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Saturday, June 24, 2017 | MANILA, PHILIPPINES
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   top1000
Date posted: Thursday, March 30, 2017 | Manila, Philippines

TOP 1000 Corporations in the Philippines (2016)

How a telco used prepaid to laugh all the way to the bank

THE idea of a phone company stepping into the breach to serve the unbanked might have been hard to imagine a generation ago. But it turns out that decades of selling prepaid products has suited them for the task, making them more ready than banks to charge into the less-creditworthy segments of the market.

How a telco used prepaid to laugh all the way to the bank

In the years since, prepaid has also trained the marketplace to be comfortable with the idea of phone service providers holding small amounts of money on behalf of their clients, putting such companies in good position to clear purchases with vendors, just in time for the e-commerce revolution.

The potential for phone companies to thrive in a payments economy was a long time coming, but critical mass was fairly recent. Mobile phone penetration (111 phones per 100 Filipinos in 2014, according to the World Bank) and smartphone adoption (30% of mobile users in 2015, according to IDC) have conspired to place powerful e-commerce tools in the hands of ordinary people, putting the industry in position to take off decisively. Statista.com expects Philippine e-commerce revenue to cross the billion-dollar threshold for the first time in 2016, then doubling to over $2 billion by 2020.

Against this, banking coverage has lagged (31% of Filipino adults have a bank account, the World Bank reckons, as opposed to 69% in East Asia and the Pacific), much of it due to an approach to business that discourages bank officers from spending too much time with potential clients who don’t have much in their deposit accounts or can’t pass a rigorous credit check. A credit card application form illustrates the nature of the problem: banks want to know whether you own or rent, if you have a car, what kind of job you hold and how long you’ve been there, how much you have in the bank, and whether you have references. It’s hard to imagine many 20-somethings in entry-level jobs getting through all the hurdles.

Smart Communications, Inc.’s PayMaya, formerly Smart eMoney, Inc., is what the state of the art looks like in the Philippines, with a P50,000 monthly spending limit and maximum “wallet” balance, both upgradable to P100,000. The scheme provides users a virtual Visa account for those who don’t have credit cards, and, in recognition of the e-commerce savvy of pre-teens, admits users as young as 12 years old. It doesn’t even require a Smart subscription, and in some cases doesn’t even require a phone -- you can get the same PayMaya services from a physical card, a natural extension of the company’s prepaid expertise.

Away from the retail end, PayMaya also has an enterprise-focused service, known as PayMaya Business, that offers mobile-optimized payment processing solutions, enabling small businesses to accept payments from Visa and MasterCard users. The service charges 3%-4% of the transaction value and promises access to funds in 1-2 business days.

The service also has the expected range of bill payment offerings, as is natural for a business controlled by a phone company, where billing is a major part of operations and a core expertise. The amounts involved are bigger than what you might expect -- PayMaya’s managing director, Paolo Azzola, has said that the company has a P200-billion transactions target for 2016. Just to be clear, that’s not a revenue figure -- transactions are payments entrusted to the company by customers who use its services -- but PayMaya’s synergies with other group companies give its payment volumes instant scale, in theory giving it all sorts of opportunities to earn from fees or even float. By way of comparison, a company like LBC Express Holdings, Inc., which has a payments business attached to its core delivery service, earns about P2 billion in revenue per quarter from all sources.

Many of these services are of course easily replicable within a banking context, but the strength of the credit culture and the structure of the industry’s incentives and rewards mean bankers will primarily be focused on dispensing loans and building up their branch deposits, thereby leaving some potentially good clients behind. A phone company, by way of contrast, is only interested in whether you already own the necessary equipment (phone, app), doesn’t sweat how bad your credit is, and wants you to have a convenient e-commerce platform as a means of making you ever more dependent on your device for every transaction imaginable. It also has the infrastructure in place for the critical “load” transaction that is at the heart of all prepaid business models, an advantage that comes from years of dealing with impecunious types like students or minors who never would have qualified for its top phone plans.

Mr. Medina is the Online Managing Editor of BusinessWorld.

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