Financial Inclusion Improved, But Job's Not Done

Great strides have been made towards financial inclusion in the country, due to a combined effort from public and private sectors as well as demand generated by the pandemic lockdown. But as we continue to move beyond the pandemic years, so too should we consider how to sustain this newfound momentum. These recent advancements have led us further down the path to progress, but have also illuminated the next set of problems. What is the state of financial inclusion in the country and what more must be done to achieve further inclusion? Let’s dig in.

E-money is the hero of the day, but it isn’t perfect

E-money account opening has led the charge over the past 3 years. “Formal account ownership” among Filipino adults rose from 29% in 2019 to 56% in 2021, according to the Bangko Sentral’s 2021 Financial Inclusion Survey. That figure has nearly doubled in 2 years since 2019, sparked by the necessity of digital payments during lockdown. E-money account openings were the largest contributor to that growth, with e-money account holders growing from a mere 8% in 2019 to 36% in 2021.

The rise of e-money has improved the payments capabilities of Filipinos at large, and the mass adoption of e-payments in a relatively short period points to the clear demand for that service among the population. In fact, with 36% of adult Filipinos owning an e-money account and only 23% a bank account, e-money account holders now significantly outweigh traditional bank account owners. While that growth should be celebrated, it does outline the next problem in the question of financial inclusion in the Philippines.

The buck does not stop at payments

While payment capabilities are the first step towards financial inclusion, it is far from the final destination. Deeper services, such as savings, credit, insurance, and investment, require a more robust system than e-money services currently offer. While strides have been made in this area - GCash loans based on users’ GScore, for instance, and other services including GInvest, GSave and GInsure - they currently face challenges and are not (yet) fully equipped to offer all of the inclusive financial services that one might access through traditional banking.

For instance, let us consider GScore. A GScore is a trust rating calculated from user data on the GCash app, and acts as a proxy to a credit score within the GCash platform. While the solution works as a clever way to enable loans on the platform, with GCash reportedly disbursing P40 billion in loans as of September 2022, it has its limitations. For one, GScore calculations are limited to app activity, meaning it cannot develop a holistic view of user’s creditworthiness beyond GCash for now. If a user has other financial activities not tracked through the app, they may receive a GScore that does not accurately reflect their ability to afford a loan. Similarly, non-GCash services do not yet recognize GScores, making it a siloed feature that cannot contribute to users’ financial footprint beyond the app. Furthermore, activity is restricted to a user’s phone number, so if a user with a high GScore changes their number for any reason, their GScore will reset, according to the GCash help center: “Your GScore is unique to your mobile number. Your new sim activities would be the basis for your current GScore.”

These limitations reveal the makeshift nature of e-money services. Many use proxies to established financial services. While these are often ingenious workarounds that enable these services to offer more value, in the big picture they are only partial solutions. True access to credit should not be limited by one’s ability to retain the same phone number, for instance, and should be more resilient rather than transitory. Reliance on these types of proxy solutions may create an all too familiar case of ancillary issues and logistical red tape that will ultimately interfere with financial inclusion in the long run.

As another example of ancillary issues, consider how the lack of standard identification among the population has made opening bank accounts a non-starter. Before financial services can be rendered, Filipinos need the capability to verify their identity. However, without widespread and reliable access to identification documents, Filipinos have been limited in their access to inclusive financial products. This is not necessarily due to the limitations of the financial system, but to the deficiencies of the country’s identification system. Put another way, this extraneous, or ancillary layer of issues is impeding financial inclusion.

The Philippines faces an identity crisis

Indeed this identity crisis continues to make itself evident. Referencing the 2021 Financial Inclusion Survey once more, we see that 40% of respondents cited a lack of documentary requirements as a main reason for not opening a bank account. This is perhaps the worst possible reason for not opening an account because it is not a result of the respondents’ choices, but a forced conclusion due to a lack of choice. This is a prevalent issue in the country and the precise antithesis to the spirit of financial inclusion, which aims to enable and proliferate choice.

In response to this issue, the Philippine Identification System, aka PhilSys, has been working to create a digital identification database for all Filipinos and resident aliens. And according to PhilSys data from February 2022, 19.35 million out of 22 million total registrants, a whopping 87.9%, did not have primary identification documents when registering for PhilSys.

87.9% of registrants did not possess ANY of the following:

• Certificate of Live Birth,
• Philippine Passport or ePassport,
• Government Service Insurance System or Social Security-issued Unified Multi-purpose Identification Card (UMID),
• Student’s License Permit or Non-Professional/Professional Driver’s License

This highlights a serious lack of access to official ID, and precisely justifies the need for a program like PhilSys. The vast majority experience a drastic lack of access to a fundamental necessity like identification. Without these forms of documentation, opening a bank account is impossible, indicating that the financial inclusion issue is a symptom of a larger systemic problem: a general lack of unified data and access to digital identity.

