Tuesday, September 24, 2024
Riding Into the Digital Age (Speech by MMB Romeo Bernardo at the Induction Ceremony and General Membership Meeting of the Bankers Institute of the Philippines (BAIPHIL))
20 September 2024.
Introduction
(To mention other
MBM present); BAIPHIL President, Inigo “Nitoy” Regalado; immediate past
president, Ms. Racquel Mañago; (to mention other distinguished guests);
esteemed board members and officers of BAIPHIL; fellow BSPers; colleagues;
ladies; and gentlemen, good afternoon.
It is a great
pleasure to be here with you today and carry on the tradition of inducting the
newly elected board members and officers of BAIPHIL. Let me extend my heartfelt
congratulations to immediate past President Raquel Mañago and team for a highly
successful year. I would also like to
offer my congratulations to President Nitoy Regalado and the newly elected
board members and officers of BAIPHIL. I
am confident that under President Nitoy’s leadership, BAIPHIL will continue its
excellent work and make even greater strides.
Digitalization and
Motorcycle Riding
As most of you
know, I have been appointed as a member of the Monetary Board only for over a
year now. During this time, I have been fascinated
by the rapid pace of change in both the banking industry and the regulatory
landscape. Transformations largely driven by digitalization, especially in the
payments system, the focus of my remarks this afternoon.
Digitalization, in
many ways, reminds me of motorcycle riding. I am part of a motorcycle
enthusiasts group, “The Hombres”, which has been written up by fellow rider,
Randy David in his column.
Like motorcycle
riding, digitalization starts with a clear destination in mind. The key questions remain : Where do we
want to go? How do we get there?
I recall that at
the height of our adventures, “The Hombres” would go around Luzon on weekends. We
rode through the Halsema Road in Benguet, completed the Mindoro loop, and even
embarked on an inter-island tour to Visayas and Mindanao via roro[1],[2].
Both the thrill of reaching our
destination and the challenges and fun involved in the journey fueled our
passion.
In much the same
way, digitalization is a journey. Our ultimate destination is to establish
a digital financial ecosystem that ensures secure, convenient, and affordable
services accessible to every Filipino. This
aspiration is reflected in the 2020-2023 Digital Payments Transformation
Roadmap.
Pit stop/Fuel Stop
The Roadmap laid
out two ambitious goals. First, to
strengthen customer preference for digital payments. Second, to foster more innovative and
responsive digital financial services.
I can only imagine the dedication behind
these efforts, particularly in achieving the first goal. The BSP aimed to increase
the share of digital retail transactions to 50 percent (50%) of the total
retail transactions and ensure that 70 percent of (70%) of Filipino adults have
transaction accounts.
Based on recent data, the share of
digital payment transactions grew from 42.1 percent in 2022 to 52.8 percent in
2023. Meanwhile, account ownership continued
its upward growth trajectory from 56% in 2021. We believe that we have attained
the 70% target at the end of 2023 .
But, the question remains, have we
reached our destination? Almost, but not quite.
There is still work to be done to fully achieve the second strategic goal. This
goal envisions a future wherein digital financial services are not only innovative
but also responsive. This
future is characterized by consumer data driving the development of tailored financial
products, a Philsys enabled KYC on-boarding process, and availability of next
generation payment system.
Since 2020, the industry has continued to
evolve. New opportunities have emerged, technology has advanced, and consumer
preferences have changed.
As cliché as it sounds, every journey,
including motorcycle rides, reaches a “point of no return”. These are moments when the only option is to
move forward. I believe that we are at such a crucial point in our
digitalization journey. Now is the time to rethink our strategies and take
a bold leap into the future.
For this afternoon, instead of assessing
where we stand with respect to the second strategic goal, I invite you to focus
on a vision inspired by the concept “Finternet.” This idea was
introduced in a working paper[3] by
Mr. Agustin Carstens, General Manager of the Bank for International Settlements
and Nandan Nilekani, co-founder and non-executive Chairman of the board of
Infosys.
In the said working paper, the authors described
a future where multiple financial ecosystems interconnect seamlessly like
the internet.
In the “Finternet” future, individuals
and businesses would be able to transfer any financial asset they wish, in any
amount, at any time, using any device, to anyone else, anywhere in the world.
Financial transactions would be cheap, secure, and near-instantaneous –
available to all.
The vision is ambitious,
but fully aligns with our goals of building a safe, secure, borderless, and inclusive
digital financial ecosystem.
Preparing for the Ride
(Safe and Secure, Borderless, and Inclusive Digital Financial Ecosystem)
ATTGATT (Safe and Secure digital
ecosystem)
To achieve our goal, we must prepare for the journey ahead.
