ENSURING A SAFE, EFFICIENT, AND RELIABLE PAYMENTS AND SETTLEMENTS SYSTEM

An efficient, secure, and reliable payment system reduces the cost of exchanging goods and services. It is also an essential tool for effective implementation of monetary policy, and for smooth functioning of money and capital markets.

The Bangko Sentral ng Pilipinas (BSP) leads in promoting an efficient payments and settlements system by providing the necessary infrastructure through the operations of the Philippine Payment and Settlement System (PhilPaSS); and the policy and regulatory framework, also known as the National Retail Payment System (NRPS), to establish a safe, efficient, and reliable retail payment system in the country.

PhilPaSS and PhilPaSSPLUS

In 2019, the BSP focused on advancing the robustness and interoperability of the PhilPaSS and began to develop the PhilPaSSPLUS. The new system, which was launched on 26 July 2021, can accommodate a growing number of settlements between financial institutions; has rigid controls to support transaction security in fund transfers; and has enhanced system availability.

With broader access channels, PhilPaSSPLUS enables integration with other payment systems locally and abroad and allows for transparent, low-cost, and quick exchange of richer payment information for business and regulatory purposes. It facilitates realtime processing of financial transactions.

As the country recovers from the pandemic, the value of PhilPaSSPLUS transactions surged by 104.2 percent to P42.43 trillion in February 2022 from the same period in 2019. Transaction volumes rose 15.1 percent to 96,000 over the same period.

The PhilPaSSPLUS is designated as a” systemically important payment system” (SIPS). A SIPS is a payment system that poses or has the potential to pose systemic risk.

As such, Philippine Peso Real-Time Gross Settlement (PhP-RTGS) participants shall ensure the safety, efficiency, and reliability of the payment system by adhering to the relevant regulations prescribed by the BSP for SIPS, such as the adoption of Principles for Financial Market Infrastructures (PFMI). The BSP shall continue to evaluate and identify payment systems that shall be designated as SIPS and “prominently important payment systems” (PIPS) for oversight strategies that are commensurate to their business activities, systemic importance, and risk profiles. Designated payment systems, such as SIPS and PIPS, shall be subject to closer BSP oversight and to relatively more comprehensive risk management standards and governance arrangements, compared with their nondesignated counterparts.

ISO 20022

In 2019, BSP’s Monetary Board approved the mandating of the adoption of the ISO 20022 as the messaging and communication standard to be implemented by all banks, non-bank financial institutions, and third-party service providers that transmit electronic payment instructions to PhilPaSS.

The ISO 20022 standardizes financial messages for all initiatives with different counterparties, business domains, and networks, thereby facilitating the interoperability of payment and settlement systems and other financial initiatives, allowing for straight-throughprocessing of payments.

Aside from allowing transmission of useful transaction details along with payments, the adoption of ISO 20022 enhances the interoperability of the country’s RTGS with the payment systems both onshore and offshore. Interoperability is key to achieving payment system efficiency, which is vital in keeping pace with the growing demand for faster payment services in the interbank market and in the retail space.

National Retail Payment System

The emergence of innovative payment technology is revolutionizing the payments and settlements system. Promoting payments digitalization while maintaining the safety and efficiency of the national payment system is at the forefront of the BSP’s policy agenda as the country transitions into a cash-lite society. As such, the BSP launched a threeyear Digital Payments Transformation Roadmap (2020-2023) that charts its current initiatives and strategy toward an efficient, inclusive, safe, and secure digital payments ecosystem.

The digital transformation of the national payment system is crucial in broadening financial inclusion. It enables households, businesses, and the government to conduct financial transactions amid the social mobility restrictions and health protocols against the COVID-19 pandemic.

The COVID-19 pandemic became an essential catalyst for greater digital payments adoption. The BSP’s prepandemic initiatives to lay the groundwork for interoperable payment systems proved critical in expanding digital payments adoption during the COVID-19 health crisis. The NRPS capitalizes on the benefits of digital payments to support the country’s economic competitiveness and inclusive growth. It has paved the way for the creation of two automated clearing houses—the Philippine Electronic Fund Transfer System and Operations Network (PESONet) and InstaPay, which allow interoperable fund transfers among accounts from different participating bank and non-bank financial institutions.

Since the pandemic started, there has been a sustained rise in the adoption of digital payments in the Philippines. The latest e-payments measurement report showed that as of end-2021, the share of monthly digital payments volume rose to 30.3 percent from 20.1 percent in 2020. The value of digital payments in the country represents 44.1 percent of total retail payments in 2021—close to the BSP’s target of converting at least 50 percent of retail payments to digital form by the end of 2023.

