Suits the C-Suite

01 August 2022

Maria Kathrina S. Macaisa-Peña

Consumer values in a world in crisis (First Part)

First of three partsThe past three years have been an unwelcome rollercoaster ride for consumers everywhere. People prioritized their health when the pandemic initially broke out and drastically changed their actions and attitudes towards purchasing goods and services. As the pandemic’s effects on the economy became more pronounced, consumers began to focus more on accessibility and living expenses. As the crisis slowed, people began to give more importance to a new set of “post-crisis” ideals, particularly those related to sustainability.However, the post-crisis period has not yet begun. Inflation has returned on a scale not seen in decades, interest rates are rising, the global economy is slowing down, geopolitics is being played out on a grand scale, and new COVID-19 variants keep appearing. It’s unclear if this confluence of events is ushering in a new crisis or merely escalating what we currently have, but the distinction will not likely matter in the eyes of customers.The most recent edition of the EY Future Consumer Index demonstrates how accustomed people are to living in a constant state of crisis and uncertainty. Consumers globally are concerned about the future; as much as 63% do not see economic recovery within the next 12 months, and 62% anticipate an increase in living expenses during the following six months.The EY Future Consumer Index examines shifting consumer attitudes and behaviors over a range of time horizons and across international markets, revealing the emergence of new consumer segments.The Index has been tracking five main consumer segments since the pandemic began. These five segments describe the consumers that organizations will have to engage with beyond the pandemic. They reflect the different ways that people make their choices, how they will live their lives, and what truly matters to them.Of these segments, two highlight the way consumers focus on living within their means and looking after the health of their families and themselves (“Affordability first” and “Health first”). Two other segments refer to the way some consumers prioritize environmental and social concerns (“Planet first” and “Society first”). The final segment identifies those who focus on living within the moment and maximizing their experiences (“Experience first”).As people react to a chaotic world, the proportion of customers who fit into each sector has fluctuated over the past year. They are actively responding to — or at least attempting to respond to — the never-ending waves of change and uncertainty rather than merely reacting passively. Even while the world keeps presenting them with new obstacles, people are becoming more and more motivated to take charge of and mold their lives around their own wants and objectives. In fact, 58% of people say they feel more in charge of their lives, a situation they wish to maintain and sustain.FUNDAMENTAL CHANGES IN THE CONSUMER LANDSCAPEConsumers now have greater control over how they organize their time due to the rise in remote working, but they also want more control over other aspects of their lives including how they spend their money and disclose their personal information. While they are growing more frugal with their money, they are also feeling more confident about acting to defend their lifestyles and values. There are three key shifts in play that can be identified compared to previous financial crises:1. Customers are more adaptable due to the pandemic experience.People are becoming accustomed to instability and uncertainty. Nowadays, many people have what is known as the “always on emergency mindset.” They are more willing to give up long-held habits and adopt new ones because they are accustomed to making significant changes to how they live, from daily decisions to long-term objectives. They have discovered levels of resilience they were unaware they possessed.2. They have more options thanks to the digital world.The online world was a startlingly undeveloped place in 2008 and 2009, during the previous major financial crisis. The smartphone was a basic device and broadband connections moved slowly. Today, consumers can obtain information, discover alternatives, share their experiences, collaborate, and learn from one another much more easily. However, the digital age can simultaneously increase anxiety, intensify uncertainty, and overwhelm people with too much knowledge, ideas and new concepts, especially given the speed of digital transformation.3. Consumer values have fundamentally changed.Previous versions of the Index demonstrated how drastically consumer values have shifted as a result of the pandemic. Particularly, people’s interest in material possessions has diminished as they became more committed to leading ecological lifestyles. The most recent data demonstrate that despite the impact on their household budgets, people are unwilling to simply give up on their new beliefs. Instead, they want to find new ways to convey them.What ramifications do these shifts pose for corporate executives? When a company’s ideals and activities are in line with the customers it hopes to serve, it succeeds; when they are not, it fails. Customers want to see their concerns and priorities mirrored back at them when deciding which brands to purchase. They increasingly focus on the company behind the brand rather than just the product, asking questions such as: what influence is it having on the globe, and is that impact consistent with its values?In the second part of this three-part article, we discuss the key trends in consumer behavior identified by the Index: cost-cutting, where consumers substitute instead of sacrifice; sustainability, where consumers prioritize their values in living affordably and sustainably; and digital, where consumers are increasingly turning to emerging technology to take control of their finances. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Maria Kathrina S. Macaisa-Peña is a business consulting partner and the consumer products and retail sector leader of SGV & Co.

