Professional Documents
Culture Documents
5
B E T T E R THANC A S H EVIDENCE PAPER
A L L I A N C E Empowering People Through Electronic Payments
July 2015
Shifting payment of salaries, social welfare and relief payments, payments to suppliers, remittances, etc.
from cash to electronic has the potential to improve the lives of low-income people, particularly women,
while giving governments, the private sector and the development community a more transparent,
time- cost-efficient, and often safer means of making and receiving payments.
BTCAs Development Results Focused Research Programme (DRFRP) accelerates the generation and
dissemination of knowledge and tools for stakeholders transitioning part of their payments from cash to
electronic. The DRFRP has three components: 1) Readiness diagnostics, which compile existing data on the
volumes, values, and payment means for each kind of payment made by governments, the private sector,
and development community partners, and assess the countrys readiness to replace cash payments with
electronic payments; 2) Case studies of on-going shifts; and 3) Toolkits to provide practical steps for BTCA
stakeholders to plan, measure and implement shifts.
The DRFRP is managed, on behalf of BTCA, by a consortium led by Bankable Frontier Associates, a Boston-
based consulting firm, with advice from experts from the World Bank Payments Group and the CGAP
Technology Team, as well as local research staff.
BTCA Case Study No. 5
B E T T E R THANC A S H EVIDENCE PAPER
A L L I A N C E Empowering People Through Electronic Payments
July 2015
AUTHORS
James Hokans, Bankable Frontier Associates
ACKNOWLEDGMENTS
This case study is the outcome of a recommendation made in the BTCA Country Diagnostic
for the Philippines to examine interbank e-payments and their impact on supplier payments
by business. For this case study, Abraham Co, President of the Asia United Bank and John Cary
Ong, Director from Citi Philippines were generous with their time and assisted in making several
of the introductions for interviews with Filipino medium sized businesses. Wajiha Ahmed from
BFA oversaw the development and piloting of the survey instrument of small businesses in the
National Capital Region, with support from Jay Sandoval from Social Weather Stations and
Laura Cojocaru from BFA. Johann Bezuidenhoudt, senior associate with BFA, was invaluable
as always in assisting the author with some of the technical details of making inter-bank fund
transfers. Consultants Jing Gusto and Jun Perez were of great assistance in helping the author
to implement a survey questionnaire with some of the businesses mentioned in this case study.
Finally, the author would like to give special thanks to Nestor A. Espenilla, Jr., Deputy Governor,
Bangko Sentral ng Pilipinas (BSP) for inspiring this case study, and to the Payments Office of the
BSP for providing the author with high level information about the national retail payment system.
Special thanks are also extended to the staff members of BancNet, Megalink and the Philippines
Clearing House Corporation for their patience in answering the authors many questions.
Finally, I wish to thank Pia Roman of BSP and John Carey Ong of Citi Philippines for reviewing
adraft of this paper.
Every effort has been made to limit the number of technical errors, which are the sole
responsibility of the author.
All photos USAID Digital Development - Shutterstock.com
I EXECUTIVE SUMMARY 1
II INTRODUCTION 5
4.2 SME franchisee in pharma painstakingly manages its multiple account balances 17
4.3 Global Restaurant Concepts, Inc struggles to convince suppliers to take interbank
electronic payments18
V THE AVAILABLE OPTIONS ALL CARRY COSTS FOR BUSINESSES, BUT AUTOMATING
CHECKS OFFERS AN ATTRACTIVE HALF-WAY STAGE21
VI BUT BANKS MAINLY BEAR THE COST OF CHECKS AND SHOULD HAVE REASON
TO CHANGE 25
7.1 Even where access is not a challenge, most small businesses are unbanked29
7.2 Even banked businesses are not using electronic payments30
7.3 Small businesses are not shopping around for lower fees or better products 31
ANNEXES.................................................................................................................................................... 35
ANNEX A: LIST OF ACRONYMS 35
ANNEX B: SOURCES36
ANNEX C: CALCULATOR DETAILED ASSUMPTIONS (SHOWING 100% DIGITAL SHIFT)38
ANNEX D: ECONOMETRIC ANALYSIS 40
Endnotes41
Note: Exchange rate conversions made at the rate of 1 USD to 45 PHP (as of 26 September 2014).
1 Executive summary
2 Introduction
SECTION 2: INTRODUCTION 5
EVIDENCE PAPER
The first section presents the current results of the small business survey
methods available for large and and the factors limiting the usage of
medium-sized businesses to make digital payments. The final section
payments to employees and suppliers. draws implications for governments
The next section examines three interested in strategically supporting
mini-cases of medium size businesses businesses to digitize their payments,
in the Philippines, each of which and for businesses that operate in this
is seeking to digitize its payment kind of payments ecosystem.
streams, but with little or no success.