PesoNet and InstaPay

Combined transactions using PESONet and InstaPay—the two interoperable platforms for electronic fund transfers—rose by 44 percent in terms of volume and 46 percent in terms of value as of end-December 2021 compared with2020.

Volume and value of transactions using InstaPay—the platform of small-value transactions worth P50,000 and below— surpassed ATM withdrawals for the period January-December 2021. Volume and value of transactions using PESONet—the platform for bigger-value transactions—may approach check volume over time if it will maintain its steady increase.

Over the same period, the number of PESONet participants increased to 94 while InstaPay reached 62 payment service providers. The growth and diverse participation of banks, including thrift banks and rural banks, as well as non-bank e-money issuers, indicate the widening reach of interoperable digital payment services across different regions and income classes in the country.

The PESONet Multiple Batch Settlement (PESONet MBS) was launched on 24 January 2022, adding another milestone in the BSP’s payment system development agenda. With this service enhancement, PESONet users are able to receive funds at an earlier time than the usual end of banking day.

For participating banks and e-money issuers, this allows better risk management as settlement of transactions are spread into two cycles within a banking day. On the other hand, businesses benefit from shorter clearing intervals, which enable them to manage cashflows better.

By end-2021, PESONet transaction volume grew by 26 percent year-on-year from about 5.5 million to 7 million.

Familiarization with and wider use of digital payments made through PESONet and InstaPay gave impetus to other digital payment streams, such as the EGov Pay and QR Ph facilities.

EGov Pay

Using the PESONet rail, EGov Pay is an electronic payment facility that allows individuals and businesses to digitally pay taxes, licenses, permits, and other obligations to the government.

By participating in the EGov Pay as billers, government institutions can efficiently collect revenues and, therefore, improve their delivery of public and social services. Moreover, the government can curb revenue leaks through efficient collection means, better audit trails, and enhanced transparency.

Following the successful pilot launch of the Digital Tax Payment Service using PESONet on 15 August 2019, the BSP approved the onboarding of other government agencies and other payment systems providers to the digitalization of government collections.

The volume of EGov Pay transactions jumped by 467 percent to over 91,000 at end-2021 from around 16,000 transactions a year earlier. The value of EGov Pay transactions increased by 300 percent, from around P61 million to nearly P246 million over the same period. The increase in the use of EGov Pay, even after mobility restrictions were lifted, proves the shifting preference of consumers from cash to digital payments.

From only two government billers when the facility was launched in 2019, 484 billers had been onboarded to EGov Pay as of end-April this year. The billers include provincial and local government units, state colleges and universities, water districts, and other government agencies and offices.

Digital Banking

To maintain the momentum in digital transformation, the BSP is pursuing several other initiatives, such as promotion of digital banking. The Philippines is a pioneer among the countries in the Asia-Pacific region in developing a digital banking framework.

Digital banks may conduct end-to-end processing of financial products and services through digital platforms and electronic channels. They are expected to have robust, secure, and resilient technology infrastructure, as well as effective data management strategy and practices, and sound digital governance.

Digital banks are seen helping accelerate financial inclusion. They have the capacity to deliver financial services to unbanked and underserved individuals and businesses. Digital banks may offer financial products and services through cash agents and other qualified service providers that are located closer to customers to facilitate cash-in/deposit and cash-out/ withdrawal services, fund transfers, bills payment, as well as other ancillary services. The BSP has so far issued licenses to six digital banks.

The BSP supports the ASEAN financial integration, which aims to foster greater interconnectivity of the national payment system with the fast payment systems of other member economies. The BSP shall prioritize establishing bilateral linkages with these countries that have significant remittance, tourism, and trade transactions with the Philippines in a scalable manner that can facilitate transition to multilateral arrangements.

Cognizant of the exposure to the same set of risks being faced by other bank categories, digital banks are subject to the same prudential requirements on governance and risk management systems, information technology, cybersecurity, outsourcing, anti-money laundering, and consumer protection, among others, tailored to their business model and risk profile.

Open Finance

Another digitalization initiative is open finance. With this, the BSP espouses consent-driven data portability, interoperability, and collaborative partnerships among incumbent financial institutions and third-party players. Through open banking, incumbents and third parties are allowed access to financial information needed to develop innovative products and services that suit changing customer needs.

