Digital Banking: The future of lower remittance costs

In Photo: The Philippine peso gains most in three months on remittance inflows. In photo, overseas Filipino workers still processing their documents at the Philippine Overseas Employment Administration office in Ortigas.

IN 2016 just under $27 billion fresh foreign-currency earnings were pumped into the local economy in the form of the remittances sent home by Filipino migrant workers to their families and loved ones.

Each year in the past decade, the volume of remittances continued to grow in significant amounts. The growth  continued amid global political and economic shifts that hounded economies in the countries hosting millions of overseas Filipino workers (OFWs).

Remittance projections grew bleaker, particularly last year, when salaries of Filipinos deployed in the Middle East came under threat due to the sudden unprofitability of oil firms. The latter resulted from the persistent decline of global oil prices as producers stubbornly stuck to supply targets.

However, OFWs surpassed expectations, again. With the total volume of money sent back home growing by 5 percent at the end of 2016, OFW remittances proved higher than the government’s 4-percent projection for the year.

The central bank particularly reported a 12.7-percent increase in remittances from the Middle East, driven by growth in cash sent from Filipinos in Qatar, Kuwait, Oman and the United Arab Emirates.

This drive of the Filipinos abroad to send money back home for their families has been one of the pillars of the consumption-driven local economic growth. Philippine economy, which has been growing around a rough average of above 6 percent in the past five years, can credit OFWs for maintaining the momentum of GDP growth. A local analyst said a good measure of how important remittances are to a country would be to measure remittances as percent of its GDP. Last year the remittances sent by Filipino migrant workers accounted for roughly 9.8 percent of the country’s total output, ranking 29th in the world with the highest remittance-to-GDP ratio as per World Bank’s data.


HOWEVER, the volume of remittances sent by Filipino migrant workers could be larger, if fees to send money to the Philippines were significantly cut.

Bangko Sentral ng Pilipinas (BSP) Deputy Governor Nestor Espenilla Jr. shared latest data with the BusinessMirror, saying the cost to send remittances home has already been slashed by about half since 2008.

In particular, citing World Bank figures, Espenilla said that as of the fourth quarter of 2016, the cost of sending a standard amount of $200 from the US to the Philippines has dropped to 4.67 percent, compared with the baseline 8.9 percent in 2008.

The BSP senior official said the Philippines’s remittance fees are currently cheaper than other neighboring countries, including Vietnam’s 4.73 percent, Bangladesh’s 4.84 percent, Indonesia’s 8.44 percent, China’s 8.7 percent and Thailand’s 11.24 percent.

Based on the 2016 cash-remittance volume, reducing money-transfer costs by even 0.05 percent could give an average of roughly an additional $1.35 billion more in remittances, or about P67.3 billion in recent foreign-exchange terms.

These remittance fees in the country are projected to come down further with the advent of a more efficient electronic money scheme in the Philippines through the central bank’s National Retail Payments System (NRPS) initiative.

“[The] BSP has taken a strategic approach of promoting open competition among banks and non-banks in the remittance business,” Espenilla told the BusinessMirror. “This has generally resulted in more alternatives, better quality, and lower remittance costs notwithstanding effects of de-risking. Remittances continue to grow strongly over time.”


ESPENILLA, BSP deputy governor for the supervision and examination sector, added: “We expect remittance costs to further decline as the NRPS, promoting inter-operable digital payments, gain traction this year.”

The NRPS, which has been in the works since early last year, was formally launched in 2015.

The new system aims to usher the shift of consumers’ way of transactions in the country from the traditional cash and checks to electronic means.

The BSP said the takeoff point for the NRPS is that the competition has created a very fragmented market with each having its own solution, resulting in a situation of difficulty in transacting with one account to another account because of the fragmented structure of the retail payments system.

The NRPS aims to directly address market segmentation by creating a central infrastructure that is accessible to all industry players, much like a shared highway for stakeholders to deliver their services on a common and level playing field.


ONE of the biggest players in the digital money-transfer industry said the potential shift of the practice of transferring money from informal couriers to a more efficient electronic scheme could help bridge gaps, lower costs and speed up the process along the way.

“There is big demand for an efficient money-transfer system in the Philippines. It reduces friction and time,” PayMaya Philippines COO and Managing Director Paolo Azzola told the BusinessMirror. “Our business at Smart Padala and PayMaya are proof of that.”

Azzola explained the first condition showing demand is that 86 percent of households don’t have a deposit account (as per the BSP 2014 Consumer Finance Survey).

“Second, as much as 36 percent of cities and municipalities still don’t have a bank branch presence,” he said. “An efficient money transfer system can help bridge the gaps, and help fuel economic growth.”

Azzola said the company and other players support the vision of the NRPS being pushed by the BSP, which aims to make at least 20 percent of all transactions to be done electronically by 2020.

“Toward that end, we are making continuous improvements to our digital financial service platforms, on top of more ubiquitous presence, more services for customers and more enticing promotions.”

Azzola added research from the industry predicts the transformation of the sari-sari stores as a touchpoint for multiple financial services for consumers.

“Actually, we are already seeing this happen with Smart Padala,” Azzola said. “Our partner-agents are doing not only remittance services but also bills payments, load selling and, to a limited extent, micro loans disbursement for a partner.”


THE central bank has expanded the guidelines covering nonbank remittance agents, such as mobile finance agents, just this year. There is also the updated oversight framework that includes provisions to prevent money laundering, as well as to uphold certain standards of consumer protection.