25 July 2022

Rossana A. Fajardo

Transforming with humans at center (Second Part)

Second of two partsWhile transformation has always been integral to the long-term success of a business, both the nature and rate of transformation have changed in the past few years. Companies have to transform more regularly to keep up due to market disruptions increasing in frequency and impact, further highlighting the need to transform successfully and consistently.A 2021 research collaboration between EY and the Saïd Business School of the University of Oxford determined that to push organizational change, leaders must use a strategy that emphasizes human factors and take into account both leaders and workers. As much as 67% of the respondents claimed that they had gone through at least one underwhelming transformation during that period, leading to the startling insight that organizations accept this failure rate as the price of transformation.The path to transformation is neither straightforward nor linear, with detours and turns along the way. Leaders must be able to learn as they go, develop a strong belief in the transformation, cultivate a culture of both discipline and experimentation, and welcome emotions instead of ignoring them. Research findings from the study highlight that emotions are at the core of the complex factors that determine if transformation succeeds, regardless of location or industry. The study identified six key drivers that leaders have to instill in their practices to increase the likelihood of success in their transformation projects.In the previous article, we discussed the first three key drivers: adapting and nurturing the necessary leadership skills, creating a vision that everyone can believe in, and building a culture that encourages and embraces all opinions. In this second part, we discuss setting clear responsibilities and preparing for change, using technology to quickly drive visible action, and finding the best ways to connect and collaborate.EMPOWER: SET CLEAR RESPONSIBILITIES AND PREPARE FOR CHANGETransformations are typically viewed as linear processes, but findings from the study prove this is not the case. There will be all manner of twists and turns and stops and starts. Offering structure, discipline, and the creative flexibility to experiment and innovate will be key to managing transformation.Autonomy to execute must be established for the organization to transform effectively. In high-performing transitions, 52% of respondents indicated that roles and duties were clearly assigned to staff, and 49% said that decision-making authority was delegated in a clear and appropriate manner throughout the business compared to the 29% in low-performing transformations.By adopting a “fail fast” mentality as opposed to a “don’t fail” attitude, leaders can encourage experimentation and innovation. While a fear of failure frequently results in squandered opportunities, huge successes can be gained from small failures. The approach set up by 46% of respondents from high-performing transformations fosters creative experimentation, but they also simultaneously ensure that failed experiments do not have a detrimental impact on compensation or career.Key driver: In order to seize and take advantage of possibilities that can be overlooked by a mindset that is unwilling to fail, leaders must encourage experimentation and help their people develop a mindset of failing quickly instead.BUILD: USE TECHNOLOGY TO QUICKLY DRIVE VISIBLE ACTIONTechnology does not create the vision; it enables it. For the vision to be realized and the transformation process to be facilitated, the appropriate technology is essential. According to executives, effective technology usage is the second most critical factor in success, and poor technology use is the second highest factor in failure.It’s also critical to recognize how emotionally charged the introduction of new technologies may be. There are some that are afraid of what technology is capable of, or the impact it can make. Employees in unsuccessful transformations are 25% more likely to concur that the change causes job security concerns. Others might also view it as a way to avoid interpersonal connections, which are crucial for the emotional health of employees as well as the operations of the company.To get customers and employees on board with the vision and the value of new technology-enabled techniques, it’s critical to demonstrate their value early on and to attract early adopters and influencers. Leaders must prioritize progress over perfection and recognize how technology can affect the emotions within an organization.Key driver: With appropriate learning and emotional support, employees are more likely to develop a digital mentality and embrace the vision and value that technology can provide.COLLABORATE: FIND THE BEST WAYS TO CONNECT AND CO-CREATEThe perpetual state of transformation now makes interdependency and collaboration a critical need. This is opposed to legacy cultures that adopted a command-and-control, top-down hierarchical approach, with leaders setting the vision and employees simply carrying it out.Leaders will have to create a culture that encourages collaboration and creativity. They must create a safe environment where new ways of agile and digital working can flourish in order to promote creativity, engagement, and meaningful work. In high-performing transformations, 44% of respondents reported that their organization’s culture fostered new methods of working, as opposed to 28% in low-performing transformations. It is therefore important to enable employees to redesign and redefine their own jobs, both in terms of what tasks and behaviors need to change and how work is accomplished. Leaders can co-create new methods of working and purposefully build interdependence across teams to handle both the emotional and logical aspects of change.Key driver: Leaders and employees must work together to rebalance delegation, ownership, and empowerment in order for new ways of working to be successful.UTILIZE THE STRENGTH OF YOUR PEOPLE TO ACCELERATE TRANSFORMATION SUCCESSLeaders are aware of the need for their organizations to transform but acknowledge that change is difficult, with many intimidated by the idea. Simply standing still is not an option in a time of constant disruption. Leaders can put their business on the path to successful transformation by utilizing the power of their people and implementing leading practices in each of the six drivers.It is imperative to recognize that success does not come from excelling in just one of these drivers, but in all six of them. Simply put, while strategy, vision and technology set the framework for transformation, it is still humans that have to remain at the center of the journey. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Rossana A. Fajardo is the EY ASEAN business consulting leader and the consulting service line leader of SGV & Co.