The National QR Code Standard The BSP’s issuance of a policy requiring adoption of a National QR Code Standard was a turning point in the country’s digital transformation journey. Leveraging on the efficiency, safety, and affordability of the QR technology, this regulation bears far-reaching benefits by enabling micro and small merchants to accept digital payments, which used to be done only by well-established businesses.

The National QR Code Standard dubbed “QR Ph” was launched in November 2019, with the Person-toPerson (P2P) use case made available first, followed by the Person-to-Merchant (P2M) in 2020. QR Ph P2M’s main feature is interoperability, as it enables the transfer of funds across different participating payment service providers. Customers with accounts in participating banks and electronic money issuers (EMIs) can pay for their purchases via the QR Ph P2M with more than 20,000 merchants in over 30,000 locations. The BSP also issued Circular No. 1055 requiring all payment service providers, including banks and non-bank EMIs, to adopt the QR Ph.

In Q4 2021, BSP and the Department of Interior and Local Government (DILG) developed the Paleng-QR Ph program to promote account ownership and digital payments among market vendors and tricycle drivers. This joint initiative will initially be implemented in pilot LGUs to be identified by the DILG. It will capitalize on the use of the QR Ph initiative, which uses QR technology as a means of payment in public markets and tricycle hubs.

Cross Border Payments System Milestones in the BSP’s digitalization agenda provided the impetus for improving the cross-border payment system. The Association of Southeast Asian Nations (ASEAN) envisions efficient and effective interoperability among payment systems in the region, pursuant to the vision under the ASEAN Payments Policy Framework. The framework supported the bilateral connectivity of many of the ASEAN member states’ fast payment systems.

The BSP supports the ASEAN financial integration, which aims to foster greater interconnectivity of the national payment system with the fast payment systems of other member economies. The BSP shall prioritize establishing bilateral linkages with these countries that have significant remittance, tourism, and trade transactions with the Philippines in a scalable manner that can facilitate transition to multilateral arrangements.

In 2021, the BSP started to tackle the challenges of cross-border payments, which include high costs, low speed, limited access, and insufficient transparency. The target beneficiaries are overseas Filipinos, businesses in the tourism, export, import, and e-commerce industries, as well as firms receiving financial support from their global institutional investors and affiliates abroad.

The BSP laid out three strategic undertakings to achieve its objective. The first is identifying potential payment use cases and the digital payment rails that can best serve target beneficiaries. The BSP then decided to prioritize the creation of bilateral linkages between fast payment systems that allow electronic fund transfers by simply providing one’s mobile phone number or email address through the use of common QR Code standards or proxy-based services in lieu of an account number. Fully aware of international efforts to create a multilateral platform, such as the Bank for International Settlement Innovation Hub’s Project Nexus, the BSP is designing the envisioned two-party linkages to be flexible enough to transition to a multi-party arrangement.

This includes building a domestic and regional payments ecosystem to ensure a safer and more efficient environment for online consumers and merchants. Similarly, the BSP works with the payments industry through the Philippine Payments Management, Inc. to steadily improve the payment systems in the country.

The BSP also engages other countries to form spheres of cooperation in enhancing the safety and efficiency of cross-border payments. In the second half of 2021, the BSP started to engage with various ASEAN central banks, namely, Bank Indonesia, Bank Negara Malaysia (BNM), Bank of Thailand, and Monetary Authority of Singapore (MAS), to explore opportunities for collaboration and information sharing on cross-border payment initiatives.

The first fruit of these dialogues is the signing of the enhanced BSP-MAS FinTech Cooperation Agreement in November 2021, which kicks off the development of the linkage of Philippines’ InstaPay with Singapore’s PayNow. Another outcome is the expression of a clear intention by the BSP and BNM toward linking InstaPay with Malaysia’s DuitNow.

Currency Management

On 27 July 2020, the BSP launched enhanced Philippine banknotes that are more responsive to the needs of the elderly and the visually impaired and feature the latest anti-counterfeiting technology. To further refine the current series’ design, the BSP added short horizontal lines that may be touched and felt at the right side of the banknotes. One pair of these lines are on the 50-Piso, two

pairs on the 100-Piso, three on the 200Piso, four on the 500-Piso, and five on the 1000-Piso. The security features of the 500-Piso and 1000-Piso were strengthened by adding a roller bar effect on the value panels and color-shifting in the optically variable Ink. These features will make the higher denominations more difficult to counterfeit. The launch of enhanced Philippine banknotes is consistent with the recommendation of currency experts worldwide to introduce enhancements to banknotes every 10 years.

