FINTECH: Digital Payments

DOGWE | EUSEBIO | GONZALES | TANDOC | TATINGTM 206 SECTOR STUDY

03 MAY 2016

OVERVIEW1. Industry Structure2. Macro Environmental Trends3. Task Environment4. Market Segments5. Recommendations

Industry Structure1

FinTechFinTech

B2B

B2C

P2P

Differentiation◇ Banks

￮ Traditional￮ Funding comes from depositors￮ Earns through loans & mortgages￮ Adapts to Technology￮ Provides value-added service￮ Higher interest rates for short-term loans

◇ FinTech

o Innovative solutions for finance

o Funding comes from investors

o Earns through profit-sharing

o Technology driveno Value-added service is

already included with higher rates of return

Sudden Growth

o 2008 – emerged because of the global financial crisis

o Risk management centrico Rise of the Millenials

Rapid Growth

Source: Accenture, April 2016

◇ Attributable growth:Asia: 2,500 startupsEU: 4,000 startups

Source: Business Insider, April 2016

Notable Fintech STARTUPS in PH

Source: World Bank, Global Findex 2014, Published 2015

Macro-Environmental Trends2

Social, Cultural, Demographic Forces

Social, Cultural, Demographic Forces

Social, Cultural, Demographic Forces

◇ 10M Overseas Filipino Workers send remittances regularly

◇ 610 out of 1635 municipalities do not have banks

◇ 26% of Filipinos have access to formal financial channels

◇ Large % of unbanked has a mobile phone, of which 60% keep some form of savings, 13% borrow from informal providers

Political, Governmental and Legal Forces◇ Philippine Development Plan (2011-2016)

◇ USAID-funded: E-Peso Project◇ BSP Circular 649: Guidelines on issuance of e-

money and the operations of e-money issuers in the Philippines

“A regionally responsive, development, oriented and inclusive financial system which provides for the evolving needs of its diverse public” and supports inclusive growth”

Political, Governmental and Legal Forces

◇ BSP: National Strategy for Financial Inclusion

policy and regulation which also encompass products and services

as well as financial infrastructure

financial education and consumer protection advocacy programs data and measurement

Technological Forces

NFC

OPEN API

BIG DATA ANALYTICS

Economic Forces

Financial Inclusion

Access

Welfare

Usage

Quality

Economic Forces

Task Environment3

Task Environment◇ Value Chain

Traditional Value TransferDecentralised Payment SchemesNon-traditional Payment Schemes

◇ Porter’s Five Forces◇ Key Innovations

Characteristics of Successful Payments Innovations◇ Key Characteristics of Future Value Transfer

Traditional Value Transfer

Key Characteristics◇ Processing of transfers is handled by correspondent financial

institutions ◇ Relies on a central clearing body

Traditional Value TransferAdvantages◇ Has established wide

network including most existing financial institutions

◇ Ability to manage large capital flows on a global scale

◇ Large retail and institutional customer base who are familiar with the model

Limitations/Disadvantages◇ Limited visibility into

value flow for both senders and recipients

◇ Prone to fraud when the sender’s credentials are exposed

◇ Transfer inefficiencies vary by countries /institutions

◇ High costs/number of intermediaries

Decentralised Payment Schemes

Key Characteristics◇ Value transfer is recorded in a distributed ledger ◇ Transactions are managed by a distributed

network of processors ◇ Sender initiates the transfer

Decentralised Payment SchemesAdvantages◇ Transfer history is

transparent, traceable and unalterable

◇ Lower costs of transaction

◇ Lower exposure to conventional fraud

◇ Settlement is near real-time; no counterparty risk

Limitations/Disadvantages◇ High volatility in the value

of the native “currency” ◇ Regulatory scrutiny

creates challenges to connecting with fiat currency ecosystems

◇ Accounts are anonymous / transfers are irreversible

◇ Higher exposure to unconventional fraud (large-scale hacking)

Non-traditional Payment Schemes

Key Characteristics◇ Value transfer is facilitated by a single

trusted non-financial third party

◇ Relies on the intermediary to keep records and settle the transfer

◇ Sender initiates the transfer

Non-traditional Payment SchemesAdvantages

◇ Simpler and cheaper transfers

◇ Improved user transparency

◇ Enables real-time settlement

◇ Intermediaries has greater reach than financial institutions

Limitations/Disadvantages

◇ Scalability is dependent on the availability/adoption of the intermediary platform

◇ Cross border flows of funds can create regulatory challenges

Porter’s Five ForcesBargaining Power of Customers/Suppliers (High)◇ Low switching costs◇ Vast number of competitors◇ Access to substitute products and services

