How Philippines’ cash management services thrived amongst MSMEs amidst the crisis

BDO, Security Bank, and BPI on how the pandemic changed Philippines' cash management services industry.

More than 99.5% of the total businesses in the Philippines are micro, small, and medium enterprises (MSMEs), according to the latest data from the country’s Department of Trade and Industry. That means that only 4,700 companies are considered large enterprises from the over a million businesses that existed in the country in 2019.

The predominance of smaller businesses, coupled with digital infrastructures being vastly different between metro areas and provinces and the strong preference for physical banking and cash-based transactions, has meant that cash management services (CMS) remain rare in the Philippines.

This spells trouble for a country whose financial regulator has set an ambitious target on banks to have 50% of their transactions on electronic mediums by 2023—even for the country’s biggest banks, where many of their clients still prefer to pay and transact via physical means.

One reason why MSMEs have failed to incorporate CMS before has been simply because up until recently they were not the target of banks, says John Carry Ong, executive vice president for the Transaction Banking Group of Security Bank.

Ong notes that the low adoption of CMS in MSMEs isn’t because they have traditionally resisted online platforms, as commonly thought — but because most banks have mainly targeted large and medium sized companies for cash management services.

“The reason is clear – due to manual and disjointed internal processes, banks have limited resources and these resources were channeled towards larger companies who can generate more core deposits per account,” he explained.

“In a sense, MSMEs were excluded as a target market. But the game has now changed.  Banks now have to build scalable and flexible systems with self service capabilities in order to accommodate the growing demand for CMS from MSMEs,” he added.

Even those small businesses that have CMS have owners who prefer to go to bank branches as they still distrust digital processes, according to Carlo Nazareno, senior vice president and head of cash management at BDO Unibank. Nazareno describes the CMS scene in the Philippines as “a good mix of electronic cash management services, in addition to physical”.

“In certain areas in the Philippines, where we may not have a very good infrastructure in terms of technology such as internet access or even mobile access, the need for physical branch presence still plays a major part,” Nazareno told Asian Banking & Finance in an exclusive interview.

He added that even at places where BDO has no branches, the bank still collects money through physical brick-and-mortar alternatives like pawn shops or even money transfer bureaus.

Problematic legacies
Security Bank’s Ong named three challenges in introducing cash management systems in the Philippines: legacy systems, legacy mindsets, and legacy ways of working.

Separately, Nazareno recognized these problems, adding that there was only so much banks can do when it comes to infrastructure outside of metro areas and how “bank, king, and customers” operate.

“If you look at the non-metro areas in the provinces, they may not have the same amount of access to the internet or even mobile devices,” he noted, adding that although they want to align with the vision of the local regulator, Bangko Sentral ng Pilipinas (BSP) for electronic payments to make up 50% of payment transactions in two years, it is very challenging given the holes in technological infrastructure in the provinces.

In terms of operations, having businesses take up electronic cash management and banking services is also a challenge given that bureaus in the government itself continue to require physical documents.

“For example, if you look at the Bureau of Internal Revenue (BIR) and what its requirements are for corporate clients, they still require physical official receipts [and] physical proofs of payment for tax returns. There really isn't a program to help migrate these into electronic forms, so there will still be a need for a physical process,” Nazareno said.

Physical processes are not only less efficient than electronic processes, they're also more costly in Nazareno’s view, and present challenges in the efficiency and organization of businesses.

“So although we may want people to move electronically, it has to be a complete end-to-end view of all of the different points in the cycle of a payment. It needs upgrading or changes for us to fully realize the benefits of digital payments,” he added.   

For their part, banks like BDO have participated in roundtables with BSP and their corporate clients to look for ways to streamline the take-up of electronic and digital banking services in the country.

“As long as the dialogue is ongoing, and there are clear milestones that the industry is looking towards to achieving them, I think the Philippines can take that step forward now in really getting more digital than what it is today.

“But it will have to be a concerted effort amongst all of the players, the government, the central bank, the banks, the clearing houses, and the corporates whilst working to get it easier for the entire industry,” Nazareno said.

For Ana Sison, head of transaction banking at Bank of the Philippine Islands’ (BPI), another challenge for cash management to thrive is not only to continuously offer digital cash management solutions, but to deliver these with speed and agility in order to address quickly evolving customer demands.

To meet corporate clients’ needs during the pandemic, BPI introduced the Electronic ADA Enrollment Solution within three months, achieved through a partnership with a third party fintech provider in order to meet this. The digital collection facility, available at the bank’s corporate online banking platform BPI BizLink, allowed corporate clients to collect payments by directly debiting their pre-enrolled BPI accounts on a real-time basis.

