The Philippines: Part Two

FinTechs Solving Problems

The Philippines boasts a growing number of FinTech companies seeking to tackle the issue of financial inclusion. Such companies are typically in sectors such as lending and payments, as these are key areas that effect the underbanked. One such company is Mynt: a FinTech whose two primary services are ‘GCash’ and ‘Fuse Lending‘. GCash is a micropayment service that allows consumers to buy prepaid currency in order to pay bills, send money and purchase goods amongst other services. Fuse Lending makes use of alternative data and credit scoring to offer both personal and business loans to primarily underbanked and underserved Filipinos. Mynt has hit the headlines recently too, after attracting an undisclosed investment in February from Ant Financial and Ayala. Ant Financial originated from Alipay – the world’s leading third-party payment platform – and is an affiliate company of Alibaba Group, and this move sees Globe – who are the Philippines’ largest telecom operator – retain a 10% stake.

I had the chance to speak to John Rubio, the President and CEO at Mynt, to find out more about the company and his views on financial inclusion. He gave me a brief overview of the country, which he says is a leading example of:

“traditional financial institutions’ inability to address the needs of an emerging country.”

John also provided me with some new statistics such as the country’s credit card penetration rate being at 5% and as high as 40% of municipalities not having a bank.

Mynt is leveraging technology to tackle problems that specifically relate to the financially excluded. By being able to send money from mobile wallet to mobile wallet for free, as well as paying bills and government fees via mobile in real-time, those who live in isolated areas and are constrained by high fees can improve their financial standing. On top of this, Mynt offers access to credit at rates 70-90% lower than 5-6 lenders, whom charge extortionate rates and operate without a permit or license. As recently as February, the government has begun a crackdown on these 5-6 lending schemes, which in total are valued at P2.4 billion across 30,000 operators. Lenders are now being given the opportunity to legalise their operations.

Continuing my chat with John, I asked for his view on the potential of FinTech for bridging the gap between the unbanked and financial services. His response was one full of optimism for the future:

“The potential is significant – it removes many of the friction costs that hinder traditional institutions from serving the vast majority of Filipinos. Mobile phone access and devices significantly drop cost to curve. Technology allows us to create alternative credit scores, alternative payment channels, etc., that drop the costs to customers, and make it much more convenient – oftentimes as simple as buying prepaid load at their neighbourhood store.”

For a country as large and rurally dispersed as the Philippines, FinTech is a prime example of how technology can create alternative solutions to everyday problems. if Mynt can continue its upward trend in the industry – and I see no reason why it wouldn’t, especially with its new financial backing – then there is a huge opportunity to better the financial prospects of large populations.

Crowd Financing

One of the sectors to have flourished out of the FinTech boom has been crowdfunding. Most recent statistics show the total global crowdfunding industry estimated fundraising volume at $34 billion, of which $10.54 billion was raised in Asia. I was intrigued when I came across ‘Cropital‘, a crowdfunding startup which connects potential investors to farming communities in need of capital. With agriculture being such an important industry to the Philippines, but with little room for growth without access to financial services, Cropital looks to fill this void by offering short- and long-term loans to farmers through the use of crowdfunding. Minimum investments start at just P5,000 (around £80), and the site has already attracted 100,000 unique investors with 80% sourced domestically.

So what does Cropital offer that’s unique? The firm aims to manage risks for both investors and farmers by verifying and selecting all farmers, giving access to crop insurance, and promoting diversification of crops to mitigate volatility of single crop markets. They go one step further than just providing a platform for funding by training farmers in financial literacy and basic business accounting, as well as ensuring farmers have access to professional agriculturists. Financial literacy is hugely important for the unbanked population, as simply having access to finance does not guarantee success. Whilst still only in Beta stage, both short- and long-term investments are fully funded, and founder Ruel Amparo told an interview with FT that they are projecting to turn a profit by the first half of 2018. Add to this the fact that their Co-Founder and CTO Rachel de Villa made Forbes Magazine’s inaugural ’30 under 30′ Asia list and it looks as if this Cropital could make a real difference to increasing access to finance.

Notable Mentions

My research on the Philippines revealed a variety of FinTechs looking to combat the problems associated with poor access to financial services. These companies are typically within the payments market, as they seek to disrupt the outdated methods for bill payments and transferring money. Ayannah is a FinTech provider of commerce and payment services. It operates SaaS platforms under the brand Sendah to allow B2B payments, B2C gift remittance for migrants and international and domestic remittance transactions. As recently as February, Ayannah announced a partnership with Bayad Center, the bills payment subsidiary of the largest electric utility company in the Philippines, to launch Juan Credit. This represents, what they say, a first for emerging markets in the form of an AI-powered credit scoring system for the unbanked. Through the use of unstructured data from sources such as bill payments, mobile tops, insurance premium payments and social media profiles, meaningful credit scores are constructed for those who would otherwise struggle to generate one. The JuanCredit online marketplace will allow banks and other financial service companies to access these scores and offer suitable products to those Juan Credit members.