As motorcycle riders say, ATGATT – “All
the Gears All the Time”. A commitment of
riders to always wear protective gear all the time, whether the trip is long or
short. In the same way, we must protect the digital financial ecosystem to ensure
that financial transactions are secured. This is how we earn the trust of the
public in using digital channels.
The BSP has laid down the foundation by issuing
standards on the use of technology. The regulatory
framework outlines risk management expectations while fostering innovation and
allowing new technologies to thrive. Recently,
we launched the 2024-2029 Financial Services Cyber Resilience Plan
(FSCRP). This plan builds on strong
partnerships of the BSP with other government agencies, financial sector
supervisors, and the industry to further strengthen our defenses against cyber
threats.
Our ATGATT in the digital space involves
four key elements outlined in FSCRP: (1) Establishing defined and coordinated
incident response protocols, (2) Fostering active information sharing and
collaboration, (3) Cultivating a strong cybersecurity culture and awareness,
and (4) Implementing holistic cybersecurity best practices and standards. These efforts are grounded in effective
information sharing among stakeholders for a more impactful cyber response. The
passage of the Anti-Financial Account Scamming Act (AFASA) complements all our
initiatives as it further strengthens our defenses against cyber criminals.
Meanwhile, the BSP adopted state of the
art tools to enhance our risk surveillance.
Many of you are now familiar with PRIME -- Prudential Reporting
Innovation and Monitoring Engine, which is an API based submission platform and
ASTERiSC – Advanced Suptech Engine for Risk Based Compliance, which enables
near-real time monitoring of cyber threats to banks. Soon, we will launch BLAST – Blockchain Analysis
Tool, to enhance monitoring of AML risk in the VASP industry.
These
surveillance tools have enabled us to respond swiftly to cybersecurity threats
or disruptions in the banking system.
This was demonstrated once again in the Crowdstrike-related outage in July,
where, in a short period of time, the BSP identified the impact of the Blue
Screen of Death incident on supervised financial institutions. This informed the supervision and
communication strategies employed by the BSP.
Plan our Route
(Borderless)
Just as a motorcycle rider prepares for a
long-distance journey by planning routes that transcend local boundaries, our
vision for a borderless digital financial system seeks to extend beyond the
confines of our domestic banking system. The aim is to foster interoperability,
not just within our national borders but across them, enhancing the financial
connectivity for Filipinos globally. This would provide our compatriots
overseas with the same ease and security in financial transactions they would
enjoy at home, but with reduced costs.
The BSP has adopted a two-pronged
approach in pursuing this. First, through
bilateral engagements, we are in advanced discussions with Bank Negara Malaysia
to link InstaPay with Malaysia’s fast payment system, DuitNow.
Second,
we are working to establish payment linkages with multiple countries
through a multilateral approach. The BSP
is part of Project Nexus, an initiative led by the Bank for International
Settlements Innovation Hub. This project
aims to connect domestic payment systems of India, Malaysia, the Philippines,
Singapore, and Thailand for real-world applications. We are now in Phase 4 of this project,
transitioning from proof of concept to the live implementation of the
multilateral connectivity of instant payments of five countries. Overseas Filipinos
stand to benefit significantly from the successful execution of Nexus.
Just as challenging routes and
destinations excite motorcycle riders, we share the same enthusiasm when we talk
about new technologies like central bank digital currencies (CBDC) and
artificial intelligence.
Many of you may be familiar with
Project Agila, a CBDC initiative on wholesale or large-value payments. The pilot project is currently underway,
testing the programmability and security of the platform. The project aims to raise
awareness within the BSP and participating domestic financial institutions[4],
fostering a common understanding of the use of CBDC. We are targeting to
publish a report detailing our findings and assessment of the project by the
end of the year.
Similarly, the potential of AI has sparked
our imagination in countless ways. The applications of AI in banking have streamlined
the KYC process and enhanced fraud detection in transactions. AI also facilitated
the use of alternative data for credit scoring, which could unlock financing for
MSMEs.
The BSP is exploring various
applications of AI. In supervision, we
are working on a tool called IDEA or Intelligent Detection of Atypicality
(IDeA) which uses machine learning algorithms to identify unusual data patterns
in prudential reports[5].
The BSP Hackathon also generated AI solutions for supervision largely in the
form of chatbots with information on issued regulations. Meanwhile, we have completed a thematic
review on the use of AI in the banking industry to determine the level of its
uptake and learn about its various uses.