18 July 2022

Rossana A. Fajardo

Transforming with humans at center (First Part)

First of two partsTransformation has always been integral to the long-term success of a business. But for many years, the process by which businesses overhauled their operations to boost productivity and promote sustainable growth was sporadic. In many instances, changes in stakeholder expectations or market sentiment would prompt leaders to rethink their organizations from the ground up or make small changes to adapt.However, both the nature and rate of transformation have changed in the past few years. In the EY 2021 Global Board Risk survey, as much as 82% of board members and CEOs stated that market disruptions have increased in frequency and severity. Companies have started to transform more regularly to keep up — amplifying the need to successfully transform and do so consistently.A research collaboration established in 2021 between EY and the Saïd Business School of the University of Oxford determined the need for a more effective and contemporary means to sustain organizational change. Specifically, it has to employ a strategy that takes into account the sentiments of both leaders and workers to focus on human factors, which are frequently cited as one of the main reasons why transformations fail. Moreover, the research posited that apart from the transformation failure rate being too high, organizations can no longer afford the human cost associated with it.HUMAN EMOTIONS AT THE HEART OF TRANSFORMATION SUCCESSLeaders usually invest early to create the circumstances for a successful transformation on both an emotional and a rational level. The research observed that, along the way, confidence in the process may ebb as tensions arise, but also noted that the support usually increases to match the pressure. Workers will feel positive by the end of the transformation with proper and timely support. The study has found that positive worker sentiment increased by 50% after successful transformations.The emotional state of both leaders and employees at the start of a successful transition is comparable, but there will be a point in the transformation when things start to go awry. This is where supportive intervention is needed as up to 66% of employees feel stressed with an underperforming transformation. The impact of a failed transformation can be severe, with up to 75% of the workforce experiencing negative feelings and an extreme of 31% feeling angry, depressed or sad.This is particularly noteworthy in situations where a series of transformations is planned. While negative emotions in the workforce can rise by 25% during successful transformations, it rises dramatically to 130% during unsuccessful ones. Going into the next transformation with this negativity can be devastating for any new transformation efforts. This makes it even more important for organizations to revisit their transformation plans and keep humans at the center in order to better turn transformation failure into success.Research findings from the study identified six key drivers that can help increase the likelihood of transformation success. In the first part of this article, we discuss the first three: adapting and nurturing the necessary leadership skills, creating a vision that everyone can believe in, and building a culture that encourages and embraces all opinions.LEAD: ADAPT AND NURTURE THE NECESSARY LEADERSHIP SKILLSRegardless of whether a transformation was successful or not, employees in the study ranked leadership as the most important factor. Interestingly, while leaders considered leadership as the primary factor in successful transformations, they also saw it as irrelevant when the transformation failed. Given the importance of personal emotional development, leaders must be aware of their own mental and physical limitations. Moreover, they must be absolutely open and honest about their worries, fears, and self-doubt regarding the transformation journey, as well as admit what they don’t know and still need to learn.Leaders need to have the courage to admit they may not have all the solutions and be willing to demonstrate the humility to search both inside and outside the company for such solutions. For instance, compared to respondents in low-performing transformations, respondents in high-performing transformations were more likely to say that leaders embraced ideas from more junior staff.To demonstrate that the entire team is participating in the transformation together, leaders must take responsibility for both the good and the bad. By promoting collaboration, achieving consensus, and establishing consistent two-way communication with those driving the execution, leaders can highlight that everyone contributes. Successful transformation executives have reportedly spoken with employees directly to ascertain their concerns. Others made investments in technological platforms that enabled two-way communication and united diverse viewpoints.Key driver: Leaders must invest in their own transformation and place a strong emphasis on teamwork and communication.INSPIRE: CREATE A VISION EVERYONE CAN BELIEVE INVision establishes the transformation tone and foundational framework. In order to find a compelling vision, leaders must look outside of themselves, their company, and their sector. They should cast a wide net to find inspiration and employ future-back planning to locate exciting new opportunities, creating a compelling vision that can inspire everyone. Compared to 26% of respondents in a low-performing transformation, 47% of those in a high-performing transformation thought the vision was compelling and clear.As much as 71% of employees think that this can increase the success of a transformation, making it imperative for leaders to effectively convey why change is necessary rather than merely state what they must do if they want the vision to become a reality. Instead of just encouraging their people to understand the vision, leaders must nurture genuine belief in it.Compared to 25% of respondents in low-performing transformations, 50% of respondents in high-performing transformations said that leadership made it obvious why the organization needed to change.Key driver: Leaders must manifest a vision that everyone can support, motivating employees to go above and beyond.CARE: BUILD A CULTURE THAT ENCOURAGES AND EMBRACES ALL OPINIONSEmotions are the key to a successful transition, but if the business is unprepared, it can doom the transformation to failure. In the study, 50% of the employees who went through a successful transformation felt that transformation was merely another word for layoffs. Workers involved in poorly executed transformations reported feeling ignored, unsupported, and stressed both during and after the transition. Leaders admitted in follow-up meetings that they were shocked by these results and were not aware of the severe toll that a poorly executed change had taken on their workforce.In addition to giving enough emotional support to minimize anxiety and burnout, leaders must be able to manage emotions to keep employees motivated and engaged. According to the prediction model used in the study, extending emotional support increased the average likelihood of transformation success by 17%.Understanding the emotional condition of the workforce during the transformation process will help leaders spot early warning signs and make the necessary modifications to set the transformation back on track.Key driver: Leaders will have to pay close attention to what their people are saying, identify the cause of their anxiety, and try to solve problems in a way that is both productive and emotionally supportive.In the second part of this article, we will discuss the next three key drivers: setting clear responsibilities and preparing for change, using technology to quickly drive visible action, and finding the best ways to connect and collaborate. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Rossana A. Fajardo is the EY ASEAN business consulting leader and the consulting service line leader of SGV & Co.

