PhilSmile Strengthens Remittance Regulation

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After the attack on the Wall Trade Center on 9/11/2001, the United States of America launched a global initiative to curb terrorism financing, mainly aimed as enforcing new regulations on international money transfer (remittances) worldwide, known as Know Your Customer (KYC) and Anti-Money Laundering (AML). It mostly requires a strong identification (with government ID) of the sender and the beneficiary of such a money transfer, as well as accurate bookkeeping from remittance license holder.

We fully strengthen the spirit of the regulation, intended at controlling the direction of the money flow. By paying directly an education institution in the Philippines, the direction and the use of the money is far clearer than for a cash beneficiary in Sulu. How do you make sure the beneficiary does not use the money to buy weapons or fund terrorism activities there?

From a regulatory point of view, we offer e-commerce transaction only. The beneficiary only receives an educational service (an exam permit most of the time) and never any cash. It's not different from buying a book on Amazon.

As an e-commerce merchant, PhilSmile is unregulated.

How can PhilSmile offer such a low-cost service?

The cost of a remittance is mainly explained by the shops for the cash-in and cash-out. Since PhilSmile pays directly the schools by domestic bank transfer in the Philippines, we cut the cost by half. By not being subject to remittance regulation, we can diversify our payment channels to cheaper options, not only through remittance license holders but a wide range of automatic solutions (kiosks) or smaller retailers.

The key benefit of electronic payment is the lowering of cost of transaction. According to CEB Tower Group study, widely quoted like by PwC, in 2012, for a bank in US to serve a customer, the average cost per transaction including (labor and IT costs) was $4.00 at a branch, 61cts at an ATM, 9cts online. This explains how PhilSmile manages to be so cheap.

What is electronic money?

How can you differentiate between e-commerce and remittance? The key question is whether the client is buying money (money transfer) or a good and service (food, education).

At the bottom down, the line is defined by jurisdiction on what is money, more precisely, electronic money. It mostly goes down to whether the financial instrument can be used for a single purpose (merchant gift card) or for several purposes (prepaid card). If you buy a widely acceptable voucher (i.e. electronic money), like Gcash, MPesa, Ezelink, it's electronic money, regulated. If you buy a flight ticket or a voucher of $20 at your favorite merchant, it's not electronic and unregulated. The exact extent of single purpose or the widely accepted differs between jurisdictions, but the general rationale remains the same.

In the Philippines, Circular 649 issued by Bangko Sentral Ng Filipinas in 2009 defined

"e-money shall mean monetary value as represented by a claim on its issuer that is : (a) electronically stored in an instrument or device (b) issued against receipt of funds of an amount not lesser in value than the monetary value issued (c) accepted as means of payment by persons or entities other than the issuer (d) withdrawable in cash or cash equivalent (e) issued in accordance to this Circular"

The compliance cost widely varies too. It's striking that a payment institution license (E-Money Directive -2009/110/EC-) requires EUR 350,000 (or about US$430k) in European Union while a similar electronic money issuer in the Philippines requires PhP100m (or about US$2,250k) or 5.2 times more, while the Philippines economy is so much smaller than the whole European Union.

Innovation around payment is key in lowering the friction in the economy that eats out remittances, favors trades and increases accountability and transparency.