Meanwhile, Security Bank’s Ong said that they are architecting a CMS platform with speed and flexibility in mind, investing heavily in training its staff and bringing in new people with fresh perspectives.

Game changer
The COVID-19 pandemic has shaken up the physical transaction-reliant ecosystem, driving more customers to take up digital banking channels, the bank representatives collectively agreed. The trend includes even older clients who are not willing or who initially do not understand how to use digital channels.

“With the emergence of e-commerce and the COVID-19 lockdowns in the Philippines last year, the view on cash management has definitely accelerated more towards digital,” BPI’s Sison said. “ We are cognizant that cash and check payments will not be completely eradicated in the Philippine payments space in the immediate future. However, local businesses are now more open to quasi-digital solutions in order to remain relevant and efficient.”

Sison noted a faster increasing trend in the adoption of digital disbursements during the pandemic. “Last year, the number of active users on our digital disbursement facilities for intra-bank and interbank transfers doubled,” she shared.

“However, collection activities among our Corporate Customers remains relatively more difficult to digitize. There is still reliance on manual cash and check-based collections, especially as the Philippines transitioned to the less restrictive General Community Quarantine (GCQ) in June 2020,” she added.

Outside of cash management, BPI also observed a significant uptake in digital transaction volume in BPI’s online corporate banking portal, BPI BizLink, with the performance of the platform rising 35% by transaction volume, and 56% in transaction value.

Aside from digital disbursements, BPI also saw increased demand for Online/Digital Bills Collection services.  “In 2020, there was a 30% increase in the number of corporate billers that availed of the bank’s online bills collection channel. This allows a corporate biller to collect billing payments from their retail payors/subscribers through the Bank’s retail online banking platform, BPI Online. Subsequently, online bills collection volumes increased by 20%,” Sison said.

Meanwhile, BDO’s Nazareno shared that due to lockdown measures imposed by the government last March, even their most online banking-averse customers have taken up their digital banking platforms.

“A lot of customers, even the traditional Chinese customers who we work with in Binondo and who are very averse to using online banking and mobile banking, are now opening their doors to installing online banking [platforms], and using them,” he said.

Big businesses have especially been key to pushing MSMEs to take up digital CMS and banking services, according to Nazareno. His team have observed how larger corporate clients drove MSMEs to go digital by asking their supply chain partners to send their money and confirm their orders via online services. This is helpful in letting smaller businesses see the benefits of online processing and cash management, he said.

“If a customer of ours sees the benefit of electronic [platforms] by looking at how quickly and more efficient they can get money into the door, and then carrying it around to their suppliers without affecting their operation, then they tend to want to use it more often,” Nazareno explained.

He shared that during the height of the pandemic, his team observed how larger corporate clients drove MSMEs to go digital by asking their supply chain partners to send money and orders via online means added.

For their part, Security Bank’s Ong said that the bank rolled out a plethora of new services that allowed MSMEs not only to open accounts digitally, but to also enroll in various cash management services.

The pandemic allowed cash management systems like Security Bank’s DigiBanker to gain momentum as businesses were forced to operate remotely to prevent the spread of the COVID-19 virus, he noted.

“Cash management used to be more of a value-added service but today it has become a critical core business of banks.  Previously, the idea of working in cash management was unexciting, but today, it’s regarded as one of the most dynamic and vibrant areas to work in and definitely a key area for growth in the finance sector,” Ong added.

In the future, Nazareno expects two main trends to influence how CMS will grow and thrive in the Philippines: increased efficiency of electronic payments, and the increased importance of information in banking. He cited open banking as a future in improving cash management services and systems not just in the Philippines, but around the globe.

“How do we leverage information, not only to help our clients better manage their cash, but also help them strategically?” he asked. “Because operationally, yes, [clients] need to know where the money is. They need to know that they need to pay these people. They need to know that they got paid by these people to manage the inventory, the accounts receivables, the accounts payables.

“[But] cash management, I think, goes beyond that when we talk about strategic cash management. It is important that they see how the operations are moving, how the entire supply chain or how their supply chain affects the way they operate,” Nazareno noted.

He added that openness of information could also help in unique circumstances like the COVID-19 scenario, where clients’ having access to information could help them make the necessary strategic decisions.

“I think there are good visions out there. It's a matter of how we, as an industry, execute it. And I think openness is also going to be important among the players,” he concluded.

Photo courtesy of Meo Fernando (Pexels)