calculations. average of these numbers as a proxy But analysis does suggest that the of where the cost might be in future: banking sector as a whole has much $0.29. to gain from revising its fee structures on digital products and together Using these cost assumptions, Filipino actively seeking to encourage banks would save on average $1.52 corporate customers to shift to digital per transaction shifted from check solutions, rather than competing to direct credit ($1.81 for check less for shares of float in a smaller pie $0.29 for direct credit). Again, using of profit after the cost of checks the present numbers of checks are considered. cleared, the annual net saving for the banking system would be $272 million, over 8% of the sector’s entire 2013 net profit. This is money left “ on the table” for the banking sector as a whole.

These savings at the level of the sector are not necessarily applicable at the level of each individual bank. While it seems clear that all banks would save costs by switching inter- bank checks to credit transfers, the net benefit to any one bank would vary depending on which banks today benefited most from holding proportionately more float. Also, while banks may also be able to charge for the digital transfers, unlike for checks today, thereby earning additional

SECTION 6: BUT BANKS MAINLY BEAR THE COST OF CHECKS 27 AND SHOULD HAVE REASON TO CHANGE EVIDENCE PAPER

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7 The world of digital payments has yet to significantly touch smaller businesses

The preceding sections showed that 7 .1 Even where access is not large and medium-size businesses are a challenge, most small using bank transfers for payments like businesses are unbanked salaries, albeit largely on an intra-bank IBFTs, as with other digital payment basis, but they generally use checks instruments, are available in theory for most supplier payments, even to all businesses and individuals though they may save costs overall from shifting with card-linked accounts at formal to digital payments. financial institutions. Yet very few Filipino small businesses — even in Even these basic payment options urban Manila — in fact have bank are unavailable in practice today accounts. In the survey, 70% of to most small businesses in the businesses operated without any bank Philippines, though. Working with account; 17% used a personal bank Social Weather Stations (SWS), a account belonging to the business leading private Filipino research owner; and just 11% did business institute, BTCA surveyed owners, managers, accountants and cashiers from a corporate bank account (3% at 400 small businesses in the Manila used both kinds of accounts). The area.12 The hypothesis in selecting percentage of small businesses this sample was that these urban- banked is far lower than was revealed based businesses would not face a in a similar BTCA survey of businesses geographic challenge in accessing with equivalent employee numbers formal financial services so they in Lagos, Nigeria, where only 17% would be the most likely of the of small businesses had no account. country’s small businesses to have digitized some of their payments.

SECTION 7: THE WORLD OF DIGITAL PAYMENTS HAS YET 29 TO SIGNIFICANTLY TOUCH SMALLER BUSINESSES EVIDENCE PAPER

Regression analysis (see Annex D for 7.2 Even banked businesses more detail) of the Philippines survey are not using electronic data shows that small businesses with payments bank accounts are most likely to be Unlike with large and medium older businesses and are likely to have businesses, small businesses’ a greater number of suppliers than main challenge to using electronic are businesses without bank accounts. payments is not mainly fees or other However, the number of transactions costs. Rather, it is that they operate a business does per day, as well as the in an environment dominated by average value of those transactions, cash. Moreover, banks are not playing is not a good predictor of having a an active role in on-boarding and bank account. In other words, the promoting digital payments to small businesses with bank accounts a wider SME customer base. are typically more established and more complex businesses. This is not The median number of sales that surprising in itself. businesses in the survey did in a day was 30, with a median value of The fact that most small businesses just $1. Almost all (99.99%) of these do not have bank accounts means purchases are done in cash. (The that they cannot access the digital findings of the survey confirmed the payment instruments provided by BancNet and others, even if these estimates made in the 2013 BTCA were well suited to their needs. As Country Diagnostic for the Philippines noted earlier (see Table 3), IBFTs are of the usage of electronic payments limited in daily value to the amount by small businesses.) When asked that cardholders can withdraw at what hindered their businesses from ATMs, making this service impractical receiving electronic payments, over for most payments by large and even 82% said their customers think cash is medium-sized businesses. Small easier or their customers feel better businesses, on the other hand, would paying in cash. not be constrained by these limits: The same is true for outgoing among the businesses surveyed, payments. In the survey, just 1% of the median value of a payment to a small business payments were made supplier was about $467, well within electronically. And over 92% of the IBFT limits. So even though small businesses said cash is easier to use businesses would still face the high or that they feel better using cash. fees of IBFTs (possibly both as payer This finding does not differ materially and as payee), the service could cater between businesses with accounts for the sizes of transactions most and those without accounts. small businesses need to make. But most do not have bank accounts. Among those with accounts, just 7% of businesses have made an effort to make more payments digitally, and

30 Leaving money on the table: CORPORATE AND SME EXPERIENCES OF DIGITIZING BUSINESS PAYMENTS IN THE PHILIPPINES PHILIPPINESEVIDENCE CASE PAPERSTUDY

7% have made an effort to receive because they had a personal account more payments digitally (compared at the same bank. Only a handful of to less than 1% of businesses without respondents said they chose their accounts in both cases). There is just bank because it had the lowest fees, not a strong appetite for digitizing that it is a good bank for their type of payments. business, or that it is the same bank used by their main customer.