The BSP released and circulated 29 million pieces of the new 20-Piso coin, which is now the highest denomination Philippine coin. With a longer lifespan than the banknote version, the 20-Piso coin is more cost-efficient to produce.

Meantime, in line with its mandate and global good practice, the BSP explored the adoption of polymer banknotes. In April 2022, it issued a limited volume of 1000-Piso polymer banknotes, which is co-circulating with the 1000-Piso paper banknotes.

The advantages of polymer substrate are widely documented. Based on reported experiences of other central banks, polymer banknotes are significantly cleaner and less susceptible to viral and bacterial transmission due to their smooth and non-absorptive surfaces. Their resilience against extreme temperatures and resistance against water and dirt make them highly durable. They have been found to last two to five times longer than paper money, more than offsetting the initial increase in production cost. Thus, polymer notes are more costeffective than paper notes.

Moreover, the use of polymer is said to reduce expenses on banknote issuance by 40.0 to 60.0 percent. In addition, polymer banknotes have a smaller carbon footprint and lower water and energy usage. Its recyclability enables polymer banknotes to have more than one life cycle. Thus, the materials can be kept within the economy indefinitely and used productively, creating further value.

While the COVID-19 pandemic heightened the preference for and use of digital modes of payments and settlement, the demand for the highest denominated 1000-Piso banknotes rose, buoyed by precautionary motive for holding cash even as demand for lower denominated currencies went down. The share of 1000-Piso to total volume of currency in circulation reached 33.0 percent as of endDecember 2021. The 1000-Piso banknote is also most susceptible to counterfeiting, accounting for almost half of the volume of the documented counterfeit banknotes in 2021. It is against this backdrop that the BSP chose the 1000 denomination for the test circulation of polymer banknotes.

The design adopted for the 1000-Piso polymer banknotes is consistent with the principles of currency integrity, social relevance, efficiency, unified theme and aesthetics, and enhanced security features.

The obverse side features the portrait of the Philippine Eagle (“Pithecophaga jefferyi”) as its focal point. The Philippine Eagle is deemed a strong image to represent the country’s highest banknote denomination. On the reverse side, the images of the Tubbataha Reefs National Park, declared as a UNESCO World Heritage Site, and the South Sea Pearl have been retained.

The BSP has also considered the impact of polymer substrate on the abaca industry, given that the existing substrate has abaca content. In partnership with other government agencies, the BSP has taken a proactive stance in exploring other avenues for possible use of abaca products, such as the procurement of abaca for BSP collaterals and the inclusion of abaca content in land titles and other security documents.

Cash Service Alliance

The BSP’s currency management strategy is guided by the mandate of ensuring sufficient supply of safe and reliable currency in the most cost-effective and efficient way. As such, amid the pandemic, the Cash Service Alliance (CSA) initiative was launched in October 2020.

Under this initiative, authorized agent banks (AABs) may enter into mutually beneficial agreements to service each other’s requirement for fit currency using their available currency holdings.

This helps ensure availability of fit currencies even during crises, such as at the height of lockdowns amid COVID-19 crisis.

The CSA in the Greater Manila Area went into full gear in 2021. As of endDecember 2021, 28 out of the 29 AABs participated in the CSA. On 1 June 2021, the CSA was launched in six other BSP Regional Offices and Branches (ROBs) with the highest volume of fit note deposits (i.e., Cebu, Davao, Tuguegarao, Tacloban, Cagayan de Oro, and General Santos). It was subsequently rolled out in the remaining ROBs on 1 July 2021.

As of end-December 2021, total CSA transactions amounted to P302,491.7 million or 376.7 million pieces.

Counterfeit, Unfit, Mutilated, and Demonetized Coins

To ensure that only fit legal tender coins recirculate, the BSP facilitated the destruction of counterfeit, unfit, mutilated, and demonetized (CUMD) coins through the high-capacity Coin Defacement Machine (CDM) leased to BSP. A total of 435.2 metric tons were defaced in 2021.

The BSP also conducted 11 successful law enforcement operations in 2021. These resulted in the arrest of 19 individuals, the filing of 15 criminal charges, and the seizure and confiscation of 813 pieces of counterfeit New Generation Currency banknotes, 144 counterfeit US dollars, other foreign currencies, and other counterfeiting-related items. By the end of 2021, the BSP was able to secure a 100-percent conviction rate, with the conclusion of the three counterfeiting cases and conviction of the accused in criminal cases for counterfeiting or possession, or both, of counterfeit currencies.*