(Aug 5): In June, the Monetary Authority Singapore announced that it would be issuing two full digital bank licences and three digital wholesale bank licences to players of non-bank parentage. But there are very few underserved segments in the local financial services. On July 29, in a results briefing, Piyush Gupta, CEO of DBS Group Holdings, said he viewed micro small and medium-sized enterprise (SME) financing and moneylending as underserved parts of the financial network.  

Remittances could be another underserved segment. For the Filipino foreign worker community, sending remittances home takes a long time and is expensive. What can be done to improve this essential service for workers in Singapore? 

On July 23, Philippines Stock Exchange-listed Union Bank of the Philippines (UnionBank) successfully piloted blockchain-based remittances from Singapore to the Philippines in partnership with Oversea-Chinese Banking Corp (OCBC) using Adhara, a liquidity management and international payments platform.

“It’s a fraction of the cost of remittance because it’s digital all the way. Now, rural banks [and their customers] can deal on the blockchain in a trusted immutable manner,” says Justo Ortiz, chairman of UnionBank.

According to statistics by Bangko Sentral ng Pilipinas (BSP), the Philippine central bank, US$26.1 billion was remitted in 2017 by 10.3 million overseas Filipino workers. The World Bank says US$30 billion was remitted to the Philippines last year. 

It remains to be seen whether remittance is a business that OCBC is interested in and whether the local bank can commercialise it, given the data mining and artificial intelligence needed for this segment. 

In Hong Kong, WeChat — owned by Tencent Holdings — has a facility called We Remit specifically for domestic workers that was launched in 2017. The workers can send money to the Philippines through their WeChat mobile app with no charge and confirm that the remittance has been received on the other end in under 10 minutes.

Because the WeChat app works like a wallet, domestic workers in Hong Kong just top up their e-wallet at convenience stores such as 7-Eleven, and transfer the money home. In the Philippines, the receiver gets a code and heads down to a Cebuana Lhuillier outlet. Cebuana is a financial services company that operates services such as pawnbrokering, money remittance, insurance, bills payment, remit-to-account, corporate payout, collections and e-loading. 

What if sending remittances was even more seamless, and the person who receives the money does not have to head to the nearest Cebuana Lhuillier outlet?

Pain point of tokenised remittances

The pain point of the cross-border transfers such as the pilot between OCBC and -UnionBank is that it is bilateral. OCBC makes its own token, Adhara mints the OCBC token and passes it to UnionBank. “We burn the token and pass it on to Cantilan Bank,” Ortiz says. (Cantilan Bank is a rural bank in the Philippines.) “We cannot have a series of bilateral transactions across the globe where all the banks have their own tokens because it will be confusing. The end goal is to achieve the same universality that exists with the US dollar or euro.”

The way Ortiz sees this working is if global central banks issue a central bank-backed token so that all banks can use the token to transfer value. This could be done on a regional basis initially — say with the European Central Bank in Europe, or the Monetary Authority of Singapore for a regional Asean token.

“The [current] remittance [service] goes through, maybe, a bank, a courier service or pawn shop, and customers get the cash. It costs a lot of money, around 5% to 10% the value of the remittance. Some remittances go through Western Union,” Ortiz says, referring to the US company offering such services globally.

Remittances from overseas can take five to seven days to be credited to a beneficiary’s account. The alternative for people residing in rural areas is to use non-bank remittance methods, which can cost 50% to 80% more than bank-to-bank transfers. 

For OCBC, one way to get around Know-Your-Client issues with hundreds of very small bank balances that are expensive to maintain is to have a wallet on its mobile banking app — a bit like WeChat. Then it “blockchains” its tokenised fiat to UnionBank, which in turn transmits the tokenised currency to the rural banks. 

Within the Philippines, UnionBank has commercialised its blockchain-enabled payment and settlement system, according to Ortiz. The primary remittance system in the country is non-bank and the new system could be transformational if adopted by all the rural banks. 

The Philippines consists of more than 7,500 islands and has a population of around 104 million, of which more than 70% are unbanked. (In contrast, Singapore’s unbanked population is reportedly 2%, and these are usually foreign workers.) These far-flung islands are served by some of the Philippines’ 454 rural banks. Rural banks can take deposits, disburse loans and provide remittance services.

As a small bank with a market cap of PHP73,056.57 million ($1.96 billion), -UnionBank is unlikely to have a large branch network. As at March 31, 2018, it had 316 branches and 338 ATMs nationwide.  

“We’re a small bank, so our retail approach is not [to bank] retail customers directly. We build ecosystems where our customer [usually a rural bank] is the owner of a retail customer base and the banks’ customers become our customers and we enable the banks to provide better services. Some of the banks’ customers, when they become large enough, will graduate from the rural bank to UnionBank,” Ortiz explains. “Our approach is to enable [our partners] to be more efficient with cash management solutions, and in that way, we end up with [more] retail and SME customers.”

Because of its limited size, UnionBank has adopted digitalisation and financial technology to reach more customers, including rural banks, even though some of them may not be connected to the ATM system or the Philippines’ national retail payment system or SWIFT.

Benefits of UnionBank’s blockchain-based remittance  

In May last year, UnionBank unveiled Project i2i (Project island-to-island), an Ethereum-based blockchain initiative for real-time retail payments that involved five rural banks as a pilot. The project was launched in Davao City jointly with Cantilan Bank, PR Savings Bank, City Savings Bank, FairBank and Progressive Bank. The technology was developed by Adhara to tokenise money over a smart contract-enabled distributed ledger (blockchain is a form of distributed ledger). 

I2i is operated by UBX, the fintech subsidiary of UnionBank, and the commercial bank-backed tokenised fiat is called PHX (essentially pesos). Through the i2i platform, rural banks will have access to the main banking network in the Philippines, which allows them to perform key banking transactions that universal banks do. Ortiz says the blockchain-enabled remittance platform has gone live in the Philippines with Cantilan Bank.

Since PHX is programmable, the beneficiary for which the monies is intended gets the money, to be used for the purpose it is intended. For instance, an overseas Filipino worker may send money for education. So, the money is used for education rather than for any other purpose. 

“In this system, the token contains the law, regulations and compliance, and will also contain the account to which the money needs to be credited,” Ortiz says. In a nutshell, the real value of UnionBank’s platform and PHX is that it is cheaper, faster and the money gets used for its intended purpose.

According to Ortiz, this enables the rural bank, say Cantilan, to give the rural customer a housing, motorbike or even school tuition fee loan through the i2i platform. Once the customer’s small business begins to flourish, Cantilan can refer the customer to UnionBank for a savings or investment product.

“This is the real financial inclusion story. It’s not only about fast, transparent, cheap — that doesn’t create financial inclusion, which comes from credit,” Ortiz says. If credit costs are high, that will not produce financial inclusion, he adds. 

With i2i, the rural banks themselves are likely to become UnionBank’s customers. As rural folks become wealthier, they will want more services, such as postpaid and debit cards.

According to BSP, mobile penetration in the Philippines is 60% of the population, and mobile banking just 28%. In 2017, only 46.7% of the population lived in urban -areas and cities.

In the very long term, Ortiz expects the Philippines to develop into a G20 economy. “This is an opportunity to have touch points with this unviable customer, who in the future will become the middle class,” he says. 

This story appears in The Edge Singapore (Issue 893, week of Aug 5) which is on sale now. Subscribe here