PayMaya is a well established FinTech in the mobile money and payments space. The Smart PayMaya brand is a partnership with Smart, one of the leading telecom providers in the country, which offers a prepaid online payment app that enables payments online without a physical credit card, but instead using a virtual prepaid Smart MasterCard. PayMaya cuts out the need for lengthy application forms which often require proof of address and identification cards, as you are only required to download the app and register online which can be done in a matter of minutes. This provides more incentive to the unbanked population, who may struggle to provide all the details for a traditional application process. Another brand is Smart Padala, which targets the remittance market, claiming to be the largest remittance network in the Philippines with over 15,000 agents across the country. It also offers various services for both the banked and unbanked such as bill payments, airtime load selling, and reloading of mobile wallets such as PayMaya.

This concludes my visit to the Philippines. I have been fascinated by the circumstances that surround this country’s financial state, and I believe there is a huge appetite for innovation and change within for disrupting the traditional financial structures in place. If these FinTechs can continue their journey, and inspire others to do the same, there is hope for a more equal access to financial services for the vast amount of unserved and underserved amongst the population. I hope you’ve enjoyed this post, and look forward to reading my next one where I will be looking at FinTech and financial inclusion in the Indonesian archipelago.

 

 

 

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The Philippines: Part One

Background and Economy

The first stop on my travels has been the Philippines, where I spent a month exploring the wide variety of landscapes and attractions that the country has to offer. With a population of just over 100 million, it is the 12th largest country in the world. This enormous population is spread over 7,000 islands;  44.4% is urban population and 55.6% is rural (World Bank, 2015). Many of these rural populations are isolated. For example, I spent my first week in Sagada, a remote town in the northern mountains of Luzon. Despite being 400km away from Manila, the only direct bus per day took over 13 hours to arrive due to the mountainous terrain and dangerous roads. 

In terms of its economy, the Philippines is regarded as a Newly Industrialised Country (NIC), and so whilst service industries now dominate much of the economy, agriculture continues to play a significant role. As much as 30% of the population is employed in agriculture, contributing around 11% of the country’s GDP (World Bank, 2014). Due to the low wages in agriculture, and typically lack of other opportunities in rural areas, many Filipinos have emigrated for work. In fact, there are so many Overseas Filipino Workers (OFWs) that remittances received totalled $25.6 billion USD in 2015 (BSP), making the Philippines third in the world for remittances received behind only China and India. This accounts for an estimated 10.2% of GDP, and is growing at a rate of 5.2% (BSP, 2015). 
Financial Inclusion: The Story so Far

So what is the state of Financial Inclusion in the Philippines? There are many ways of measuring it; which Bangko Sentral ng Philippines (BSP, 2013) – the Central Bank of the Philippines – defines as “a state wherein there is effective access to a wide range of financial services for all Filipinos.” Basic measures of Financial Inclusion include bank account ownership, format of money savings, borrowing rates and borrowing institutions. The following bullet points will detail some of the key statistics for these measures, as well as touching on the state of remittances using the most recent data from The World Bank unless stated otherwise: 

  • 31.3% of people aged 15+ have a bank account, compared to 69% across East Asia and Pacific, and 42.7% for lower-middle-income countries average. 
  • 67.3% of people saved money in some form in the last year, compared to 71% total in East Asia and Pacific, and 45.6% for lower-middle-income countries average. 
  • Despite this high rate of savings, only 14.8% of people had bank savings in the last year; lower than the 36.5% in East Asia and Pacific and equalling the percentage for lower-middle-income countries. 
  • Whilst a high proportion of people do save, many do not have access to the financial institutions to do so, and instead are forced to lose both the security and interest that comes from access to financial services. 
  • As high as 48.7% of people borrowed from family or friends in the last year; significantly higher than 28.3% in East Asia and Pacific, and 33.1% for lower-middle-income countries average. 
  • A higher percentage of people (13.5%) borrowed from a private informal lender than a financial institution (11.8%). It is well known the perils of borrowing from informal lenders, which is often accompanied by strict repayment schedules and extremely high interest rates. 
  • Of received remittances, only 12.1% were via a financial institution, and 10.8% via mobile phone (2014). 
  • The World Bank’s (2015) study in remittances measures banks as the most expensive means at a 10.96% interest rate, and claims that most migrants typically send cash as a result of this. 

These statistics suggest that there is much work to be done to reach the goal of providing suitable financial products and services to all in the Philippines. The next section will assess what the government is doing to make the country financially inclusive. 