11 July 2022

Kristopher S. Catalan and Jules E. Riego

Tradition and transformation in single family offices (Second Part)

Second of two partsIn the first part of this article, we discussed how single family offices (SFOs) have concerns about managing reporting responsibilities and compliance in response to the evolving regulations and seizing the opportunities arising from harnessing new technologies to enable data-driven decision-making. This is based on the survey recently conducted by EY teams to gather and share deeper insights into their priorities in times of accelerating economic, social, and geopolitical disruption.It was striking how, regardless of where these surveyed SFOs are and the different functions they undertake, there were several common focus areas identified — wealth and regulation, digital transformation, risk and regulation, and strategy and governance.In this second part, we will discuss risk and reputation, and strategy and governance.RISK AND REPUTATIONRisk management has long been a strategic focus for most SFOs, but many are seeing the need to revisit scope, methods and leading practices. In particular, SFOs raised the need for more sophisticated and rigorous models for managing an expanding scope of risk and reputation considerations. A failure to address this need can leave families and family office leaders exposed to unexpected situations.While many SFOs recognize risk management as a key function that must be fulfilled, the survey suggests that some SFOs feel their own risk management frameworks could be strengthened. Only 49% of surveyed SFOs shared confidence that they have a structured process in place to identify risks, while 31% say that risk management decisions are not taken at the highest levels of their organization. This lack of formal, institutional-grade risk management can leave SFOs in a reactive posture, resulting in them spending valuable time putting out fires or dealing with gaps in expectations. Moreover, it can result in reputational risks given the prominence of families.Robust risk management can deliver broader benefits to the organization, reinforcing trust and confidence not just within the organization, but with the stakeholders as well. Families must review their governance frameworks to determine gaps and potential opportunities, but they must also have a commonly agreed ownership strategy. Families will need to determine high-level risks and use them to frame a properly designed risk program based on their own risk appetite. However, not all families will rank top areas of focus — such as family reputation, investments, cyber and data security and integrity — equally or even view them in the same way.After refreshing the SFO’s risk management strategy and program, benefits will only materialize once an enhanced risk management model is implemented and operating as intended. In order to ensure that these benefits are sustained, SFOs will need to establish an evergreen program for the continuous testing and refinement of their risk management processes. Adopting a comprehensive approach tailored to their own unique risk appetite, strengths and resources will provide SFOs with more certainty and resilience.Rapid changes in doing business today are disruptions that cause the imbalance of priorities, often becoming a forgone conclusion of misplaced resources as plans are no longer responsive to the current challenges.Family offices should look at these changes as opportunities to thrive in rather than difficulties to falter from. Establishing a well-organized risk management plan structure would make sense to protect the family name and reputation for years to come. The study shows that as many as 90% of SFOs are considering or are already co-sourcing functions related to risk management, collaborating with external partners to support their risk agenda.STRATEGY AND GOVERNANCEIn an environment where emerging technologies and changing regulations create disruption, a validated strategic plan and governance systems that are periodically refreshed are more valuable than ever for SFOs. While most SFOs indicated some form of strategic planning and governance construct in place, too many share that these systems are relatively informal. This can often leave gaps in expectations, escalation or execution.The study showed that SFOs and prominent families themselves are being intentional in designing and operating more sophisticated and strategic governance constructs. Dual Governance, which distinguishes and aligns the business and family governance and contemplates the strategic and often essential role of the family office, is facilitating clarity, execution, and stakeholder alignment.One of the dynamics driving new risk and reputation frameworks is expanding the definition of value and risk to include new environmental, social and governance (ESG) considerations. This was identified as an area for increased focus and action, especially as it relates to evolving multigenerational family priorities and legacy amidst more prominent ESG trends.Human capital, societal and community value as well as customer and stakeholder impact are now part of a growing appetite to define value and purpose beyond traditional performance metrics. At the same time, many families are innovating to formally incorporate growing consumer expectations into their strategic planning and governance constructs.Leading SFOs are taking action in different ways, with 44% of survey respondents planning to exclude investments that do not align with the ethics and values of the family, whether these are ESG-related or reflect other values the family holds. However, the survey also exposes a potential gap in execution — while as much as 85% of SFOs indicate the importance of measuring and optimizing non-financial performance, only 30% do so to a significant extent. Across all regions of the world, the most widely deployed metric in measuring performance for the SFO is cost instead of value.It should be noted that there is a proven and tangible benefit to innovating performance to include new measures, with 58% of SFOs sharing that including non-financial metrics to a significant extent led to performance that exceeded expectations. As the aspirations and goals of the family expand, it will be critical for SFOs to take the lead in designing and deploying next generation performance criteria that encompasses the broader mandate as it relates to ESG.PROTECTING THE FAMILY LEGACY ACROSS GENERATIONSThe four key themes discussed show the new pressures that SFOs must navigate related to their wealth. They will have to consider accelerating tax, regulatory and economic policies and disruptions as jurisdictions around the world attempt to address a wide range of societal and geopolitical challenges. This provides exciting opportunities to make use of emerging technologies and data to deliver insights like never before.As they traverse the pace of change in technology, regulation, risk and governance, SFOs will need agility as they balance their obligations with the need to maintain strategic focus in support of their family stakeholders. In keeping up with the times, SFOs need to align their objectives to enable them to create long-term value and not just short-term returns while managing the risks that will threaten the continuity of the family legacy. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.Kristopher S. Catalan is the Philippines EY private leader and Jules E. Riego is the Philippines and ASEAN Business Tax Services (BTS) leader of SGV & Co.

