A comparison of digital banking regulations: Philippines

    By Mark S Gorriceta, Micaela Kristina V Galvez, and Liane Stella R Candelario, Gorriceta Africa Cauton & Saavedra
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    The state of Philippine digital banking made significant headway after the publication by the central bank of the Philippines, the Bangko Sentral ng Pilipinas (BSP), of circular No. 1105, series of 2020, or the Guidelines for the Establishment of Digital Banks. This circular recognised digital banking institutions that can operate and deploy their banking products and services via fully digital platforms.

    Aside from digital banks as strictly defined, there are various electronic products and services that Philippine banks can explore and offer to the domestic market.

    SERVICES AND OPERATIONS

    Prior to the issuance of circular No. 1105, digital banking in the Philippines was deployed by traditional BSP-licensed banks through electronic banking services and operations, as regulated under the BSP’s Manual of Regulations for Banks (MORB).

    Under the MORB, banks that plan to offer or enhance existing electronic banking services must submit an application to the BSP, describing the services to offer or enhance, and how it fits in the bank’s overall strategy. The application must be accompanied by a certification signed by its president or equivalent ranking officer that the bank has complied with the BSP’s minimum pre-conditions, which entails adopting:

    1. An adequate risk management process to assess, control, monitor and respond to potential risks arising from the proposed electronic banking activities;
    2. A manual on corporate security policy and procedures that shall address all security issues affecting its electronic banking system;
    3. A system that has been tested prior to its implementation and the test results are satisfactory – whereas a minimum standard, appropriate systems testing and user acceptance testing should have been conducted; and
    4. A business continuity planning process and manuals, including a section on electronic banking channels and systems.
    Mark S Gorriceta
    Managing Partner
    Gorriceta Africa Cauton & Saavedra in Metro Manila
    Tel: +632 8696 0687
    Email: msgorriceta@gorricetalaw.com

    Traditional banks seeking to introduce electronic banking services and operations will undergo a pre-screening by the BSP’s technical working group on electronic banking to examine the overall financial condition and the applicant bank’s compliance with BSP rules and regulations, based on the latest available bank performance rating and report of examination, including the applicant bank’s capital adequacy, asset quality, management, earnings and liquidity rating.

    The BSP shall evaluate the applicant bank’s overall financial condition to ensure that it can adequately support its electronic banking activities and comply with comprehensive prudential requirements.

    Based on the recommendation of the technical working group and clearance of the appropriate BSP sector, the BSP will approve the application for immediate launch and/or enhancements, subject to compliance with certain conditions for approval and additional documentary requirements to be required by the BSP post-launch, or enhancement of the electronic banking services and operations.

    ELECTRONIC MONEY ISSUER

    Another digital banking product or service that banks can engage in is the issuance of electronic money and operation as an electronic money issuer (EMI).

    A comparison of digital banking regulations Micaela Kristina V Galvez
    Micaela Kristina V Galvez
    Junior Partner
    Gorriceta Africa Cauton & Saavedra in Metro Manila

    Preliminarily, electronic money is defined under BSP circular No. 649, series of 2009, as monetary value represented by a claim on its issuer, that is: (1) electronically stored in an instrument or device; (2) issued against receipt of funds of an amount not lesser in value than the monetary value issued; (3) accepted as a means of payment by persons or entities other than the issuer; (4) withdrawable in cash or cash equivalent; and (5) issued pursuant to other guidelines of BSP circular No. 649.

    EMIs can be in the form of EMI banks, non-bank financial institutions, or non-bank institutions registered as a money transfer agent. Notably, electronic money issued by banks shall not be considered as deposits as they can only be redeemed at face value, which shall not earn interest, rewards and other similar incentives.

    At present, the BSP has issued a draft amendment to the EMI Regulations for public comment, which allows banks to offer electronic money services subject to prior BSP approval under an electronic payment and financial services (EPFS) type A licence, and compliance with prudential criteria provided under the MORB.