7.3 Small businesses are Businesses without bank accounts did not shopping around not worry about fees, either: just 2% for lower fees or better said fees are too high. Instead, these products businesses tended to say they did The survey asked each business with not feel they had enough money to a bank account why it chose warrant having a bank account (50%), its specific bank. Two possible that they generally did not need one hypotheses were (i) big players in the (19%), or that they needed cash on small business’s value chain would hand to buy supplies (17%). have forced it to choose a certain These finding suggest two things: bank so as to facilitate intra-bank payments, and (ii) small business • Banks are not competing for these owners would be willing to travel a businesses, either on products little extra in order to get services that (electronic payments or others) were more tailored to their needs and or on price; and revenue flows. • Small businesses perceive that having a bank account is not Overwhelmingly, however, necessarily good for managing the responses had to do with complexity once they are convenience: 59% of respondents established — and the need to make said they chose their bank because it electronic payments is not bringing was the closest bank to their business these businesses through the location, and other 18% said it was branch door.

SECTION 7: THE WORLD OF DIGITAL PAYMENTS HAS YET 31 TO SIGNIFICANTLY TOUCH SMALLER BUSINESSES EVIDENCE PAPER

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8 Lessons for regulators and businesses

The barriers that businesses in the efficient interoperability among banks Philippines face to making efficient is beyond the scope of this case study. digital payments are high but not But this case does demonstrate, as is unique: banks and other providers in the case in other contexts, that moral many markets also have incentives suasion from policymakers alone may that may differ from their clients. not be sufficient to persuade banks to And as other BTCA case studies have be drivers of the shift. also emphasized, some actors in the payments ecosystem are likely to lose Common tactics of keeping bank out from a shift to greater usage of fees opaque (by requiring minimum digital payments. The two lessons balances rather than charging fees) below should help regulators and on checks, and of charging fees for businesses in a context similar to receiving transfers have had the effect that of the Philippines. of discouraging digital payments and protecting traditional sources of margin income. Disrupting this low 8.1 Aligning banks’ interests level equilibrium may require some with those of businesses experimentation with different policy and consumers may measures, including promoting more require incentives or even penalties open and clear pricing structures so that businesses know what the value The BSP has clearly made a proposition may be for speed, trust commitment to shifting more and cost reductions. payments in the country to digital, most prominently through its Though it operates in a different leadership in collaboration with payments context, the Central Bank the SIMM project, supported by of Nigeria began experimenting in USAID. The policy, governance and 2012 with penalties on bank clients for businesses case for effective and cash usage at the bank — penalties

SECTION 8: LESSONS FOR REGULATORS AND BUSINESSES 33 EVIDENCE PAPER

that are assessed on the banks for the payment processes. This starts with activities of their corporate clients, understanding the true costs they as explored in a BTCA case study.13 currently pay to make (and even Though it is still early in the policy’s receive) payments. These are the implementation, the BTCA case costs that, in the Filipino context, study found that the incentives for are kept opaque by bundling Nigerian banks and large businesses various corporate banking services had changed as a result, although in exchange for a high minimum it had not yet touched smaller account balance. This situation may businesses. This penalty-based policy also be reinforced by the way the approach may well not be best for the performance of CFOs is evaluated. Philippines or other countries, but it is helpful to build an evidence base of A next step is for businesses to other countries’ policy innovations to take that knowledge of costs into promote a shift when incentives are negotiations with their current banks not aligned. Sometimes the threat of and potential banks. In the Philippines, introducing a penalty is sufficient to these negotiations are particularly have the effect of stimulating change. difficult for medium-sized businesses: like large businesses, they need to The BSP clearly can continue to play a pay employees and suppliers with role in shaping a positive vision of the accounts at many different banks or future for banks in which they save on in cash; but unlike large businesses, the high costs of checks and can see they cannot coerce their salaried and the advantages of business models upper tier employees or suppliers into in which digital payments feature opening accounts at a certain bank. prominently. However, since the gains and losses from new business models Without this knowledge, though, may not be equally distributed, the even large businesses in a context regulator would still have to be ready like this may feel stuck in a low level to resolve any sticking points. equilibrium with limited chance of shifting. However, as in the Philippines, there may be “money on the table for 8.2 Businesses should study the banking sector as a whole and the costs they face in for businesses that could be claimed making payments, and by a concerted move towards digital then shop around for payments. Identifying and then better bank services agreeing to share those savings offers In the absence of changes in the the best chance of motivating the rules of the payments system, shift towards a digital future. including the commercial agreements between banks and banking groups, businesses in the Philippines will have to put much more effort into seeking out efficiency gains in their