04 July 2022

Kristopher S. Catalan and Jules E. Riego

Tradition and transformation in single family offices (First Part)

First of two partsFamily-run businesses require structures that are necessary to ensure a smooth transition. In the Philippines, the wealth of ultra-high net worth families is often managed by holding companies or a trust, and not by a family office.So, what is a family office and why is it important for ultra-high net worth families? A family office provides services specifically to meet the needs of high net-worth families. It is basically private wealth management for family assets and so much more. Apart from being a financial advisor, single family offices (SFOs) are usually involved in activities in furtherance of the family’s philanthropical objectives, succession planning, family governance, tax reporting and other compliance matters. It is often used as a structure to manage family wealth in developed countries such as Singapore.In today’s high-pressure and fast-changing environment, the strategic role of the SFO continues to evolve, amplify and expand. EY teams recently engaged with more than 250 SFOs around the world with the goal of gathering and sharing deeper insights into their priorities in times of accelerating economic, social, and geopolitical disruption.The EY SFO study was commissioned to determine how SFOs perceive their capabilities, how they can learn from best practices, and where they can see growth opportunities or market challenges.The EY study aims to help SFOs innovate around purpose, priorities and legacy, creating and protecting long-term value while also optimizing family office strategy and operations. The key findings from the SFO study are based on focus areas shared by the respondents regardless of their location and function. They reflect the insights shared by the respondents to the survey as well as the actions that leading SFOs are taking to respond to the rapidly changing business environment to deliver long-term value and support to family office stakeholders.The key findings of the survey are set out across four focus areas: (a) wealth and regulation; (b) digital transformation; (c) risk and reputation; and (d) strategy and governance. In the first part of this article, we cover wealth and regulation, and digital transformation.WEALTH AND REGULATIONPolicy changes have always had far-reaching implications to the strategy, structure and operations of SFOs. Changes in the wealth and regulatory landscape are impacting every aspect of family office planning, strategy, and execution with the pace of developments requiring the need for agility. Recently, external forces brought about by the pandemic, geopolitical uncertainties, economic trends and social considerations have further intensified a keen focus on family wealth profiles.As an example, an increasing number of global jurisdictions are using tax policy and transparency initiatives as a platform to address broader economic and social policy issues. Moreover, many jurisdictions are reviewing how their tax policies and enforcement will evolve to secure higher revenue while remaining fair and competitive.SFOs also shared concerns about how new virtual ways of working will raise new tax considerations for family members, family office employees and their broader business ecosystem. Family office principals and beneficiaries often lead an international lifestyle, so when that is combined with the new normal of virtual work, it comes as no surprise that as much as 72% of the respondents in the SFO survey cited the tax consequences of remote working as a concern.One survey respondent shared how companies now need to be more transparent about their taxes to both tax authorities and shareholders, and how family offices and family businesses worry about long-term sustainability. If SFOs want to be sustainable for the next 50 to 100 years, they should consider avoiding any entanglement with cross-border tax issues.In addition, SFOs have to manage a delicate interplay between increasing demands for transparency and obligations for additional reporting and the ongoing desire to maintain family and personal privacy. This is reflected in the study, where 67% of the survey respondents shared significant concern about three or more regulatory issues.Their worries are not very different from corporate entities, especially in the Philippines. As much as 64% also shared that they were not very confident that their tax operations are high performing, which indicates that more work must be done to remain compliant.With the many external forces at play as well as the likely inevitable regulatory policy changes for prominent families, most SFOs will benefit from a careful review of how best to adapt to the shifting landscape. Fresh perspectives are needed now more than ever to satisfy critical obligations while sustaining strategic focus in support of family, business and regulatory stakeholders.SFOs that can engage and proactively adapt are better positioned to meet these obligations.However, getting hold of the required technology and skills in-house can prove difficult given the rapid pace and sophistication of changes in technology. This is why many SFOs are instead considering co-sourcing family office operations that involve the fastest changing technology and operating model or the most unique skillsets.Emerging areas of focus also include tax, accounting, risk management and technology. SFOs need to adapt easily with the changing times, and they need tools in order to do so.Disruptive technology is here to stay, and the technological landscape provides significant opportunities as well as challenges for SFOs as they prioritize technology and digital transformation trends more and more. Responses to the survey share a clear urgency for digital transformation across a broad spectrum, with 81% of respondents indicating plans to make significant investments in three or more digital tools and technologies in the next two years.Whether it is regarding cybersecurity or using intelligent automation to improve efficiency and manage risk, SFOs are showing a clear drive towards employing a “digital first” mindset in the entire ecosystem — including connected businesses and the families involved.As much as 74% of the respondents indicated experience in some form of data or cybersecurity breach. This is not surprising, as SFOs share concerns about a wide range of associated risks such as theft, loss of privacy, stolen identities, reputational threats, and even physical risks to family security.However, the survey also shows that a diligent approach to cybersecurity does not seem to be the norm despite acute concerns. Most SFOs do not have robust practices in place to respond to cyber issues, with as many as 72% of respondents lacking a cyber incident response plan and less than a third with actual cyber training for their employees or family members.With the increased use of remote working and collaboration amidst evolving technology requirements, there is a greater risk from a data security perspective. Leading families cannot simply acknowledge these inevitable changes — they must seize the opportunities arising from harnessing new technologies while becoming more sophisticated in managing related risks. Data-driven decision-making makes sense now more than ever given the insights that we can draw from it.SFOs need reliable and ‘fresh’ data in order for such information to be useful in coming up with critical decisions. Before creating or choosing technology solutions, however, SFOs must first define evolving family stakeholder needs, strategic priorities, multi and generational expectations, and the core business functions of the SFO. These will determine the nature of the technology required, whether it would be a product off the shelf or an ecosystem of integrated solutions.SFOs are also considering how to leverage external service providers in new ways by having them operate or support specific functions given the need for specialized resources. Some SFOs take a proactive route and formally engage the next generation of family leaders in designing and defining the necessary technology solutions for the future. By taking the lead, next generations can use their level of comfort with digital trends to spur innovation and align with objectives and expectations for tomorrow. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.Kristopher S. Catalan is the Philippines EY private leader and Jules E. Riego is the Philippines and ASEAN Business Tax Services (BTS) leader of SGV & Co.

