Leveraging Public-Private Partnership in the Philipines for Digital Financial Inclusion

While Governments are the biggest generators of payments globally—making billions of dollars of cash payments to poor people through disbursements of salaries, payments to suppliers, pensions, social welfare stipends, cash-for-work programmes, or emergency relief payments—only 25[1] percent of developing countries process their cash transactions and social benefits electronically. The Government of the Philippines is one of the early adopters of electronic payment systems. Since 2011 it has partially “electronified” the stipends distribution of its Pantawid Pamilyang Pilipino Programme (4Ps), a conditional cash transfer (CCT) programme, through a public-private partnership with a telecommunication company. Shifting from cash to electronic payments and partnering with the private sector has allowed the government to reach out to a greater number of recipients in a timely manner and also paved the way for reduced distribution costs and greater transparency.

Scaling up social benefits payments

The Pantawid Pamilyang Pilipino Programme (4Ps) an initiative of the Department of Social Welfare and Development (DSWD) that addresses poor households’ low access to health services and education has reached 3.9 million families to date. It acts as a poverty reduction mechanism by providing monthly cash allowances to poor families that comply with programme conditions, addressing the unequal distribution that has accompanied recent economic growth in the Philippines. “Looking at the last one and a half years, our overall economic growth rates have been among the highest in South East Asia […]. The first half of this year we had 7.6 percent GDP growth rate, yet the economic benefits have not trickled down to the lowest income groups”, said His Excellency Ambassador Cuisia during a panel session on Partnerships for Digital Financial Inclusion co-hosted by the Better Than Cash Alliance, UNCDF and UNDP held on September 24, 2013 during the 68th United Nations General Assembly Week.

A 4Ps pilot was launched for 6,000 beneficiaries in late 2007, with the intent to initially test the programmme before scaling it up. After just a few months, however, the then-President Gloria Macapagal-Arroyo mandated its expansion and growth. As the programme quickly grew by volume and geographical scope, so did the challenges in getting payments quickly and efficiently to recipients. At the start of the programme, in order to “simplify processes” the Land Bank of the Philippines was the only manager of all 4Ps payments. The unanticipated scale-up of the project within its first year resulted in Land Bank struggling to complete timely, accurate payments to all recipients every other month.

During President Aquino’s term, the delivery of CCTs were “electronified” and the budget for CCTs was increased to P29.2 billion. In 2011, that rose gradually to P39.4 billion in 2012, P44.3 billion in 2013, and P44 billion in 2014. The programme is expected to continue to increase until 2015 when 4.6 million families, or roughly 28 million people, benefit.

Partnering with the private sector to gain efficiency

Several challenges hindered the CCT payouts. First the geography of the archipelago makes the distribution difficult. “To reach the areas where the poorest live, you might have to travel 10 hours by land and 5 hours by boat and that boat only leaves once a week” observed Mr. Baltao, President, G-Xchange. Security is another issue: “Knowing that there is only one trip, it is obvious where the bandits would be waiting for the payouts to happen” he added. Reaching the poor is also complex due to the low financial infrastructure in areas where there are no banks or cash machines and when 73 percent of the adults do not have a bank account. Finally, CCT payments are distributed once every two months, all on the same day, with beneficiaries reporting to a specific agent. Scheduling the payments and managing the massive transfer was certainly a challenge as vast quantities of liquidity were needed and the lines, at the agents’ counters, went long on these days.

Going digital seemed to be a good option, especially as the Philippines has a huge mobile rate penetration—(although many people amongst the target population of the 4Ps doesn’t have a cell phone). Leveraging the infrastructure and the skills of the private sector appeared in this context the best way for the government to manage payments. “Partnering with the private sector was a logical step to make the programme more efficient and to achieve cost efficiency” added the Ambassador.

Why would the private sector engage in payments delivery?

G-Xchange was motivated to join 4Ps as an opportunity to test and prove that its platform could be successful for government payment purposes. Mr. Baltao explained that, “We strongly believed that our platform would be able to address these issues […]. Previously, [Land Bank agents] were disbursing until 2 AM. Money had to be brought in via helicopters. When we came in, we did 10,000 disbursements by 2pm—not 2am […] The DSW asked G-Xchange to pay the back log for the past two years, beginning with 10,000 disbursements in November 2010 and reaching 2.5 million disbursements in 2011. We ensured that disbursements were done on time and reduced transportation costs from US $20 to $2 at most for beneficiaries. Reconciliation of settlement is done instantly. The benefit of using our infrastructure was very evident.”

The company quickly found out that only 20 percent of the recipients in their payout areas had a phone, however, and that the partnership would not result in gaining new clients and cross selling as initially envisaged. But corporate social responsibility proved a valuable motivation as the partnership promoted a positive image of the firm and its payment capacities. “With this bigger scale, we felt that by coming into this project, we would gain the credibility that our system is reliable and really can be trusted by the public,” Mr. Baltao commented.

Indeed, the 4Ps distribution benefited from the existing infrastructure but also from the private sector’s capacity to innovate. For example, G-Xchange had to adapt their model due to the fact that so few recipients had a mobile phone and did not use P2P remittance functionality. Instead, bulk grants were sent to merchants who completed manual cash disbursements. “Private companies like the telecommunication companies invest a lot in technology. We breathe innovation 24 hours a day. The benefits of these can be reaped by the government. What we are after is cost efficiency. We can provide a much better service at a reasonable margin. The Government is now benefiting from economies of scale and as well as access to the latest technology that the private sector can bring in,” noted Mr. Baltao.

A partnership that benefits all

Using digital payments helped the government scaling up the distribution of the CCT benefits. “So far we have reached 3.9 million families of the 5.2 million families targeted for 2016,” said the Ambassador. Scale is one benefit, but cost efficiency is another now that systems are in place for online reconciliation, monitoring and evaluation. It paves the way for saving on distribution costs and for better governance and ultimately inclusive growth. “Our experience shows that digitizing is a tool for ensuring great transparency and security in financial transactions particularly in government,” concluded Ambassador Cuisia.

Payments are now made on time, which makes a huge difference for the poor. Before going digital, a family could wait 9 to 12 months to receive the payout. “They were not getting paid on time and even when they did get paid, $20 of their $80 cash grant was used for transportation,” said Mr. Baltao.

Lessons from a success story

When asked about the ingredients of the success, the Ambassador noted the importance of an enabling regulatory framework. “It is Important for governments to create policy environments that encourages digital financial inclusion. Normally regulators, like the Central Bank, only focus on banks and don’t provide incentives to non-banks. But in this particular situation, the Bangko Sentral ng Philipinos (the Philippines Central Bank) saw the advantage of the banks partnering with private companies in this payment system.” In the Philippines, the regulator has quickly allowed digital platforms that can be leveraged by government and private sector in delivering services, transacting with their partners and the general public so as to bring more people into the financial system.

The Philippines’ experience is a good example of the added value of the convergence of the ecosystem. It highlights the importance of creating more opportunities for public-private partnerships so that governments can tap into the innovation capacity of the private sector, reach a wider audience and save on their distribution costs while commercial companies build their credibility, strengthen their brand as well as develop their customer base. Let’s take for granted that other players will put together the conditions for this win-win situation and actively contribute to the shift from cash to electronic payments.