Digital Payments and Logistics Services: Twin Catalysts for E-commerce Growth in the Philippines
E-commerce and digital payments are mutually reinforcing. They help advance goals of broader merchant digitization, increase financial inclusion and revenues, ultimately helping promote the 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, which represent the bulk of transactions in the Philippines , comprise 95% of overall Person to Business (P2B) payments. However, only 15% of all merchants and 31% of all Filipino adults who have accounts accept or pay digitally, and that too infrequently . The potential for digitization is most significant amongst micro and small merchants who form the majority and stand to gain the most from its benefits.
The Philippine government has long recognized digital payments as a policy priority to enable Filipinos to seize the opportunities of the digital revolution. Over the last few 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) . The interoperable payments infrastructure established by the NRPS Framework has laid the foundation for the acceleration of digital solutions during the COVID-19 pandemic. Specifically, InstaPay and PESONet adoption has soared and has facilitated the transition to contactless payment options, indicating a paradigm shift for consumers and businesses . This accelerated uptake of digital solutions has sped up the transition towards a digital economy. Thus, a unique opportunity has emerged to leverage on this momentum to address the key challenges faced by various types of merchants, responsibly scale adoption by underserved customers, and 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 responsibly 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 that 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, less than 2% by volume and 6% by value of payment are made digitally . Businesses cite audit requirements paper trails, and a preference for cheques to be the key barriers in digitizing the space further. To ease operational barriers, recent regulation by BIR on the issuance of e-ORs aims to mitigate identified obstacles . 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 systems . Digitizing supplier payments is estimated to result in USD 20–45 billion annual savings .
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 five months . Given that the small and micro-segment of merchants is 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 payments , a gender-specific approach to addressing the challenges of this segment will be key.
Consumers (P2B payments)
The COVID crisis has similarly shifted consumer purchases towards electronic and social commerce platforms. A recent consumer survey shows that 80% of respondents shopped online and more than 40% of them have purchased more online during the resulting lockdowns.
However, Filipinos still consistently show a preference for Cash-on-Delivery (COD) schemes, which is estimated to account for approximately 80% of all e-commerce payments on e-commerce platforms . While access to transaction accounts still has much growth potential, 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, the entire ecosystem must nurture consumer awareness and afford greater attention to enabling responsible digital payments through transparent grievance redressal mechanisms and secure digital payment platforms and data infrastructure for both merchants and consumers.
The BSP, through its Digital Payments Transformation Roadmap 2020-2023, has 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 – for consumers to avoid the hassle of keying in account details of merchants by scanning the merchant’s QR code. The interoperability enabled by the QR PH standard further removes the need for merchants and customers to maintain several accounts. There is also a potential for further innovation and impact on e-commerce through the use of QR for payment on delivery instead of COD.
- Direct Debit via Batch EFT Credit ACH – to 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 ACH – to 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 the growth of this sector.
The DTI Team eCommerce team acknowledges the Bangko Central ng Pilipinas (BSP) and the Better than Cash Alignment (BCTA) for this contribution.