27 June 2022

Benjamin N. Villacorte

A new chapter for Philippine sustainability reporting

In the last few years, a growing number of companies have been publishing sustainability reports and have started integrating environmental, social and governance (ESG) considerations into their strategic frameworks because of regulatory developments and increasing demand from investors and customers.Locally, a key driver for sustainability reporting is Memorandum Circular No. 4, series of 2019, issued by the Securities and Exchange Commission (SEC) in 2019. This requires publicly-listed companies (PLCs) to submit an annual sustainability report under a “comply or explain” approach. The SEC recognized the relevance of ESG disclosures not only to support global and local sustainability goals, but also to encourage transparency and accountability from companies by requiring public disclosure of their sustainability performance.After a year of implementation, we conducted a review on how listed firms responded to the mandate. We then published a report containing a review of listed companies’ 2020 sustainability reports, known as “Beyond the Bottom Line 2nd Edition: Sustainability Landscape in the Philippines.”IMPROVED QUALITY AND COVERAGEThe number of reviewed sustainability reports increased from 73 in 2019 to 118 in 2020. Consistent with the 2019 review results, the 2020 review revealed that 66% still applied the SEC’s template, while 52% released stand-alone, glossy sustainability reports and 53% included sustainability content in their annual reports, which shows that PLCs are gradually adopting more formats than just using the SEC’s template. The most widely adopted (79%) standard remained the Global Reporting Initiative (GRI) Standards.However, there was a notable increase in the use of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations (41%), which suggests that listed companies are recognizing the need to identify potential impacts of climate change to their businesses and mitigate climate risks. Companies in the construction and power & utilities industries covered most of the TCFD disclosures, showing their awareness of their exposure to the adverse impacts of climate change. Meanwhile, holding firms and listed companies in the banking, mining, retail and transportation industries had some climate-related disclosures, whereas the food, beverage and tobacco companies had little to none.Only 10% of the listed firms we reviewed obtained limited assurance, and 56% did not disclose their sustainability vision and strategies or provided only high-level statements of intent relating to sustainability. Sixty-two percent disclosed their materiality assessment process, while biodiversity-related topics like watersheds, marine and International Union for Conservation of Nature Key Biodiversity Areas (IUCN/KBA) remained the least reported. Knowing that the Philippines is one of the most megadiverse countries globally, biodiversity loss is a crucial issue. This makes it imperative for companies to report on biodiversity, especially for industries with direct impact such as mining and power & utilities.Overall, there has been improved quality and coverage in the 2020 sustainability reports compared to the previous year, and ESG disclosures are expected to improve further especially since the “comply or explain” approach ended in 2021. We also anticipate changes in the global and local reporting landscape to address the call to harmonize sustainability reporting standards and frameworks.The IFRS Foundation, through the International Sustainability Standards Board (ISSB), has released the first two exposure drafts of the IFRS Sustainability Standards Disclosures. Comments on the exposure drafts are due on 29 July 2022, and we are expecting the official publication of these standards before 2022 ends.POLICY LANDSCAPE OF SUSTAINABILITY REPORTINGSustainability reporting is just one of the growing regulations that aim to accelerate sustainable development in the country. The growing concern over ESG risks, compounded by the impacts of the COVID-19 pandemic, are driving stronger sustainability efforts from the government and companies.The government has developed and released several policies and frameworks to support decarbonization and the transition to a cleaner energy source through climate funding and action plans. Multiple regulatory and reporting developments are underway to address ESG issues: sustainable finance, extended producer responsibility (EPR), sustainable mining, and biodiversity protection. Investors are also paying more attention to ESG and are saying they are now attaching greater importance to companies’ ESG performance because of the pandemic, as revealed in EY’s 6th Institutional Investor Survey.Despite the current gaps in ESG disclosures as observed in the 2020 review, we see a potential acceleration in the incorporation of ESG considerations into corporate strategies and investment on resources as companies begin to realize that gains from their sustainability efforts outweigh the related costs and are not just an added expense to the business.BEYOND COMPLIANCECurrently, the SEC only requires listed companies to submit sustainability reports, but this will soon be extended to other types of corporations, as they have announced in several webinars. Considering the multiple, fast-paced global and local developments around ESG, businesses should reinforce their sustainability journey as soon as possible and consider the following actions:• Define sustainability governance at the management and board levels• Integrate sustainability into the enterprise risk management system and corporate strategies• Invest in systems and processes that will support reliable and timely ESG reporting• Obtain third-party assurance on ESG disclosures• Keep tabs on the developments around sustainability reporting standards, especially on the IFRS Sustainability Standards Disclosures• Build internal capacity to support the organization’s sustainability thrustSustainability reporting is one of the best ways to boost stakeholder confidence as it demonstrates transparency and accountability. However, it is not enough for companies to produce sustainability reports for compliance purposes alone.Instead, determining material ESG issues for the business is essential to disclosing relevant information to stakeholders and to manage the risks these issues bring. A company’s sustainability journey may also entail business model changes, portfolio rebalancing and investments in new technologies and capabilities. Thus, corporates should start realigning their resources and strategies and understanding what they need to ensure accurate and timely ESG disclosures.Bold sustainability commitments and goals with defined metrics will be necessary to drive impactful actions that help accelerate the country’s sustainable development. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Benjamin N. Villacorte is a partner from the Climate Change and Sustainability Services team of SGV & Co.

20 June 2022

Lee Carlo B. Abadia

The Metaverse beckons: Is it time to explore?