The Government’s Approach

The challenge of Financial Inclusion demands a government strategy to tackle it, in order to create an environment in which financial instututions are forced or incentivised to be inclusive, or in which innovations can flourish. On July 1st 2015, the BSP signed a Memorandum of Understanding on the National Strategy for Financial Inclusion (NSFI). The executive summary reads as following:

“The National Strategy aims to optimise collective efforts toward Financial Inclusion in the Philippines. It will raise awareness, appreciation and understanding of Financial Inclusion, and enable coordination among various stakeholders.”

Alongside this NSFI, efforts are being made to reach these goals. The BSP Deputy Governor Nestor Espenilla Jr. (Manila Standard, 2016) stated that: 

“Rapid improvement of power supply and the digital infrastructure that makes telecommunications and broadband available everywhere and more reliable will be a particular help to Financial Inclusion by enabling affordable digital financial services” 

Lack of infrastructure is often cited as a key obstacle for investors, banks and other financial insitutuons in expanding to far-flung islands and rural areas. Whilst in the Philippines I bought a local SIM card, which in certain islands was particularly slow to connect to the internet. The slow speed was still hugely faster than the almost non-existent local WiFi connection. 

This requirement for improved infrastructure has been reflected in the government budget, as Budget and Management Secretary Benjamin Diokno (2016) announced that the Duterte Administration has allocated P8.2 trillion solely to fund the “golden age of infrastructure” over the next 6 years. This would boost infrastructure spending to around 5.2% of GDP. 

Whilst we are yet to see much in terms of the concrete effects of the NFSI, the government’s focus on Financial Inclusion has not gone unnoticed. Think-Tank Brooking’s Insitution’s report titled ‘Advancing Equitable Financial Ecosystems’ ranked the Philippines as the most improved country in providing digital and Financial Inclusion from 2015-2016 in its data pool. The report claims that this was driven not only by the launch of NSFI, but also noted that:

“Strong performance in terms of mobile capacity, as measured through smartphone penetration; and highest rate of adoption of mobile money accounts among the South East Asian countries included in the report.” 

This concludes Part One of the Philippines. Part Two will take a look at some of the startups and established companies using FinTech to tackle Financial Inclusion the Philippines. 

The Importance of Financial Inclusion

Financial Inclusion is defined by The World Bank as giving individuals and businesses access to useful and affordable financial products and services that have the ability to meet their needs in a way that is both responsible and sustainable. These products and services primarily refer to transactions, payments, savings, credit and insurance – all of which are typically taken for granted in more economically developed countries. In more developed countries, the notion of being ‘unbanked’ is associated with those who do so voluntarily, rather than involuntarily, whereas in developing and emerging economies, those who are ‘unbanked’ are often so not through choice.

For developing economies, financial inclusion is a significant issue, with a variety of barriers often preventing access to financial services such as high account fees, rural areas being far away from physical banking services and a lack of suitable products for those on lower incomes. The World Bank (2016) estimates that 2 billion adults worldwide do not have a basic bank account. Added to this, results suggest that there is a gender gap, too, with 59% of men reporting having an account in 2014, compared to only 50% of women. For global development institutions the theme of financial inclusion is becoming more and more prominent, with the recent Sustainable Development Goals (taking over from the previous Millennium Development Goals) citing financial inclusion as an enabler for 7 of the 17 goals.

FinTech is one of the hottest trends worldwide in recent years, with Innovate Finance reporting $15.2bn of investment up to Q3 2016 – a 27% increase on 2015. Whilst FinTech companies across the US and Europe have brought a wealth of services for the ‘overbanked’, there is huge potential for companies in emerging economies to drive real change by empowering the ‘underbanked’. ‘The Foundations of Financial Inclusion’ report for The World Bank shows that having a bank account has a positive impact on both savings and female empowerment, as well as significantly supporting micro, small and medium-sized enterprises (MSMEs). Large banks often see these demographics as too costly to provide for, which is why micro-finance institutions such as Grameen Bank and Kiva have arisen. The accelerated growth of technology, however, represents an opportunity greater than ever for providing financial services to those currently excluded.

The continuing trend of increased mobile ownership, and even smartphone ownership, in developing countries is an example of how FinTech can break down the barriers to financial services. The Pew Research Centre (2016) reports that smartphone ownership in emerging countries is rising rapidly, climbing from a median of 21% in 2013 to 37% in 2015. Smartphones present an opportunity to remotely access financial services without the need to travel far distances from rural areas, as well as to capture data which can give greater insight to provide suitable products and services.

FinTech has the potential to widen the reach of financial services, and serve a demographic that is often not seen as worthwhile to large corporate banks. Over the next few months I will be travelling around Asia, and during this time I will seek to identify FinTech companies that are innovating in the area of financial inclusion and to report on trends in this topic. I hope you’ve enjoyed reading my first blog post, and I look forward to any feedback or questions you may have.