The third section calculates the costs As a guide to reading the case,
a stylized Filipino business faces in Table 1 below maps how this case
the current system and the potential study extends the information base
savings of digitizing part or all of its regarding each of the potential
invoice payment process. In the fourth benefits of digital inter-bank
section, the case study uses cost payments from the perspective
findings from high-income countries of businesses.
to estimate the cost of the reliance
on checks to banks in the Philippines.
Then the case study looks at the
SECTION 2: INTRODUCTION 7
EVIDENCE PAPER
The businesses interviewed report The Department of Budget and Medium size formal businesses report
costs they believe they could save Management (DBM), which oversees that they seek to reduce their security
with access to electronic inter-bank government payments, has made risks when making and collecting
payment systems from their main bank, significant strides in enabling the payments, and for the most part they
and reducing the number of checks adoption of electronic payments, trust checks which may take several
written and accounts maintained. with gains for transparency. days to clear. However, they seek
The invoice calculator suggests that However, transparency is not a major greater speed and convenience to make
the saving could be 25-46% of invoice factor for the businesses interviewed payments to suppliers. They have been
processing per annum. in this case study, though each said less able to incentivize their payees
Most businesses are also seeking they supported governments goal of to accept real time (IBFT) payments
greater control and efficiency to increased transparency. because the service is unknown,
release management time to be unavailable or expensive for payer
focused on core business. and payee.
The current electronic inter-bank
options are hugely inconvenient
and costly for payees and payers alike.
Economic
Financial Inclusion Development Changing Lives
This case study suggests that financial Businesses are not adopting a wide To date, digital payments have not had
inclusion and inter-bank electronic range of innovative approaches to a substantial impact on the lives of the
payments are linked. The survey results payments, but remain tied to checks owners of the small and medium sized
of small businesses suggest that if in spite of erosion of legal protections. businesses interviewed for this case
policymakers want to reduce the cost Banks continue to wall off their study. An unclear value proposition
of cash on the financial system, they corporate and medium size businesses across a fragmented IBFT value chain
can encourage financial inclusion from efficient cross payment systems for business and consumers hinders
by ensuring greater ability to make to capture business and protect their developing, delivering, and promoting
convenient and affordable third party intra-bank remittance services. useful many-to-many e-payments
account-to-account payments from Businesses are required to maintain by the underserved and women using
any device by small businesses high float balances and therefore lack whatever device at their disposal,
and their clients. access to locked-up capital to invest such as mobile, to make deposits
in core business. and payments.
3 Filipino businesses
have few digital
payment options
Intra-bank transfers
200.0M
180.3M 181.8M 181.1M 180.2M 179.0M
180.0M
160.0M
140.0M
120.0M
100.0M
80.0M
60.0M
40.0M
20.0M
0.9M 1.0M 1.2M 1.5M 1.7M
0M
2009 2010 2011 2012 2013
Checks
No: generally waived
with minimum balance
Inter-bank PCHC T+2 No No
or no. of transactions;
check book cost, if any
Most
commercial
banks No: inter-branch fee No direct cost, but
Instant generally waived possible account
Intra-bank transfers Favored by No with minimum balance opening costs if
No involvement of
banks with or number bank chosen by
PhilpaSS
large branch of transactions payer
networks and
client bases
BancNet
member banks Set by bank, usually at
Set by bank: up to
IBFT Real time ATM withdrawal limits Yes
Megalink 100 PHP
(up to $2220 per day)
member banks
This section describes how three and has tried to take the initiative to
medium to large-sized businesses digitize some of its payments but has
make payments. These three run into significant challenges.
companies were recommended
by two different sources: the Asia 4.1 Avon Cosmetics, Inc.
United Bank, which has been trying utilizes intra-bank digital
to break down barriers to efficient payment facilities
inter-bank digital payments for small for payroll
and medium size enterprises; and Avon Cosmetics, Inc makes direct
from contacts established during the sales of cosmetics to the mass market.
country diagnostic in 2013. It operates from a head office in
Manila, with 20 Avon-owned branches
They are drawn from three distinct
and 148 independent franchises.
sectors of the retail industry: direct It has an annual turnover of $375
selling of cosmetics (Avon), drugs and million. Avon maintains 28 corporate
health-related products (The Generics accounts to pay and receive cash
Pharmacy, an SME franchisee) and revenues from 800,000 direct sales
casual dining franchise restaurant representatives; 250 employees are
chains (Global Restaurants Concepts, paid monthly from Avons main bank
Inc). Each of these companies has account to individual ATM
the desire to digitize their payments, card accounts.
