Navigating Fintech Regulations in the Philippines: A Comprehensive Overview of Frameworks and Licenses

The regulation of fintech industry participants in the Philippines is based on the specific service or product offered by the participant, and closely follows the regulations applicable to non-fintech entities intending to engage in the same or similar service or products.

1. REGULATORY SANDBOX FRAMEWORK

A regulatory sandbox is defined under BSP Circular No. 1153 as “a controlled, time-bound, live testing environment, which may feature regulatory waivers xxx [that] involve limits or parameters within which participants must operate.”

Under the Circular, the applicants should meet the following criteria to be able to participate in the regulatory sandbox:

a.The financial solution:

1) uses new or emerging technology or utilises an existing technology in an innovative manner, or,

2) bridges a market gap in the delivery of financial products/ services. The financial solution must be supported by research that shall be part of the documents submitted to the BSP.

b.The applicant must demonstrate its capability to deploy the proposed solution through a roll-out plan or strategy.

c.The applicant shall provide an initial test plan, which includes test case scenarios and expected outcomes of the experiment.

d.The applicant must be able to identify significant risks, including money laundering and terrorist financing risks, IT and cybersecurity, data integrity and data privacy, market acceptability, consumer protection, and project implementation/execution, relevant to the innovation and the corresponding proposed safeguards and risk mitigation strategies.

e.The applicant must be able to identify Key Performance Indicators or other metrics in monitoring the progress of the pilot implementation; and,

f.The applicant shall provide an acceptable exit and transition strategy once the experimentation is completed regardless of the outcome.

Those who are eligible will be allowed to test their proposed innovation in accordance with the BSP-approved test plan which shall be suited to the features of the proposed innovation/solution. Specific regulatory requirements may be relaxed during the testing period in accordance with the test plan. Once the test plan is approved, the BSP will issue a Letter to Proceed with the Test Implementation.

From there, the Testing Implementation Phase commences, with testing duration ranging from 3 to 12 months from the go-live date, depending on the complexity of the proposed solution. After the testing stage, a comprehensive evaluation of the whole experimentation shall take place as part of the exit procedures. The participants must comply with the reportorial requirements mandated by the BSP to establish the necessary information and results of the experimentation.

Participants whose sandbox activities are assessed as successful and whose products or services are deemed fit for public consumption may apply to operate and offer for public use and consumption the proposed product or service that was subjected to the sandbox activity. The Sandbox Oversight Team shall endorse for approval the product or service that resulted in a successful sandbox testing. The pertinent requirements and processing timelines for the issuance of an authority to offer electronic products and financial services shall apply for this purpose. However, the approving authorities in the BSP reserve the right to approve or disapprove the proposed product or service despite the successful sandbox testing.

2. FINTECH LICENSES

Although most businesses only require registration with SEC, the Philippines require fintech companies that engage in remittance, money-changing, foreign exchange, and virtual currency exchanges (later termed as virtual asset service provider or VASP) to also register with BSP.

To further supervise and regulate fintech companies in the Philippines, BSP initially created two special regulations: BSP Circular No. 942 and 944, including a specialised government unit the Financial Technology Sub-Sector (FTSS).

BSP Circular No. 942 monitors fintech companies engaged in remittance, money-changing, or foreign exchange dealing. BSP Circular No. 944, on the other hand, governs the operations and reporting obligations of fintech companies that offer virtual currency exchanges or engage in activities that provide facilities for the conversion or exchanges of virtual currencies. Fintech companies that provide alternative financing, however, may be regulated under the Lending Company Regulation Act.

A Fintech startup can apply for any of the following licenses from the BSP:

1. Electronic Money Issuer (“EMI”);
2. Virtual Asset Service Provider (“VASP”);
3. Operator of a Payment System(“OPS”);
4. Money Service Business (“MSB”); and
5. Digital Banks.

Electronic Money Issuer (EMI) License

Section 702 of the Manual of Regulations for Banks defines E-money and an EMI as follows:

“E-money shall mean monetary value as represented by a claim on its issuer, that is –

1. electronically stored in an instrument or device;
2. issued against receipt of funds of an amount not lesser in value than the monetary value issued;
3. accepted as a means of payment by persons or entities other than the issuer;
4. withdrawable in cash or cash equivalent; and
5. issued in accordance with this Section.”

Electronic money issuer (EMI) shall be classified as follows:

1. Banks (EMI-Bank);
2. NBFI supervised by the Bangko Sentral (hereinafter called EMI-NBFI); and
3. Non-bank institutions registered with the Bangko Sentral as a monetary transfer agent under Sec. 4511N of the MORNBFI (hereinafter called EMI-Others).