34 Leaving money on the table: CORPORATE AND SME EXPERIENCES OF DIGITIZING BUSINESS PAYMENTS IN THE PHILIPPINES Annexes

PHILIPPINES CASE STUDY

ANNEX A: LIST OF ACRONYMS

ACH Automated Clearing House

ATM Automated Teller Machine

AUB Asia United Bank

BAP Bank ers Association of Philippines

BDO Banco De Oro

BFA Bankable Frontier Associates

BIR Bureau of Internal Revenue

BPI Bank of the Philippines Islands

BSP Bangko Sentral ng Pilipinas

BTCA Better Than Cash Alliance

DBM Department of Budget and Management

DDA Demand Deposit Account

DRFRP Development Results Focused Research Program

ECCS Electronic Check Clearing System

EPCS Electronic Peso Clearing System

ERP Enterprise Resource Planning

GDP Gross Domestic Product

GRCI Global Restaurant Concepts, Inc.

IBFT Inter-Bank Fund Transfer

KYC Know your Customer

NPA National Payments Act

OFW Overseas Filipino Workers

OTC Over the counter

PCHC Philippines Clearing House Corporation

PHP Philippine Peso

POS Point of Sale

P Person

RTGS Real Time Gross Settlement

STP Straight-Through-Processing

WB World Bank

ANNEXES 35 Annexes

EVIDENCE PAPER

ANNEX B: SOURCES

BangKo Sentral ng Pilipinas, PhilpaSS Primer, 2012.

BFA, Demand Study on Domestic Payments in Philippines, commissioned by the Bill and Melina Gates Foundation, December 2010.

BFA, Integrating Payment Systems in the Philippines: A High Level Glide Path to Interoperability, SIMM Project of USAID and DAI, June 2013.

BTCA, Development Results Focused Research Program, Country Diagnostic: PHILIPPINES, October 2013.

Payment, Clearing and Settlement Systems in the Philippines, undated. http:// www.emeap.org/emeapdb/upload/WGMeeting/Payment,clearing%20and%20 settlement%20systems%20in%20Philippines.pdf.

Schmiedel, Heiko, Gergana Kostovo & Wiebe Ruttemberg, “The social and private costs of payment instruments: a European perspective”, Occasional Paper Series 137, September 2012, available via http://www.ecb.europa.eu/pub/ pdf/scpops/ecbocp137.pdf.

Schwartz, Carl, Justin Fabo, Owen Bailey and Louise Carter, “Payment Costs in Australia”, RBA 2007, available via http://www.rba.gov.au/payments-system/ resources/publications/payments-au/paymts-sys-rev-conf/2007/7-payment- costs.pdf.

World Bank, National Retail Payment System, Discussion Paper, November 2013.

36 Leaving money on the table: CORPORATE AND SME EXPERIENCES OF DIGITIZING BUSINESS PAYMENTS IN THE PHILIPPINES PHILIPPINES CASE STUDY

Interviews

COMPANY INDIVIDUAL(S)

Asia United Bank Abr aham Co, President; Wilfredo Rodriguez, IT Head

BancNet Ais teo Zafra, Jr.,Executive Vice-President and COO

BSP Nestor Espenilla, Jr., Deputy Governor

Citibank John Ong

Generic Pharmacy SME Franchisee/Owner

Global Restaurant Concepts Ar chie Rodriguez, CEO and President; Griffith Go, CFO

MegaLink Bernadette Arguelies-Ramos, Head, Product Development

Philippines Clearing House Corporation Emmanuel Barcena, President and CEO

ANNEXES 37 Annexes

EVIDENCE PAPER

ANNEX C: BTCA BUSINESS TOOLKIT INVOICE CALCULATOR

In which currency do you wish USD to enter your assumptions? Enter exchange rate of local currency to USD: 1 LCU= x USD 1 (enter 1 if USD above)

Enter the following details: No of suppliers Number 250 Total number of invoices Number 1000 received per month

Total average value of payments USD 4,400,000 to suppliers per month Of the above invoices: Now Target Now Target Number paid by check Number 100% 0% Value 100% 0% Number paid by bank transfer Number 0% 100% Value 0% 100% Number paid in cash Number 0% 0% Value 0% 0%

Current means of payment Total value made by cash USD - Total value made by check USD 4,400,000 Total value made by bank USD - transfer

Targeted future Total value made by cash USD - Total value made by check USD - Total value made by bank USD 4,400,000 transfer

Do you send remittance advices separately from checks (alterna- Yes tive: outsource this) Do you write checks for pay manually (alternative: print Yes checks or outsource the printing)