The head office does not require sales 1000 per month to suppliers
representatives to open accounts in it will not have to pay a fee per
the same bank as Avon headquarters, check for processing; rather, it must
as the geographical spread of the maintain a minimum daily balance
business would render it impossible at its main bank. While Avon will not
in any event. experience a direct cost per check,
it may experience opportunity costs
Tina Samoy, Finance Operations from maintaining a higher balance
Manager, says the biggest obstacle than it might otherwise do; however,
in using the intra-bank digital the marginal cost for the check
payment facilities of the banks is processing service is difficult
that the electronic receipts do not to quantify.
include sufficient information for easy
reconciliation. This situation creates Avon also makes use of a corporate
considerable delay and problems, credit card and cash advances for
and absorbs substantial accounting travel and a fleet payment card for
time. The lack of transparent and fuel. However, all subcontractors,
timely messaging drives the company especially professional service
towards using checks. Ms. Samoy says providers, are paid by check.
this situation is much different than
her experience in other East Asian Avon does not use any inter-bank
countries, such as Singapore, digital payment facilities as they do
Malaysia and Korea. in other countries, because in the
Philippines they are too expensive
The business uses checks to pay for and inconvenient for both payers
rent, telephone and utilities, as well and payees, according to Ms. Declar.
as to pay other vendors. The business With access to affordable and reliable
pays all of its suppliers and vendors inter-bank transfers, Ms. Declar said,
with checks, which Ms. Samoy said is There will be huge savings in admin
unnecessarily costly. Avon currently work as well as time spent on the road
writes checks manually. Suppliers in making withdrawals and deposits
must come and pick up their physically in the branches, while
checks, a process that requires three on-line is more comfortable,
clerks alone. Staff must spend time quicker and safe.
preparing and processing invoices
and chasing people for approvals,
as well as pay for check preparation,
paper usage, and not to mention
the benefit of less printing on
the environment.
make it feasible to use them for more gives us a bit of a recording function,
of his business. Mr. Go said. Another 10 checks
are written each month for other
professional service providers, such
4.3 Global Restaurant
as legal, accounting and security
Concepts, Inc struggles
vendors. GRCIs suppliers and vendors
to convince suppliers
to take interbank do not want to receive electronic
electronic payments inter-bank payments due to the risk
of being charged unexpected high
Global Restaurant Concepts Inc. fees for receiving transfers. GRCI has
(GRCI) has exclusive rights to develop attempted to convince suppliers to
restaurant chains for such brands as open accounts in its main bank in
California Pizza, PF Changs, Morellis order to accept intra-bank payments
Gelato and at least four other global on which there would be no fee, but
or Filipino brands. GRCI still maintains accounts at 5 other
banks for both supplier payments and
According to President and CEO
for cash management purposes.
Archie Rodriguez and CFO Griffith
Go, GRCI has 800 employees and Today, when a restaurant needs to
almost all are paid via an intra- place an order, it sends a purchase
bank fund transfer from its main requisition by email to the Head
corporate account to individual ATM Office/Restaurant Support Center,
accounts. Mr. Go estimates that 80% which then prepares and faxes a
of employees cash out completely purchase order to the supplier. The
upon receipt of their bi-monthly salary supplier then delivers the goods to
payments. GRCI used to make salary the restaurant. The restaurant then
payments by check that took two needs to prepare a receiving report,
days to process. Instead, intra-bank an invoice, and the original purchase
transfers take 20 minutes to process. requisition and send them back to
the Head Office. Afterwards, the
GRCI makes at least 100 regular Accounting Department processes
monthly payments for bills, all by the check for the supplier to be signed
check. GRCI is leasing space for 21 by either the CEO or the CFO.
restaurants, and most of utility bills
are covered by rental agreements. Mr Rodriguez said, It not only takes
timeit wastes time. We would prefer
Each quarter GRCI pays its withholding not to be chased around to sign
taxes electronically; all other taxes are checks. Mr. Go added, If we were
paid by check and delivered manually able to do IBFTs, it would definitely
to local or national government offices. reduce costs. We now have 30 people
in accounting; it could probably be cut
GRCI makes at least 1,000 payments down to 12.
each month to about 200 restaurant
suppliers, 100% by checks, which
Instead, GRCI seeks to maximize the For instance, once the supplier
efficiency of using checks. GRCI is in completes the delivery, the store can
the middle of launching an enterprise just pull up the window to check the
resource planning (ERP) solution. purchase requisition order and convert
it to a receiving report. Said action
With the ERP, the Head Office and can be readily seen by the accounting
respective stores need to just pull up department so it can start processing
the appropriate window to see the the check payment for the supplier.
transaction progress, Mr. Go said.