While AI adoption is still in its early
stages, the BSP is committed to collaborating with the industry to develop an appropriate
regulatory framework for this technology.
A framework that fosters innovation while keeping risks manageable.
The Hombres - Inclusive Digital Financial Ecosystem
As time goes on, motorcycle riding becomes
even more meaningful when longtime friends and family members join the ride.
The Hombres has evolved from a group of friends who shares a passion for motorcycles
into a close-knit family bound by shared values and interests. Our group has
expanded to include younger generations and we’ve broadened our activities to
involve our families, creating a deeper sense of community.
This mirrors how we envision our
digitalization efforts to evolve. We need to bring everyone onboard the
financial system. Digitalization provides
the tools to make this possible. But, we must make this affordable. Innovations
like open finance and use of alternative data can help financial institutions
tailor products for Filipinos from all walks of life. These efforts should be
complemented by reasonable pricing of financial products. Ultimately, building an inclusive digital
financial ecosystem will open opportunities for both the public and financial
institutions.
It is also crucial to intensify efforts
to educate the public about cyber threats and the steps they can take to
protect themselves. The successful implementation of the Financial Consumer
Protection Act is essential in empowering consumers and keeping them informed
as we build an inclusive digital financial ecosystem.
Navigating, Keeping Your Balance, Countersteering
Just as riders must account for road
conditions, the weather, and their companions, we must navigate domestic and
international challenges to achieve a “Finternet” future.
On the road, unexpected obstacles may
force riders to seek alternative routes, adjust their speed, keep their
balance, and in the case of a spill, dust themselves off with as much dignity
and stay the course. One of the skills
one needs to learn in riding is how to countersteer—a technique where the rider
briefly turns the handlebars in the opposite direction to maintain control
while navigating curves at high speed. In our digitalization journey,
countersteering represents challenging the status quo and embracing innovative
approaches.
I call on the new board members and
officers of BAIPHIL to adopt countersteering strategies in preparing banking
professionals for the “Finternet” future. Allow me to share some
countersteering measures that BAIPHIL could explore:
First, collaborate with counterpart
training institutes in other jurisdictions to benchmark practices and institutionalize
information exchange on priority areas and emerging areas of interest.
Second, design a structured curriculum
that progressively sharpens the competencies of banking professionals to meet the
competencies necessary in the digital age.
This curriculum should be based on a thorough understanding of their
training needs.
Third, institutionalize the use of
research to establish the industry’s position on key issues and trends.
Fourth, harness advancements in technology. BAIPHIL
should explore offering e-learning modules, utilize Artificial Intelligence as
a resource for banking professionals, and explore additional cutting-edge tools
to remain at the forefront of learning.
Finally, BAIPHIL should help promote a
culture of customer-centricity by looking at the impact of digitalization and
the banks’ actions more holistically on the consumer experience.
Closing
As we chart our course, let us embrace
the spirit of collaboration that defines the most successful journeys, whether
on the road or in the digital realm. Together, let's continue to pave the way
for a safe, secure, and inclusive digital financial ecosystem—one
where financial services empower Filipinos everywhere.
Muli, maraming
salamat at mabuhay po tayong lahat!
[1] Go, Marianne V. (2023): The Tale of the Hombres, The Philippine
Star, 18 August 2023.
[2] The MBM may use other destinations.
[3] Carsten, A and N. Nelekani (2024): “Finternet: the financial system
for the future”, BIS working papers, no. 1178.
[4] Banks: BDO, Chinabank, Landbank, RCBC, and Unionbank; EMI: Maya
[5] Atypicality is detected based on univariate time series forecasting,
use of other accounts as predictors, and peer-based predictions using
common-size values.
Monday, September 18, 2023
Full circle
September 18, 2023 | 12:04 am
Introspective by Romeo
Bernardo
As reported in the news, I have been appointed
by President Marcos Jr. as a Member of the Monetary Board. I received this news
from Governor Eli Remolona while on a long postponed family vacation overseas.
I understand that he, Prime Minister Cesar Virata, and my former bosses in the
Department of Finance (DoF) as well as prominent leaders in the private sector
and the legislature recommended me. I am most honored, delighted, and grateful
for the opportunity to go back to my first love — public sector policy
work.
To ensure no conflict of interest, I am
obligated to say goodbye to private institutions/corporations and
colleagues/friends I worked with. I do so with a tinge of sadness. They are the
captains of industry and professional executives who make the investments that
generate jobs that improve our people’s lives, and for whom I have the highest
respect. At the end of day, they are the drivers of our economy.
Among these institutions is BusinessWorld (BW).