The Metaverse is the new industrial frontier. Futurists, entrepreneurs, and professionals have defined it in multiple ways, but its meaning continues to mystify the public. Organizations that decide to embrace it are more likely to discover a turning point, similar to the growth of the internet spurring globalization, or the rise of the smartphone that made on-the-go services available. As technologies cause a cultural shift that influence ways of living, they open a plethora of opportunities which businesses may consider for early adoption for their long-term strategy.DEFINING THE METAVERSEThe word “Meta” in Metaverse is derived from Greek that means “transcending.” Paired with the word “universe,” it implies an area that is beyond the physical. The Metaverse can be defined as a virtual world where a real person can extend themselves and their lives onto digital identities. They can earn, purchase, socialize, learn, and enjoy in this digital space, and the results from these activities can connect and apply to the real world. This is much more immersive than the current ecosystem of social media, online shopping, or gaming communities, because the Metaverse involves key characteristics enabled by key technologies.When derived from various forums, the key characteristics of the Metaverse include (1) Persistence: where your central digital identity is maintained even as you enter and leave the Metaverse; (2) Ownership: where everything you earn or purchase in the world is certified and attributed to be truly yours; (3) Interoperability: where you can carry what you own and use it in other virtual places, and (4) Decentralization: where there is no central organization that dictates the rules of the space, and is instead defined by the users themselves.It is these characteristics that make it an overarching realm, as opposed to current platforms or small metaverses (with a lowercase “m”). These metaverses are managed centrally by the company that created them, and users typically are not able to consume or port digital assets across these.On the other hand, notable technologies that realize the characteristics of the overarching Metaverse are 5G, blockchain, and virtual or augmented reality (VR/AR). Widely rolling out 5G infrastructure provides faster speeds for data consumption of up to potentially 10 GB per second, which is essential for a smooth experience in the virtual world. Blockchain is foundational in what creates the true ownership of certified digital assets or currencies, building a de-centralized autonomous environment enabled by the smart contracting that connects them. Moreover, VR and AR technology, which allows the creation of 3D environments supported by wearables, can make the experience more immersive. There are other layers of technologies involved, such as decentralized applications, but implementing the necessary infrastructure fast tracks the vision.TAPPING INTO DIGITALLY NATIVE CONSUMERSUnderstanding what the Metaverse is helps enable organizations to determine how they can generate new revenue streams or create new business models while positioning themselves early for success in this evolving technology — which can grow exponentially in the future. Leaders must realize that doing so taps into a promising audience: the digital natives. These are the people who grew up in the information age, and who spend a significant amount of their time using laptops, smartphones, and Internet of Things (IoT). Digital natives often prefer to interact online first rather than through traditional face-to-face transactions.In 2019, CNN Philippines said in an online story that the people of the Philippines are some of the heaviest users of the internet, averaging about 10 hours a day. General information from the Philippine Statistics Authority (PSA) indicates that digital natives likely comprise a third or above of the population. These numbers alone provide ample opportunity for new revenue.RECOGNIZING THE POTENTIAL OF NFTsTo cite potential application to business, it is also important to understand the concept of non-fungible tokens or NFTs in the Metaverse. NFTs are digital assets that are unique and authenticated through blockchain. This can be anything from digital art, gaming items, or video clips that are owned by people through their digital personas. Their financial value is created through supply and demand within the digital world. Its appeal can be tied to the human psychology that seeks ownership of things, which is why authenticating through blockchain is important to make it “real” and exclusively “mine.” Aside from the advent of cryptocurrency, NFTs have opened