So what would a typical medium However, with data gathered for this
to large Filipino business like those case, it is possible to make a first
in this case study save by shifting estimate of the costs and possible
its invoice payments from paper to savings involved, excluding the
digital? It turns out that none of the one-off costs of time spent
businesses interviewed has yet made
persuading suppliers to accept
the calculation themselves, in part
electronic. We used the BTCA Invoice
because this can be complex to do.
Calculator from the BTCA Business
They may not even find such an analysis
Toolkit to create a stylized profile
persuasive, as they see other barriers
to shifting: The difficulty of persuading for a representative business. Some
suppliers to receive payments digitally of the data are too sensitive for any
when checks are so entrenched and particular business to disclose, hence
offer tangible proof of payment, the use of a stylized profile to
and when there are opaque fees for provide anonymity.
receiving EFTs and the value is not
posted to their account in real time; as The detailed assumptions used in the
well as payers own incentive to pay by calculator can be found in Annex C.
check from the float income they earn The core assumptions are summarized
before the check clears. in Table 4 below.
SECTION 5: THE AVAILABLE OPTIONS ALL CARRY COSTS FOR BUSINESSES, BUT
AUTOMATING CHECKS OFFERS AN ATTRACTIVE HALF-WAY STAGE
21
EVIDENCE PAPER
B. Costs
Made up of:
Supplier setup costs - 192 383 -
Invoice processing
costs 3,807 5,376 6,945 3,807
Payment costs 42,975 29,884 18,693 21,436
Post payment costs 4,936 2,767 1,332 4,936
Supplier maintenance
costs 317 159 159 159
Source: Invoice calculator, calibrated as per Table 4
SECTION 5: THE AVAILABLE OPTIONS ALL CARRY COSTS FOR BUSINESSES, BUT
AUTOMATING CHECKS OFFERS AN ATTRACTIVE HALF-WAY STAGE
23
EVIDENCE PAPER
Note that these calculations are likely function since it provided incentive
to be conservative since they do not for the business to keep its deposit
include any benefit from reduced float with the bank. This outsourcing
risk of fraud: bankers report that the would have substantially similar
incidence of fraud is lower today on time effect as moving all suppliers
electronic transfers than on checks in to digital payments, resulting in cost
the Philippines but the numbers were savings of 41% relative to the current
not available to calibrate this benefit situation, but without having to
at the level of a single business. undergo the time consuming process
of persuading any suppliers to change
Much of the savings comes from their means of receipt.
taking the time out of paper check
preparation and signature. What this means is that, while there
As noted earlier, one of the businesses is strong incentive for a business to
interviewed (Avon) was recently take advantage of this function as a
offered the chance to outsource half step to digitizing its payments,
check issuance to their bank via an the underlying payment instrument
e-check function, whereby they would remains the paper check. As long
enter and authorize payee amounts as checks remain free to use while
via a web portal and the bank would digital payments are charged (for
issue, sign and send the checks.8 the recipient as well), the case for
Provided the business maintained businesses to make the effort to
sufficient balance, the bank would shift supplier payments will always
not even charge for the added be harder to make.
60 000
50 000 -25%
40 000 -41%
-46%
USD
30 000
20 000
10 000
-
TODAY: E-check 50% digital 100% new
100% paper
The preceding sections showed that 7.1 Even where access is not
large and medium-size businesses are a challenge, most small
using bank transfers for payments like businesses are unbanked
salaries, albeit largely on an intra-bank
IBFTs, as with other digital payment
basis, but they generally use checks
instruments, are available in theory
for most supplier payments, even
to all businesses and individuals
though they may save costs overall
from shifting with card-linked accounts at formal
to digital payments. financial institutions. Yet very few
Filipino small businesses even in
Even these basic payment options urban Manila in fact have bank
are unavailable in practice today accounts. In the survey, 70% of
to most small businesses in the
businesses operated without any bank
Philippines, though. Working with
account; 17% used a personal bank
Social Weather Stations (SWS), a
account belonging to the business
leading private Filipino research
owner; and just 11% did business
institute, BTCA surveyed owners,
managers, accountants and cashiers from a corporate bank account (3%
at 400 small businesses in the Manila used both kinds of accounts). The
area.12 The hypothesis in selecting percentage of small businesses
this sample was that these urban- banked is far lower than was revealed
based businesses would not face a in a similar BTCA survey of businesses
geographic challenge in accessing with equivalent employee numbers
formal financial services so they in Lagos, Nigeria, where only 17%
would be the most likely of the of small businesses had no account.
countrys small businesses to have
digitized some of their payments.
