THE WORLD BANK GROUP PHILIPPINES Public Disclosure Authorized FINANCIAL SECTOR ASSESSMENT PROGRAM November 2019 TECHNICAL NOTE RETAIL PAYMENTS Public Disclosure Authorized Public Disclosure Authorized Prepared by Karol This Technical Note was prepared in the context of a World Bank Financial Sector Assessment Program Karpinski (FSAP) mission in Philippines during June, 2019 led Finance, Competitiveness, and by Ilias Skamnelos, World Bank, and overseen by the Innovation Global Practice, Finance, Competitiveness, and Innovation Global WBG Practice, World Bank Group. The note contains the technical analysis and detailed information underpinning the FSAP assessment’s findings and recommendations. Further information on the FSAP program can be found at www.worldbank.org/fsap. Public Disclosure Authorized PHILIPPINES CONTENTS Contents ................................................................................................................................................ 2 Acronyms and Abbreviations .............................................................................................................. 4 Executive Summary .............................................................................................................................. 7 I. Introduction and Methodology ............................................................................................ 13 II. Overview of Retail Payments in the Philippines ................................................................. 15 III. Assessment of the Retail Payments Landscape in the Philippines .................................... 22 A. Public and Private Sector Commitment ......................................................................................................... 22 B. Legal and Regulatory Framework .................................................................................................................... 23 C. Governance Arrangements ................................................................................................................................. 27 D. Market Competitiveness ...................................................................................................................................... 31 E. Financial and ICT Infrastructures ...................................................................................................................... 34 ICT and telecommunications ............................................................................................................................. 34 Payment systems .................................................................................................................................................... 35 Check Image Clearing System (CICS) .............................................................................................................. 35 PESONet ..................................................................................................................................................................... 37 InstaPay ...................................................................................................................................................................... 39 Philippines Domestic Dollar Transfer System (PDDTS) ............................................................................ 40 Payment Application Secure System Version 5 (PASS5) ......................................................................... 40 BancNet and ATM networks ............................................................................................................................... 40 International card schemes ................................................................................................................................. 41 Beep ............................................................................................................................................................................. 41 National ID system (PhilSys) ............................................................................................................................... 41 F. Risk Management ................................................................................................................................................... 42 Legal and compliance risk ................................................................................................................................... 43 AML/CFT risk ............................................................................................................................................................ 43 Credit risk ................................................................................................................................................................... 44 Liquidity risk .............................................................................................................................................................. 44 General business risk ............................................................................................................................................. 44 Currency risk ............................................................................................................................................................. 45 Operational risk and business continuity ...................................................................................................... 45 2 PHILIPPINES G. Access Points ............................................................................................................................................................ 46 H. Product Design ........................................................................................................................................................ 51 E-money ..................................................................................................................................................................... 51 Digital banking ........................................................................................................................................................ 53 Basic deposit accounts ......................................................................................................................................... 53 Remittance products ............................................................................................................................................. 54 Fintech in payments .............................................................................................................................................. 55 Islamic banking ........................................................................................................................................................ 56 I. Consumer Awareness and Financial Literacy ............................................................................................... 56 J. Leveraging Large-Volume Recurrent Payment Streams ......................................................................... 57 Government-to-Person (G2P) payments ....................................................................................................... 58 Government procurement .................................................................................................................................. 59 Government collections ....................................................................................................................................... 59 K. Payment Systems Oversight ............................................................................................................................... 60 L. Cooperation and Information Sharing ........................................................................................................... 61 IV. Recommendations ................................................................................................................. 63 A. Public and Private Sector Commitment ......................................................................................................... 63 B. Legal and Regulatory Framework .................................................................................................................... 63 C. Governance Arrangements ................................................................................................................................. 64 D. Market Competitiveness ...................................................................................................................................... 65 E. Financial and ICT Infrastructures ...................................................................................................................... 66 F. Risk Management ................................................................................................................................................... 67 G. Access Points ............................................................................................................................................................ 68 H. Product Design ........................................................................................................................................................ 69 I. Consumer Awareness and Financial Literacy ............................................................................................... 69 J. Leveraging Large-Volume Recurrent Payment Streams ........................................................................