Barriers to entry (Low, therefore threat is High)◇ Digital business changes the rules◇ Current value transfer is inefficient and expensive – a

lot of new entrants see this as an opportunity

Porter’s Five ForcesThreat of substitute products and services (High)◇ P2P Payments – PayPal, Coins.ph◇ Mobile Wallets – MTN Mobile Money, Gcash, Smart

Money◇ Mobile Check Deposits◇ Pre-loaded Cards◇ Digital Currencies – Bitcoin

Intensity of Competition (High)

Key Innovations

Characteristics of Successful Payments Innovations

Key Characteristics of Future Value Transfer

Market Segments4

Market Segments◇ According to Usage￭ Online B2C Commerce￭ Mobile Wallet POS Payments￭ P2P Money Transfers◇ Based on End Users (Consumers)￭ Multi-channel users￭ Debt averse groups￭ Digital natives￭ Underbanked◇ Based on End Users

(Merchants/Enterprises)￭ Online Merchants￭ Offline Merchants

According to Usage: Online B2C CommerceUSD 4.87 billion forecasted transaction value for 201619.9% annual growthUSD 10.08 billion forecasted transaction value for 2020USD 153.70 average transaction value per user49.2 million users by 2020

20%50%

50%80%

Demographics:● 40% from the 25 to 34

age bracket● Female: majority of

users are from the 16 to 34 age group

● Male: majority of users are from the 25 to 44 age group

Payment Options for the Consumers:

Payment Gateways for Checkouts

According to Usage: Online B2C Commerce

According to Usage: Mobile Wallet POS Payments

USD 4.7 million forecasted transaction value for 2016113.04% annual growthUSD 97.3 million forecasted transaction value for 2020USD 5.06 average transaction value per user3.3 million users by 2020

20%50%

50%80%

Demographics:● 35% from the 25 to 34

age bracket● Female: majority of users

are from the 16 to 34 age group

● Male: majority of users are from the 25 to 44 age group

300,000

3.3 m

Keyplayers:

According to Usage: Mobile Wallet POS Payments

According to Usage: P2P Money Transfers

8.8 million active subscribers (2012)188 million P2P transactions (2012)PHP 308 billion P2P inflow (2012)PHP 305 billion P2P outflow (2012)

Dominating Players are Telco Subsidiaries

20%

50%

50%80%

Keyplayers:

According to Usage: P2P Money Transfers

Based on End Users: ConsumersA.OMNI CHANNEL USER- Strongly embraces online

and offline- Has high purchase capacity- Median age is 33- Shared market of

traditional banks and fintech

B. DEBT AVERSE USER- Has financial access but

hesitant on using credit cards

- Has high purchase capacity

- Median age is 33- Shared market of

traditional banks and fintech

C. DIGITAL NATIVE- Millennials- Highest ownership of mobile

device/ digital savvy- Banks don’t like them and

they don’t like the banks- “Viral” base

D. UNBANKED- Huge chunk of PH population- 8 out of every 10 Filipino

household is unbanked- With mobile phones- 60% of them have other form

of savings and 13% borrow from informal providers

Based on End Users: Consumers

Based on End Users: ConsumersOmni-Channel User Debt Averse Digital Native Unbanked

With Credit Card YES NO NO NO

With Bank Account

YES YES ? NO

Purchasing Power HIGH HIGH LOW LOW

Population 2 million 2-3 million 24 million 60 - 70 million

Age Group 28 to 44 28 to 44 16 - 29 N/A

Digital Payments Used

Online B2C CommerceMobile WalletP2P Transfer

Online B2C CommerceMobile WalletP2P Transfer

Online B2C CommerceMobile WalletP2P Transfer

P2P Transfer

Based on End Users: Merchants/Enterprises

A.ONLINE MERCHANTS

FINANCIAL TECHNOLOGY USED

B. BRICK & MORTAR MERCHANTS

FINANCIAL TECHNOLOGY USED

Based on End Users: Merchants/Enterprises

Recommendations5

RecommendationsIncentiviseThe government should devise programs and set incentive schemes to welcome Fintech startups to consider the country as their playground.

Regulatory EnvironmentRegulations need to be relaxed to allow ease of entry of these foreign Fintech firms into the country.

Education is keyThe educational system of the country needs to be revamped to highlight the importance and the impact of digitization and globalization.

FinTech – not a threatThe Fintech sector should be viewed not as a threat, but instead as an opportunity for growth for the Banking industry.

Cross the ChasmIdentify weak points and work quickly to address them especially that the “cash is king” mindset is still very much prevalent in developing countries.

MillenialsThe Fintech sector should capitalize on the millenials as their target market since they are the digital natives.

Thanks!Any questions?