I have had the privilege of writing a monthly column for over a decade, as part
of our “Introspective” rotating crew (all Board Directors of the Institute for
Development and Econometric Analysis, established by dear friend, now departed,
UP Economics Professor Dondon Paderanga). “Introspective” featured Dondon
together with his fellow professors Raul Fabella, Noel de Dios, Calixto
Chikiamco (my Foundation for Economic Freedom co-founder, political economist,
and net entrepreneur) and me.
In line with the highest ethical standards
instituted by BW founder Raul Locsin to ensure that there is
not even the impression of conflict of interest or lack of independence, this
will be my last column.
With your permission dear readers, I reproduce
below remarks I made on Sept. 14 to introduce Dr. Dante Canlas at the
Philippine Center for Economic Development (PCED) 50th anniversary
lecture series on “The Philippine Economy and the UP School of Economics
(UPSE): Academics and Policymaking.” Dante and other distinguished former UPSE
professors who served as Socio-Economic Planning Secretaries were requested by
the PCED to share lessons for scholars, practitioners, and the general public, to
upgrade the quality of discourse on and execution of Philippine economic policy
making.
In this final column, I will also share
some preliminary thoughts on the work ahead for the Bangko Sentral ng Pilipinas
(which I believe Dante also shares).
ON THE HONORABLE
(SMALL ‘H’) DANTE CANLAS
Let me start with an apology that I cannot be
personally present to introduce our featured lecturer. But it is not my fault.
As some may know, it is my first day on the job.
I won’t devote much time enumerating the
outstanding academic, government service record and awards of our speaker. Many
here know of them. They are a matter of public record and downloadable from the
web.
What I would like to do is introduce to you
the man behind the accomplishments and awards, what we who worked with him and
his students know.
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First, Dante as the impervious college
heartthrob.
He was already a member of the faculty when I
was a student. According to the female students, there were two in the faculty
who qualified for the title “crush ng bayan.” One told me that she
would sit in front of their classes, doubtless because of their pedagogical
skills (not because of their looks daw). Our speaker was thought of
as the Harrison Ford of UPSE — Ford as Hans Solo of the original Star
Wars, not the old guy in the latest Indiana Jones movie.
There was one difference between him and the other “crush ng bayan”
I was told. Our speaker had no idea that he was good looking and a heartthrob,
and “that made him all the more attractive” (said one who is now married to a
faculty member and former top official).
Second, NEDA (National Economic and Development
Authority) Undersecretary Dante, as the quiet modest achiever and ideal
collaborator.
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I had the good fortune and privilege of being
his counterpart at the DoF during the Ramos Administration. We worked with
ultra-competent professionals like then Budget Undersecretary Emy Boncodin,
then Central Bank (later BSP) Director for Research Say Tetangco, and others.
One could not have wished for better teammates, with abundant intelligence,
integrity, industry, and zero fanfare and zero ego. This quite efficient
technical teamwork allowed our bosses to attend to the more political aspects
of economic governance even as we, the most senior technicians, attended to the
knitting, including various inter agency committees, debt negotiating panels,
and donor conferences.
Our speaker chaired the Investment
Coordination Committee (ICC) technical board with me as his co-chair. The ICC
had the difficult task of putting together an investment program to fund
enormous infrastructure and social expenditure requirements, at a time when
interest payments alone ate up 20% to 30% of the budget and the foreign
component a substantial part of export receipts. Mind you, this was when we
were still reeling from the debt crisis, with no access to capital markets, and
still finding our bearings politically as a nation. I would like to think we
got the job done with the support of the donor and financial community
which saw the Philippine macro and structural reform program as worthy of
support. These reforms included accession to the WTO (World Trade
Organization), a comprehensive tax reform program and privatization effort that
raised tax and overall revenues to record highs as shares of GDP, breaking up
of monopolies and partnering with the private sector in delivering public
services especially in power and water, and the creation of an independent
monetary authority to replace the bankrupt old central bank. All these led to
the country’s eventual exit from IMF (International Monetary Fund)
surveillance.
Our speaker was very much on top of putting
those programs together and with the Department of Finance, coordinating — one
can say lobbying — and securing support of bilateral, multilateral institutions
to fund the same. There is a saying that nothing is impossible for the man who
does not care who gets the credit. This describes Dante.
Third, for Secretary Dante, it is principles
over principal. Given his personal and professional virtues were known by all,
it was no surprise when President Gloria Macapagal-Arroyo tapped him, her
dissertation adviser, to be her “Economist in Chief.” I was no longer in
government then, but from all I know, had she listened to him on a key
infrastructure project, the deeply flawed North Rail project, the Philippines
would have been spared some $185 million in public money that we had to pay
China as a creditor, with nothing to show for it.