PhilSys is part of the government’s ongoing approach to tackle this issue, and they’ve rightly diagnosed that digital identity is the keystone in developing an accessible and sustainable financial infrastructure in the modern era.

While e-money providers have created their own eKYC processes to help alleviate the plight of the underdocumented, the problem requires a much deeper and holistic solution.

Solutions like GScore and PhilSys are both approaches to solving the issue of identifying the customer. In lieu of a nationally adopted, reliable method to identify and assess users, e-money providers like GCash that wish to introduce more advanced features, like loans, require an alternative method. Hence, Gscore. In many ways, the government and private sector are fighting the same fight, but these efforts are siloed, not synergistic. GScore imperfectly solves the issues of knowing the customer, but only for the immediate purposes of the app. PhilSys is beginning to address the documentation issue in the country, but has yet to integrate tracking people’s financial footprint along with their identity, in order to facilitate more accurate credit scoring and enable nationwide loan access.

Make no mistake, in order to continue improving the level of financial inclusion in the country, we do need non-predatory, accessible loans, as well as additional features, like savings, insurance, and investment. We should welcome innovations around e-money, like GScore. But the buck cannot stop at payments, or else we end up in the same predicament we found ourselves in with the country’s relentless adherence to cash and seeming refusal to adopt e-money before the pandemic.

We’ve seen that behavior play out before. It’s no secret that e-payment capabilities have been available long before the pandemic - GCash was introduced as early as 2004. What held implementation back, amongst other factors, was the sentiment that learning how to use these services was not worth the trouble when cash remained a perfectly viable option. Indeed, lack of willingness to adopt digital among vendors has made it difficult to relinquish the hold of cash money on the Filipino economy. That changed with the pandemic, which created an ultimatum for many Filipinos who already possessed the means to switch to e-payments, but simply had no compulsion to do so until now. We should not wait for the next global crisis to push us forward. We should not become complacent with e-payments when systemic issues, such as the identity problem, continue to hold us back.

There are some problems e-money cannot solve

The adoption of GCash has finally enabled at scale one of the most basic financial services: payments. However, opening an e-money account does not necessarily result in access to more financial services in the same way that opening a bank account can. And if we are not careful, the Philippines may find itself stuck once again, this time in an era of e-money, as the rest of the world moves on while we repeat the mistakes of our past or fail to address the most pressing issues that restrict our growth.?

While the adoption of e-money is a great accomplishment towards financial inclusion, it is ultimately just a means of payment. And even as e-money providers find workarounds to offer more robust features, the national problems of digital identity, of data management, and siloed services - the true roots of financial exclusion - still persist. Until these are addressed, financial inclusion in the country will always be restricted, and no amount of creative short term solutions will change that, until they are incorporated into national-scale, holistic solutions.

The intrinsic limitations of e-money are stated in the Bangko Sentral’s own words, “E-money may only be redeemed at face value. It shall not earn interest nor rewards and other similar incentives convertible to cash, nor be purchased at a discount. E-money is not considered a deposit, hence, it is not insured with the PDIC.” The capabilities of e-money are limited by definition, and while they offer a range of solutions for payments issues faced by Filipinos, at the moment they are not conducive to savings precisely because they cannot be PDIC insured nor accrue interest. Limitations like these cannot be improved by fintechs or banks because they are set at the regulatory level. That’s not to say that e-money should be deregulated - the point is that this tool, like any other, has its place, but it also has its limitations. Therefore it cannot be made into the end all and be all of financial inclusion. In short, we have to keep moving forward if we want to continue achieving higher forms of financial inclusion and cannot rest our laurels on e-money nor on payments solutions alone.

The next frontier is integration. Can systems like a PhilSys and a GScore or others like them be linked to create a holistic and agnostic financial footprint, which users can take to any financial institution or fintech? Can we create, once and for all, a national database that acts as a foundation for all Filipinos to finally establish a reliable financial footprint and access more services? While this era of innovation and growth has leap-frogged us forward, there is a clear risk and tendency to develop siloed services that all attempt to fix the same problem in their own way, with none quite coming close. Rather than a collection of short term, individualized band aid solutions, the answer to sustaining our trajectory is to build upon these developments and find synergies that enable us to overcome this issue of identity for good.

Companies such as FinScore and Trusting Social, alternative data credit scoring providers that use telco data and other metrics to assess credit worthiness, are focused on that problem. Time will tell if such providers can crack the case, but again, they cannot do it alone and integration to other sources of data will be critical.

In the bank and other fintech use cases, we have found that telco data is more effective as a cherry on top of a more robust credit algorithm, rather than the main basis for assessing someone's willingness and capacity to pay. Telco data can, for instance, provide information on telco billing activities, or give insights into people's frequent locations. While lots can be extrapolated from this information, these data points alone cannot be the basis of lending. For that reason, many remain skeptical towards the use of telco data for credit scoring. However as supplementary information used in concert with other financial footprint data, it may have its place in solving this issue.