Digital Payments: A catalyst for the growth of e-Commerce in the Philippines
E-commerce and digital payments are mutually reinforcing. They help advance goals of broader merchant digitization, increase financial inclusion1 and revenues ultimately helping to promote formalization of merchants and offering greater convenience, transparency and security for consumers and merchants alike.
According to the 2019 State of Digital Payments - Country Diagnostic, payments to merchants comprise 95% of overall Person to Business (P2B) payments, which represents the bulk of transactions2 in the Philippines3. However, only 15% of all merchants and 31% of all Filipino adults who have accounts, accept, or pay digitally and that too infrequently4. The potential for digitization is most significant amongst micro and small merchants who form the majority and who also stand to gain the most from its benefits5.
The Government of the Philippines has long recognized6 digital payments as a policy priority to enable Filipinos to seize the opportunities of th e digital revolution. Over the last years, the Bangko Sentral ng Pilipinas (BSP) has coordinated strategic efforts that have resulted in significant policy and regulatory reforms promoting digital payments such as the launch of the National Retail Payment System (NRPS)7. The interoperable payments infrastructure established by the NRPS Framework has laid the foundations for the acceleration of digital solutions during the COVID-19 pandemic. Specifically, InstaPay and PESONet adoption has soared8 and has facilitated the transition to contactless payment options, indicating a paradigm shift for consumers and businesses9. This accelerated uptake of digital solutions has sped up the transition towards a digital economy. A unique opportunity has emerged to leverage this momentum to address the key challenges faced by varying types of merchants and to responsibly scale adoption by underserved customers, to ensure that this transition is equitable for all Filipinos.
Increasing the uptake of digital payments is one of the core processes in the e-Commerce Roadmap 2020-2022. Through its newly established e-Commerce bureau, the Department of Trade and Industry (DTI) is co-chairing a public-private working group together with the BSP to increase the use of digital payments in a responsible10 manner by addressing adoption and use barriers (see Table 1.) for both merchants and consumers. This initiative will also identify and outline sector-specific actions including those for leading e-Commerce players to drive digital payments uptake.
Segment-specific challenges for digital payments adoption and use in e-Commerce
Large and medium businesses (B2B payments)
Most large and medium businesses already buy and sell goods and services through electronic means. Digital orders and settlements increase the transparency and efficiency of these business to business transactions (“B2B”) which are characteristically larger, recurring and often defined by monthly or yearly demand. Businesses which have digitized other essential parts of their business processes such as inventory, accounting, customer management, logistics, invoicing, are also better positioned to settle their payments digitally.
In the Philippines, only less than 2% by volume and 6% by value of these payments are made digitally11. Businesses cite audit requirements paper trails, and a preference for checks, to be the key barriers in digitizing the space further. To ease up operational barriers, recent regulation by BIR on issuance of e-ORs aim to mitigate identified obstacles12. In parallel, a pilot is also planned in 2021 to test e-invoices and e-receipts and guidelines have been simplified for business to register their digital accounting systems13. Digitizing supplier payments is estimated to result in USD 20–45 billion in annual savings14.
Small and micro-merchants (B2B and P2B payments)
COVID-19 has accelerated the transition of small and micro retailers to online platforms with business registrations reflecting almost 40X growth in a period of 5 months15. Given that the small and micro segment of merchants are the least digitally integrated in terms of their business processes (i.e. inventory management, invoicing), their journey to digital payments requires more attention.
Their willingness to accept digital payments is largely driven by customer demand and face these additional challenges:
- the payment fee (on e-Commerce platforms) or Merchant Discount Rate (MDR) for digital payment acceptance (via debit/credit cards) are high in relation to the smaller individual transaction size;
- basic digital infrastructure challenges of internet connectivity, and cash flow management when transitioning
More than half of the country’s micro and small businesses are run by women and while Filipino women are notably ahead of men in the overall uptake of digital payments16, a gender specific approach to addressing the challenges of this segment will be key.