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He left government over that issue. What is
not clear to me is whether his resignation was accepted as a matter of “loss of
confidence,” a prerogative of the President, or whether this was a case of
Dante being just ahead of the curve, 2-1/2 years ahead of the Hyatt 10.
Dante knew he owed his principals his best
advice — and he gave it even when this may not have been what they wanted to
hear and may cost him his job. To have done otherwise would have been a
disservice to them, and a betrayal of his principles, of who he is. And
ultimately a betrayal of our ultimate principals— the Filipino people.
It is in the best interest of our leaders to
listen more to people like Dante. History will be kinder to them if they did.
Finally, may I publicly reveal a fervent wish
to be able to work with Dante soon.
ON MY NEW JOB
It is the country’s good fortune that
Professor Eli Remolona is heading our central bank during these times of
heightened global economic uncertainties clouding the Philippine economic
outlook (see my column “A 5% economy?” Aug. 28, 2023 https://www.bworldonline.com/opinion/2023/08/28/541704/a-5-economy/).
My now former GlobalSource Partners fellow analyst Christine Tang and I
described him as being “preeminently qualified” in our report to subscribers,
being personally aware of his deep academic and hands-on experience, dating
back to 1986 when he was country risk expert reporting directly to the
legendary New York Fed Chairman Gerry Corrigan. Mr. Corrigan was instrumental
in helping the Philippines reach final settlement with its consortium of creditor
commercial banks at the height of our debt crisis. I was part of the Philippine
delegation led by Finance Secretary Cesar Virata, later Secretary Jimmy Ongpin
and Governor Jobo Fernandez. Governor Remolona would later be closely involved
in crafting what would be the definitive solution to the emerging market debt
crisis — the Brady Plan.
Since that period, armed with distinguished
degrees from UP and Stanford, he would chalk up impressive experience and
credentials in central banking at the NY Fed for 14 years and the Bank for
International Settlements (BIS), the central bank of central banks, ending a
19-year career retiring as head of BIS regional office in Asia. Our paths would
cross again as fellow board directors in the Bank of the Philippines Islands,
even as he was concurrently teaching courses as Director of Central Banking at
the Asia School of Business in Kuala Lumpur and in Williams College, Mass., my
MA alma mater.
I mention all these to underscore that the
country’s financial system is in the best of hands. Supported by a solid
monetary board composed of professionals with diverse backgrounds and by the
best career officials and staff in the Philippine bureaucracy, we can sleep
soundly knowing that monetary policy and financial system supervision can
withstand headwinds all around.
I am most honored to join their ranks. And
intend to be fully supportive of the Governor’s announced priorities. As he
said in his remarks to the banking community on July 28 (see https://www.bis.org/review/r230731f.htm):
“(We will) work hard in pursuing our mandate of ensuring price stability, financial
stability, and a safe and efficient payment system. We will do this through
greater investment in our research and operational capacities to become a more
responsive, efficient, agile, and future-ready institution.” He also expressed
the intent “to deepen Philippine capital markets and consider a framework for
sustainability that includes financial inclusion.”
If I may be allowed to add, aside from its
conventional usage, financial inclusion should also cover banking
regulatory policies that give primacy to job creation and poverty elimination.
For example, to enable our banks to continue to lend so we will have secure and
affordable energy to fuel Philippine development — a subject I have written on
in this space, most recently: “It’s not easy being green: Balancing energy
security and decarbonization for an emerging economy,” in November 2021 (https://www.bworldonline.com/opinion/2021/11/07/408820/its-
not-easy-being-green-balancing-energy-security-and-decarbonization-for-an-emerging-economy/).
Financial inclusivity can also be brought
about by reducing regulatory and other costs that cause Philippine banks to
have the highest operating cost ratios (mandated lending, reserve ratios,
etc.). Lower costs mean greater ability to take on risk and reach broader
markets. Similarly, arbitrary caps on interest rates reduce inclusivity and
access, as banks ration limited funds and exclude marginal clients, driving
them to the unregulated grey market that charges much much more.
Romeo L. Bernardo was principal Philippine
adviser to GlobalSource Partners (globalsourcepartners.com). He has served as a
board director in leading companies in banking and financial services, energy,
telecommunications, education, food and beverage, real estate, and others. He
had a 20-year run in the public sector, including stints in the Department of
Finance (Undersecretary), the IMF, World Bank, and the ADB.
romeo.lopez.bernardo@gmail.com
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