8 Lessons
for regulators
and businesses
that are assessed on the banks for the payment processes. This starts with
activities of their corporate clients, understanding the true costs they
as explored in a BTCA case study.13 currently pay to make (and even
Though it is still early in the policys receive) payments. These are the
implementation, the BTCA case costs that, in the Filipino context,
study found that the incentives for are kept opaque by bundling
Nigerian banks and large businesses various corporate banking services
had changed as a result, although in exchange for a high minimum
it had not yet touched smaller account balance. This situation may
businesses. This penalty-based policy also be reinforced by the way the
approach may well not be best for the performance of CFOs is evaluated.
Philippines or other countries, but it
is helpful to build an evidence base of A next step is for businesses to
other countries policy innovations to take that knowledge of costs into
promote a shift when incentives are negotiations with their current banks
not aligned. Sometimes the threat of and potential banks. In the Philippines,
introducing a penalty is sufficient to these negotiations are particularly
have the effect of stimulating change. difficult for medium-sized businesses:
like large businesses, they need to
The BSP clearly can continue to play a pay employees and suppliers with
role in shaping a positive vision of the accounts at many different banks or
future for banks in which they save on in cash; but unlike large businesses,
the high costs of checks and can see they cannot coerce their salaried and
the advantages of business models upper tier employees or suppliers into
in which digital payments feature opening accounts at a certain bank.
prominently. However, since the gains
and losses from new business models Without this knowledge, though,
may not be equally distributed, the even large businesses in a context
regulator would still have to be ready like this may feel stuck in a low level
to resolve any sticking points. equilibrium with limited chance of
shifting. However, as in the Philippines,
there may be money on the table for
8.2 Businesses should study the banking sector as a whole and
the costs they face in for businesses that could be claimed
making payments, and by a concerted move towards digital
then shop around for
payments. Identifying and then
better bank services
agreeing to share those savings offers
In the absence of changes in the the best chance of motivating the
rules of the payments system, shift towards a digital future.
including the commercial agreements
between banks and banking groups,
businesses in the Philippines will
have to put much more effort into
seeking out efficiency gains in their
P Person
STP Straight-Through-Processing
WB World Bank
ANNEXES 35
Annexes
EVIDENCE PAPER
ANNEX B: SOURCES
BFA, Integrating Payment Systems in the Philippines: A High Level Glide Path
to Interoperability, SIMM Project of USAID and DAI, June 2013.
Schmiedel, Heiko, Gergana Kostovo & Wiebe Ruttemberg, The social and
private costs of payment instruments: a European perspective, Occasional
Paper Series 137, September 2012, available via http://www.ecb.europa.eu/pub/
pdf/scpops/ecbocp137.pdf.
Schwartz, Carl, Justin Fabo, Owen Bailey and Louise Carter, Payment Costs
in Australia, RBA 2007, available via http://www.rba.gov.au/payments-system/
resources/publications/payments-au/paymts-sys-rev-conf/2007/7-payment-
costs.pdf.
World Bank, National Retail Payment System, Discussion Paper, November 2013.
Interviews
COMPANY INDIVIDUAL(S)
MegaLink
Bernadette Arguelies-Ramos, Head,
Product Development
Philippines Clearing
House Corporation Emmanuel Barcena, President and CEO
ANNEXES 37
Annexes
EVIDENCE PAPER
Enter the
following details:
No of suppliers Number 250
Total number of invoices
Number 1000
received per month
Targeted future
Total value made by cash USD -
Total value made by check USD -
Total value made by bank
USD 4,400,000
transfer
Assumption choices
Do you want to supply your own
assumptions? (if not, the calcula- Yes
tor will use the default)
Short format (enter only key
own assumptions which will be
used instead of defaults)
Bank charge per check processed USD 0
Bank charge per EFT processed USD 0.5
Bank monthly charge for EFT
USD 0
service if any
Monthly employment cost
USD 550
per AP clerk
Monthly employment cost
USD 5500
per accounting manager
Cost to mail a check USD 0.00
Outcomes
The full invoice calculator is available in spreadsheet form in the Business Toolkit developed by BTCA,
to be made available via the BTCA website in 2015.
ANNEXES 39
Annexes
EVIDENCE PAPER
Endnotes
6 Ibid.
ANNEXES 41
About the Better Than Cash Alliance
B E T T E R THANC A S H
A L L I A N C E Empowering People Through Electronic Payments