    The draft also provides classifications between a large versus small-scale EMI bank. Large-scale EMI banks must have a 12-month average value of aggregated inflow and outflow transactions equal to or greater than PHP25 billion (USD478 million). Otherwise, it shall be classified as a small-scale EMI bank.

    Large-scale EMI banks require at least PHP200 million in capitalisation, while a small-scale EMI bank requires at least PHP100 million, unless a higher capital requirement is provided for by the MORB, depending on their inherent banking category (i.e. as a universal, commercial, digital, thrift or rural bank).

    The BSP has issued a two-year moratorium on the issuance of non-bank EMI licences to incentivise and encourage the public to maximise the use of electronic money services by existing licensed entities.

    DIGITAL BANKS

    Amid the pandemic and due to the exponential rise in the demand for digital banking transactions, the BSP has issued the Guidelines on the Establishment of Digital Banks, which paved the way for the recognition and definition of a digital bank as a banking category of its own. A digital bank is defined as a bank that offers financial products and services that are processed end-to-end through a digital platform and/or electronic channels with no physical branch or sub-branch or branch-lite unit offering financial products and services.

    A comparison of digital banking regulations Liane Stella R Candelario
    Liane Stella R Candelario
    Mid-Level Associate
    Gorriceta Africa Cauton & Saavedra in Metro Manila

    Before the issuance of circular No. 1105, many banks had styled themselves as digital banks in marketing parlance. The circular has clarified that only banks granted a licence to operate as digital banks may claim and represent themselves as a digital bank.

    Digital banks have a minimum capital requirement of PHP1 billion and, once licensed, can perform any of the following services: (1) grant loans, whether secured or unsecured; (2) accept savings and time deposits, including basic deposit accounts; (3) accept foreign currency deposits; (4) invest in readily marketable bonds and other debt securities, commercial papers and accounts receivable, drafts, bills of exchange, acceptances or notes arising out of commercial transactions; (5) act as a correspondent for other financial institutions; (6) act as a collection agent for non-government entities; (7) issue electronic money products; (8) issue credit cards; (9) buy and sell foreign exchange; (10) present, market, sell and service micro insurance products; and (11) other such activities as may be approved by the BSP’s monetary board.

    A digital bank licence application goes through three key stages with the BSP: (1) the application for approval to establish a new bank; (2) the application for the issuance of a certificate of authority (COA) to register with the Philippine Securities and Exchange Commission; and (3) the application for the issuance of the COA to operate as a digital bank.

    The most coveted BSP licence to date, digital bank licences – or at least those that have passed stage one – has been awarded to six entities before the BSP issued a moratorium on new digital bank licences.

    EPFS LICENCE

    Under BSP circular No. 1033, series of 2019, the EPFS licence generally applies across all BSP-supervised financial institutions seeking to provide electronic payment and financial services. It is an inherent part of EMI and digital banking where the requirements are embedded within EMI and digital bank application processes. Notably, whenever the IT infrastructure of an EPFS-licensed entity is set to undergo significant change or enhancement (e.g. due to a new service offering or technology), BSP approval must be secured before the implementation of the proposed change or enhancement.

    DIGITAL ECONOMY GOALS

    Digital banks, and electronic financial products and services in general, are key to the BSP’s digital payments transformation roadmap, where digital banks are expected “to provide a cost-effective and convenient banking experience, especially to retail clients and micro, small and medium enterprises” to develop an inclusive, safe and stable financial ecosystem.

    While the moratorium for the digital bank licence is presently in place, the early entrants that have been thoroughly vetted by the BSP are expected to significantly expose and popularise digital banking products and services. Outside of this, banks and other financial institutions can also explore other digital financial products such as issuing electronic money or more under an EPFS licence application or enhancement.

    For other innovative financial technologies or products or services, the BSP has fostered a very conducive and open regulatory climate with its forthcoming regulatory sandbox framework, and other amendments to existing banking rules and regulations, to entice both capital and technology to enter and support the Philippine digital financial ecosystem.

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