A Certificate of Registration to Operate as an EMI will provide a licensee with the capability to convert cash into electronic money, issue stored value cards, transfer funds and provide payment solutions to its business clients subject to compliance with other BSP license requirements. In addition, an application to operate a Money Service Business (MSB) can be integrated with the EMI application since non-bank EMIs or EMI-others are usually previously registered as Remittance and Transfer Companies or MSB Type C.

However, BSP Memorandum No. M-2021-064 and Monetary Board Resolution No. 1549 dated 11 November 2019 suspended the regular application window for new Electronic Money Issuers – Others (“EMI Others”) licenses for non-bank financial institutions until 16 December 2023 except for new non-bank EMI applicants with proposals involving (i) new business models, (ii) unserved, targeted niches, and/or (iii) new technologies may request for exception under the Test-and-Learn / Regulatory Sandbox Framework (“Sandbox”).

Virtual Asset Service Provider

Under BSP Circular No. 1108, Virtual Assets (“VA”) and VASP are defined as follows:

a.Virtual asset refers to any type of digital unit that can be digitally traded, or transferred, and can be used for payment or investment purposes. It can be defined as a “property”, “proceeds”, “funds”, “funds or other assets”, and other “corresponding value”. It is used as a medium of exchange or a form of digitally stored value created by agreement within the community of VA users. VAs are broadly construed to include digital units of exchange that (i) have a centralised repository or administrator; (ii) are decentralised and have no centralised repository or administrator; or (iii) may be created or obtained by computing or manufacturing effort. VAs are not issued nor guaranteed by any jurisdiction and do not have legal tender status.

Digital units of exchange that is used for (i) the payment of goods and services solely provided by its issuer or a limited set of merchants specified by its issuer (e.g., gift checks); or (ii) the payment of virtual goods and services within an online game (e.g., gaming tokens) shall not be considered as VAs. Also, virtual currencies as previously defined in Bangko Sentral Circular No. 944 (Guidelines for Virtual Currency Exchanges) shall now be referred to as VAs.

b.Virtual Asset Service Provider (VASP) refers to any entity that offers services or engages in activities that provide facility for the transfer or exchange of VA, which involve the conduct of one or more of the following activities:

(1) exchange between VAs and fiat currencies;

(2) exchange between one or more forms of VAs;

(3) transfer of VAs; and

(4) safekeeping and/or administration of VAs or instruments enabling control over VAs.

As a derivative of EMI licenses, a VASP license holder may also operate international and local remittance and payment functions subject to compliance with MSB and OPS requirements.

However, in BSP Memorandum No. M-2022-035, BSP closed the regular application window for new VASP Licenses for three years from 1 September 2022, subject to reassessment. Nevertheless, existing BSP Supervised Financial Institutions who wish to expand operations by offering VASP services may still apply for a license.

Operator of a Payment System

Section 4 (1) of RA 11127 defines an operator of a payment system as “any person who provides clearing or settlement services in a payment system, or defines, prescribes, designs, controls or maintains the operational framework for the system.” While Section 4(p) of the same law provides that a Payment System is “the set of payment instruments, processes, procedures and participants that ensures the circulation of money or movement of funds.”

Subsequently, BSP issued Circular No. 1049 and defined an Operator of a Payment System as a person that performs any of the following functions:

(a) Maintains the platform that enables payments or fund transfers, regardless of whether the source and destination of accounts are maintained within the same or different institutions;

(b) Operates the systems or network that enables payments or fund transfers to be made through the use of payment instruments;

(c) Provides a system that processes payments on behalf of any person or the government; and

(d) Performs such other similar activities, as may be determined by the Monetary Board.

All operators of payment systems (OPS) are obliged to comply with the regulations and guidelines set out by the BSP. All OPS are required to register with the BSP. Registered OPS that intend to operate within a designated payment system must secure prior approval from the BSP, which shall designate any payment system that:

• poses, or may pose, systematic risk that threatens the stability of the national payment system; or
• could have a major economic impact or undermine the confidence of the public in the national payment system.