38 Leaving money on the table: CORPORATE AND SME EXPERIENCES OF DIGITIZING BUSINESS PAYMENTS IN THE PHILIPPINES PHILIPPINES CASE STUDY

Assumption choices Do you want to supply your own assumptions? (if not, the calcula- Yes tor will use the default) Short format (enter only key own assumptions which will be used instead of defaults) Bank charge per check processed USD 0 Bank charge per EFT processed USD 0.5 Bank monthly charge for EFT USD 0 service if any Monthly employment cost USD 550 per AP clerk Monthly employment cost USD 5500 per accounting manager Cost to mail a check USD 0.00

Long format (enter all own assumptions (linked to each cell on workings sheet) Go to invoice assumptions

Outcomes

Based on the assumptions used, by moving to your target USD USD payment approach, You stand to reduce your annual 52,035 to 27,513 invoice related costs from This translates to a potential of current 24,522 or -46% annual saving of costs

The full invoice calculator is available in spreadsheet form in the Business Toolkit developed by BTCA, to be made available via the BTCA website in 2015.

ANNEXES 39 Annexes

EVIDENCE PAPER

ANNEX D: ECONOMETRIC ANALYSIS

Summary results table below. More technical information available from BTCA upon request.

TABLE D1 Factors related to the probability of having a bank account.

Transactions per day 0.00 Average transaction value 0.00 0.00

Number of years business has existed 0.91*** 0.98*** in this location

Part of a franchise 0.72* 0.74*

Number of bills paid per month -0.01

Total value of payments to suppliers 0.00 per month

Number of suppliers 0.42*** 0.47***

Gender of respondent (1 is male) 0.48* 0.38

Age of respondent -0.02 -0.01

Constant -2.80 -3.11

No. obs. 356 387

*** statistically significant at the 99% confidence interval; ** at 95%; * at 90%.

40 Leaving money on the table: CORPORATE AND SME EXPERIENCES OF DIGITIZING BUSINESS PAYMENTS IN THE PHILIPPINES PHILIPPINES CASE STUDY

Endnotes

1 Intr oductory remarks at a workshop 8 T his auto-check issuance function is on interoperability April 22, 2013. a common part of internet banking in countries where checks are still 2 G: Government. B: Business (non- widespread such as the US. financial private sector). P: Person (individuals). D: Development 9 ECB (2012) Table 9, average costs community partner. For further (Eu.3.86) split out to banks in the ratio explanation of the payment grid, see of bank costs to total social costs in Better Than Cash Alliance (2012), Table 8 (0.5/0.94) converted at current The Journey Toward ‘Cash Lite’, EUR/USD rate of 1.3. available at http://betterthancash. org/wp-content/uploads/2012/09/ 10 RBA report (2007) Table 7: 106, BetterThanCashAlliance- converted at AUD/USD of 1.14. JourneyTowardCashLite.pdf. 11 BSP Philippine Banking System Income 3 The PhilPaSS Primer, BSP, Statement and Key Ratios for 2013, PSO-Ref –03-02-000 “ Version2” available via http://www.bsp.gov.ph/ Updated 20 January 2012. banking/pbs_archives/2013/4.htm, accessed 18 October 2014. 4 Banks are charged according to the number of transactions incurred each 12 T he focus of the study was on day with billing statements sent to the businesses in metro Manila with banks every month. The system can between 2 and 25 employees. process transfers so that funds are These businesses offer commercial available on the next business day goods and services onsite, like (T + 1), while withdrawals of transferred restaurants, but excluding industry, funds require 48 hours advance notice small factories, and off-site jobs. before the funds may be withdrawn The interview respondent at from the payees’ accounts. the business was required to be knowledgeable about the 5 A ccording to interviews, this extra establishment’s payment outgoing fee is to deter informal processes and decision-making. remittance service providers from utilizing the facility. 13 Reference link when posted by BTCA.

6 Ibid.

7 T here is a tradeoff for businesses between paying more per-transaction fees on digital payments and maintaining a large float commitment at a bank with free checking. Using current cost parameters, even with a modest number of monthly transactions, fees are likely more costly in direct terms than float commitments in interest foregone. Hence the disincentive to change. Indirectly, however, high minimum balance requirements do cost businesses: they make it harder for businesses to manage their cashflow and invest.

ANNEXES 41 About the Better Than Cash Alliance

The Better Than Cash Alliance is an alliance of governments, private sector and development organizations committed to accelerating the shift from cash to electronic payments. The Better Than Cash Alliance is funded by the Bill & Melinda Gates Foundation, Citi, Ford Foundation, MasterCard, Omidyar Network, USAID and Visa Inc. The UN Capital Development Fund serves as the secretariat.

BETTERTHANCASH ALLIANCE Empowering People Through Electronic Payments

To learn more, visit www.betterthancash.org and follow @BetterThan_Cash.