Consumers (P2B payments)
The COVID crisis has similarly shifted consumer purchasing towards electronic and social commerce platforms. A recent consumer survey17 shows that 80% of respondents shopped online and more than 40% of them had purchased more online during the resulting lockdowns.
However, Filipinos still consistently show preference for Cash-on-Delivery (COD), which is estimated to account for approximately 80% of all e-commerce payments on the e-commerce platforms18. While access to transaction accounts19 still have much potential for growth, given the demographic of online shoppers, this preference points to larger issues around lack of trust and convenience faced by consumers.
To alleviate these concerns, it is necessary for the entire ecosystem to nurture consumer awareness and afford greater attention on enabling responsible digital payments through (1) transparent grievance redressal mechanisms and (2) improving security of digital payment platforms and data infrastructure for both merchants and consumers.
The BSP, through its Digital Payments Transformation Roadmap 2020-2023, has also outlined a set of interventions that impact the e-Commerce use-case and are expected to encourage higher consumer uptake and frequency of digital payments:
- PhilSys – continued support to the development and roll-out of the national ID including the facilitation of PhilSys enabled electronic-KYC. This will significantly reduce foundational barriers around the lack of account access in the Philippines and reduce the cost of onboarding and authentication for financial service providers.
- P2M QR-PH – Consumers can avoid the hassle of keying in account details of merchants by scanning the merchant’s QR. The interoperability enabled by the QR PH standard further removes the need for merchants and customers to maintain several accounts. There is also potential for further innovation and impact on e-Commerce through use of QR for payment on delivery instead of COD.
- Direct Debit via Batch EFT Credit ACH – helps streamline payment collections, especially for recurring payments, giving merchants the confidence of streamlined cash flows. For consumer adoption, user experience and convenience will be key.
- Bill payments ACH20 – increase convenience for merchants-billers and consumers ensuring that a biller can collect from payers with different payment service providers, thus removing the current fragmentation and inefficiencies observed in the bills collection process.
Collectively, the efforts for increased coordination of public policy initiatives and increased collaboration across the Government and with the leading e-commerce players as part of the merchant digitization working group, will facilitate the adoption and use of digital payments in e-Commerce and propel growth of the sector.
The DTI Team e-Commerce team acknowledges the Bangko Central ng Pilipinas (BSP) and the Better than Cash Alignment (BCTA) for this contribution.
1recurring digital payment transactions help to build merchant financial profiles enabling banks and electronic money issuers to design further financial services such as savings, loan products, and investments that suit their specific needs
2Overall P2B payments account for 75% of overall payment in the Philippines
3The State of Digital Payments in the Philippines-Country Diagnostic, BSP and Better than Cash Alliance, December 2019, p32
4Country Diagnostic, p11
5Country Diagnostic, p11
6The Government of the Philippines is one of the founding members of the Better than Cash Alliance in 2015.
7BSP Digital Payments Transformation Report 2020-2023, p10-11
8Based on BSP data, For the first eight months of 2020, the value of InstaPay rose almost 400 percent, while that of PESONet jumped 100 percent year-on-year. By volume of transactions, InstaPay and PESONet soared by 624 percent and 130 percent, respectively
10With reference to BTCA Responsible Digital Payment Guidelines and BSP consumer protection principles
11Country Diagnostic, p11
12(Revenue Memorandum Circular (RMC) No. 59-2020, pursuant to the Republic Act (RA) No. 11469, otherwise known as “Bayanihan to Heal As One Act”, amending the provisions of the RMC No. 47-2020)
14Country Diagnostic, p11
15As of Aug.10, business registration related to online retail grew to over 68,000 from around 1,700 registrations in January to March 2020 as quoted by DTI ASEC Jean Pacheco.
16Country Diagnostic, p9
17Rakuten insight, May 2020
18Consultations with e-commerce players; this has decreased slightly from 85% of all sales through cash as reported in the 2019 State of Digital Payments in the Philippines report
19There is 28.6% overall account penetration as per BSP’s 2019 Financial Inclusion Survey
20 Bills Pay via Real Time Low Value EFT Credit Automated Clearing House (ACH)