Money Service Business

Under Section 4511N.1 of the Manual of Regulations for Non-Bank Financial Institutions (“MORNBFI”), Remittance business may be performed by the following:

(a)Remittance and Transfer Company (RTC) – refers to any entity that provides Money or Value Transfer Service (MVTS). MVTS refers to financial services that involve the acceptance of cash, cheques, other monetary instruments or other stores of value and the payment of a corresponding sum in cash or other form to a beneficiary by means of a communication, message, transfer, or through a clearing network. This includes the following:

(1)Remittance Agent – refers to any entity that operates a remittance business network which includes any or combination of the following:

• Remittance Direct Agent (RDA) – refers to any entity that is covered by a direct contracted remittance agreement or similar agreement to act in behalf of a third party engaged in remittance
• Remittance Agent Network Provider (RANP) – refers to any entity that provides a network of Remittance SubAgents to perform remittance services to RTC.
• Such other similar entities as may be determined by the Monetary For the purpose of this Section, entities functioning as an RA as herein defined shall be registered as such, notwithstanding whether they are also acting as Remittance Sub-Agent (RSA).

(2)Remittance Platform Provider (RPP) – refers to any entity that provides a shared or common platform/IT infrastructure and maintains settlement accounts in order to provide funds for remittance transactions within its network.

Digital Banks

 Under BSP Circular No. 1105, series of 2020, a digital bank is defined as one that offers financial products and services that are processed end-to-end through a digital platform and/or electronic channels with no physical branch/sub- branch or branch-lite unit offering financial products and services.

Under the Circular, a digital bank may perform any or all of the following services:

1. grant loans, whether secured or unsecured;
2. accept savings and time deposits, including basic deposit accounts as defined under Sec. 213;
3. accept foreign currency deposits, as defined under R.A. No. 6426, as amended;
4. invest in readily marketable bonds and other debt securities, commercial papers and accounts receivable, drafts, bills of exchange, acceptances or notes arising out of commercial transactions;
5. act as correspondent for other financial institutions;
6. act as collection agent for non-government entities;
7. issue electronic money products subject to the guidelines provided under Sec. 702;
8. issue credit cards;
9. buy and sell foreign exchange; and
10. present, market, sell and service microinsurance products subject to the guidelines provided under Sec. 113-B.

However, BSP imposed a three-year moratorium and closed the application for a new Digital Bank License until August 2024.

Related Regulations: (i) Regulation of Value-Added Services

The delivery of financial services through mobile applications or online platforms generally falls under the definition of value-added services that are subject to National Telecommunications Commission (NTC) regulation, pursuant to the Philippines’ Public Telecommunications Policy Act.

Related Regulations: (ii) Crowdfunding

SEC Memorandum Circular No. 14 or the Rules and Regulations Governing Crowdfunding (Rules Governing Crowdfunding) shall primarily govern the operations and use of equity-based and lending-based Crowdfunding (CF) by registered persons who participate in CF through an online platform. Under said rules, crowdfunding platforms should be duly registered with the SEC. Section 2 (c) of said Rules defines crowdfunding platforms as “programs accessible via the Internet or other similar electronic communication medium through which a registered broker or a registered funding portal acts as an intermediary in a transaction involving the offer or sale of securities.”

Related Regulations: (iii) Financing and Lending Companies

Under R.A. 8556 or the Financing Company Act, Financing Companies are defined as corporations, except banks, investments houses, savings and loan associations, insurance companies, cooperatives, and other financial institutions organised or operating under other special laws, which are primarily organised for the purpose of extending credit facilities to consumers and to industrial, commercial, or agricultural enterprises, by direct lending or by discounting or factoring commercial papers or accounts receivable, or by buying and selling contracts, leases, chattel mortgages, or other evidence of indebtedness, or by financial leasing of movable as well as immovable property. They are regulated by the BSP. While under R.A. 9474, or the Lending Company Regulation Act, Lending Companies are defined as a corporation engaged in granting loans from its own capital funds or from funds sourced from not more than nineteen (19) persons and shall not be deemed to include banking institutions, investment houses, savings and loan associations, financing companies, pawnshops, insurance companies, cooperatives and other credit institutions already regulated by law. Lending companies are regulated by the SEC.

Related Regulations: (iv) Artificial Intelligence Roadmap.

In May 2021, the Department of Trade and Industry launched the country’s Artificial Intelligence (AI) Roadmap which contains four major dimensions for AI readiness, namely: (1) Digitisation and Infrastructure, (2) Research and Development, (3) Workforce Development, and (4) Regulation. These dimensions are then supported by seven (7) measurable strategic imperatives and forty-two (42) strategic tasks. In line with this, the country has recently enacted Republic Act No. 11927, the Philippine Digital Workforce Competitiveness Act and Republic Act 11899, the Second Congressional Commission on Education Act II to enhance the skills and competitiveness of the Philippine workforce in human, and digital technology and innovations.