Cashless transactions

Before the county was hit by COVID-19, cash has always been king, taking up 99 percent of local transactions as of January 2018. But when reports spread that virus can remain on surfaces like coins and paper bills for several days, all of a sudden, transacting with cash becomes less enticing (for instance, LRT-2 passengers are now required to use the ticket vending machines to acquire a ticket instead of transacting with a teller) or even prohibited (for instance, the LTFRB has recently allowed TNVS operators and Taxi operators to resume operations subject to the condition the payment must be cashless/contactless). As the COVID-19 pandemic greatly accelerated the public’s adoption, as well as the government and the private sector, of cashless or contactless payments, so is the need for a robust payment system as envisioned by National Payments Systems law enacted in late 2018. Payment system refers to the set of payment instruments, processes, procedures and participants that ensures the circulation of money or movement of funds.

On 7 July 2020, the Bangko Sentral ng Pilipinas (BSP) issued Circular 1089 or the Payment System Oversight Framework. Its main objectives are to ensure safety, efficiency, and reliability of the national payment system.

The BSP introduced two new concepts, borrowing largely from international standards: first is the Systemically Important Payment System (SIPS) and second is the Prominently Important Payment System (PIPS). SIPS is a payment system that poses or has the potential to pose systemic risk that could threaten the stability of the National Payment System. A PIPS is a payment system that may not trigger or transmit systemic risk but could have a major economic impact or undermine the confidence of the public in the national payment system or in the circulation of money.

According to the Bank of International Settlements, systemic importance is determined mainly by the size or nature of individual payments or their aggregate value. Systems handling specifically large-value payments would normally be considered systematically important.

Among the institutions whose activities are subject to the BSP’s oversight function are the Operators of Payment Systems (OPS), Financial Market Infrastructures (FMI) (particularly insofar as their payment activities and interlinkages that relate to or interconnect with payment systems), Payment System Management Body, Payment Service Providers (PSP) and Critical Service Provider (CSP) of a designated payment system (DPS).

Because of the complex interlinkage between payment systems and financial markets, the National Payments Systems law requires the BSP to coordinate with the Securities and Exchange Commission (SEC), the country’s securities’ regulator, to facilitate the orderly discharge of payment obligations arising from security transactions in securities trading, clearing and settlement systems. The

BSP is also required to coordinate with the overseers of payment systems of other countries, especially where a payment system participant in the Philippines also operates in other jurisdictions or a domestic payment system interacts with FMI in other countries. Implementing this mandate, the BSP adopted the concept of “cooperative oversight” requiring cooperation and information-sharing between BSP and other regulators, consistent with law and the responsibilities for authorities under the “Principles for Financial Market Infrastructures.”

Among the criteria that the BSP shall consider for purpose of designating payment systems are (a) Market share; (b) Aggregate settlement risk based on volume and value of transactions; (c) Nature and complexity of transactions that the system processes; (d) Interdependence with other payment systems or FMl; and (e) Absence of alternative payment system.

In addition to securing a certificate of registration to operator of a payment system (OPS) as required in its earlier issuance, the BSP also requires an operator of designated payment system (ODPS) to secure prior authority to be an ODPS from the BSP to determine the former’s capability in terms of its financial resources, technical expertise and reputation.

If there are some silver linings from the current pandemic from a financial and monetary perspective, it surely is that the pandemic is drastically helping us inch closer to cashless transactions although in ways we may not have imagined. As we move towards that direction, the existence of a legal and regulatory framework over our national payment system is necessary to control systemic risk, and therefore protect public interest, and to provide an environment conducive to sustainable economic growth. Knowing that such an overarching framework exists and is continuously being worked on, we could focus on keeping ourselves protected against virus and worry a little less on the various risks attending our payment transactions.

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If there are some silver linings from the current pandemic from a financial and monetary perspective, it surely is that the pandemic is drastically helping us inch closer to cashless transactions although in ways we may not have imagined.

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As the COVID-19 pandemic greatly accelerated the public’s adoption, as well as the government and the private sector, of cashless or contactless payments, so is the need for a robust payment system as envisioned by National Payments Systems law enacted in late 2018.