“Security-wise, we have empowered our PayMaya customers to block their accounts and cards via the app immediately in case of loss or fraud,” Azzola told the BusinessMirror.

“All our platforms are protected by multiple security levels as we are a licensed financial institution.” Also last year, the rise of virtual currencies—bitcoins, in its most popular form—prompted the central bank to review its potential use in money-transfers in a remittance-heavy economy.

Virtual currencies are a form of digital money that is not issued by the central bank. Unlike electronic money that is backed by cash for the entirety of its value, bitcoins are not backed by any commodity but by the mere ability of its holder to exchange them for goods.

“On one hand, we know that it can improve the efficiency of remittance transactions and lower cost of remittance businesses,” Espenilla said. “That is one good reason to not close our mind to it right away.”

As such, just last month, the central bank issued a formal regulatory framework for the exchanges of virtual currencies operating in the country.


THE Monetary Board said it has decided to adopt a formal regulatory framework in recognition of the rapid growth of virtual currency-based payments and remittance transactions.

These transactions are estimated to be at around $6 million per month for certain major players, data from the central bank show.

Under the new set of rules, the BSP considered virtual currency exchanges as companies offering money or value-transfer services. As such, the basic requirements for remittance and transfer companies such as registration, minimum capital, internal controls, regulatory reports and compliance with the Anti-Money Laundering Act and its implementing rules and regulations, shall apply to virtual currency exchanges.

The central bank’s move to regulate this type of innovation is a pioneer in Asia.

“We’re a world leader in the remittance business but, perhaps the last leg of development would be to get both senders and end users familiar with technological developments, like sending money through secure apps of banks,” a local analyst said.


DESPITE local developments and innovations to bring down the cost of sending money from overseas to the Philippines, international protectionist policies in banks abroad still post a challenge to remitting money at low costs.

The central bank earlier blamed so-called derisking practices as one of the culprits behind the temporary contraction in remittances. These “derisking practices” are the set of policies implemented by financial institutions abroad aimed to restrict or terminate certain operations to lessen exposure to risks.

The international financial institutions’ decision to cut ties with certain account holders or conduits usually affects Filipino migrant workers’ bank accounts or Filipino banks’ ties with international banks. This makes it harder for OFWs to find ways to send money back home.

“Derisking behavior by major international banks continues to pose a major challenge to the provision of remittance services,” the World Bank said in a recent report.

“Complaining that remittance transactions are prone to the risk of money laundering and other financial crimes, banks have been closing the correspondent banking accounts of many money-transfer operators [MTOs].”

World Bank data showed that over the past two years, 84 accounts of 32 Philippine remittance providers (including both banks and MTOs) were closed by 33 foreign banks in 13 major remittance-sending countries.

Also in its survey, the World Bank said MTO account closures by banks could have “obvious adverse impact on remittance costs and access to remittance services in rural and remote regions.”


ESPENILLA told the BusinessMirror that the central bank is still “closely monitoring” developments in derisking practices worldwide and how these could affect Filipino migrant workers down the line.

“It’s not necessarily an existential threat to the industry at this point, but its still definitely making it hard to open or retain correspondent accounts in some countries abroad,” Espenilla said. “This creates inconvenience and higher cost of remittance.”

BSP Deputy Governor for the Monetary Stability Sector Diwa C. Guinigundo also said earlier there are three interrelated consequences identified with the disruption in the money chain brought by derisking processes.

These include the increase in the cost of remittances, the shift toward informal channels and financial exclusion.

“This move decreases the reliability, certainty and safety of remittances, which is recognized as a greater antimoney-laundering/CFT risk and may increase the vulnerability of financial systems,” Guinigundo added.

In turn, the shift to informal channels lessen the possibility of accessing a broader range of financial services from the formal financial services providers, resulting to so-called financial exclusion.


IN 2016 sources of remittances to the Philippines include the United States, Saudi Arabia, UAE, Singapore, the United Kingdom, Japan, Qatar, Kuwait, Hong Kong and Germany.

Remittances from the Middle East grew the fastest in 2016, coming from a low base due to the oil-price slump that started in 2015.

Remittances from Asia also rose albeit at a slower pace of 7.4 percent due to transfers from workers in Singapore, Japan, China and Taiwan.

Remittances from the Americas, meanwhile, increased only by 3.8 percent, with the US being the major contributor posting a 6.2-percent growth.

Contrastingly, remittances from Europe fell by 8.4 percent as remittances from the UK, Italy and the Netherlands decline. The BSP said the decline in remittances from London may be partly blamed to the depreciation of the pound sterling against the US dollar.

Land workers still dominate most of the remittances sent home, bringing in $21.3 billion and a growth of 7.6 percent last year. Sea-based workers, meanwhile, brought in $5.6 billion in 2016, declining 3.8 percent from last year’s volume.

The BSP blames the decline of sea-based workers’ remittances to the stiffer competition in the supply of seafarers, particularly from East Asia and Eastern Europe.

Following its record-high volume in 2016, the central bank earlier said remittances to the Philippines are projected to hit $1.1 billion higher than that of the previous year—registering yet another all-time high for remittances.

This still represents a 4-percent growth expectation for money transfers, unchanged from the government’s growth projection of remittances seen last year.


Image Credits: Nonoy Lacza