possibilities of other forms of virtual ownership, and it drives demand.In effect, real world brands can use NFTs in various ways, whether for creating brand awareness as people transact through their digital identities to own these NFTs or use the actual ownership itself to unlock a privilege, such as exclusive access or discount to a physical store or location. The applications are almost endless. The experience can be gamified, where online gamers not only play for entertainment, but have their actual efforts translate to acquiring NFTs that have value for trading purposes or even for benefits in the physical world.According to Navigating the Metaverse, A Guide to Limitless Possibilities in a Web 3.0 World, by Cathy Hackl, Dirk Lueth, and Tommaso Di Bartolo, there are also potential recurring revenue streams from a secondary market for royalties for branded NFTs. This means that aside from earning from the primary purchase, royalties can still be applied as NFTs get traded down the line so that businesses can continue to receive earnings from subsequent trading.Aside from products with NFTs, services for the Metaverse can also be provided by businesses, according to the EY white paper on the “Metaverse” by Bikram Dasgupta and Aarathi Panikkar. These can range from curating and developing virtual environments, pursuing business integration, running advertising campaigns, implementing smart contracting, and so on. There is a whole ecosystem that needs to support running and maintaining the world itself, which is also an area that can be engaged in for revenue.THE METAVERSE AS AN INEVITABLE CULTURAL SHIFTBack in October 2021, the most popular social media platform renamed itself to “Meta.” This clearly demonstrates the explicit commitment of the organization to support the direction of the online environment. Moreover, one of the largest software companies has been acquiring well-known gaming companies, also alluding to how these platforms with their own communities and exchanges will play into the future of the Metaverse. The big players are preparing as early as now to help curate the future experience the Metaverse will be able to offer.Given the current interest and increasing entry into the Metaverse globally, business leaders should recognize and understand the phenomenon — even if it sounds far-fetched or unreal — and consciously consider this in their periphery or as a direct future strategy for their organization. The Metaverse is looking to inevitably shift the culture, driven by technology, and should be given the requisite attention so that companies are prepared if it becomes a truly global-level disruption.Similar to how digitization accelerated due to the obvious market of digital natives and even more so with the pandemic requiring seamless virtual work, consumerism, and lifestyles, the time to explore the potential of the Metaverse is now. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Lee Carlo B. Abadia is a technology consulting principal of SGV & Co.

13 June 2022

Anurag Mishra

Fintech: Powering digital transformation in financial services (Third Part)

Last of three partsAnyone who has transferred money to another person’s account without having to deal with a bank employee — by e-mail, text, call or physical visit to a bank branch — is no longer a total stranger to financial technology. But keeping up with developments in the market can be dizzying, as fintech has grown exponentially of late, helped in part by the global health crisis that provided the impetus to reexamine processes and put the customer at the core of solutions.Fintech trends have been disruptive and will continue to be so especially now that the mobility restrictions since 2020 forced financial institutions to take a good look at what a digital economy is going to look like. Looking at the practical responses of banks to stay agile during the pandemic by examining processes that can be automated and making them more customer-centric, we can see that financial institutions have already set into motion what could be the beginnings of digital transformation.In some countries, financial firms are proactively taking steps to understand how their organizations can benefit from the wide array of available and emerging technologies. The experience over the past two years points to an acceleration of technological innovation in the years to come. Making sense of all the buzzwords can be a task for the uninitiated in the fintech world. It would be wise to identify which tech trends to focus on in relation to how they can impact the industry and diverse organizations.In the first part of this three-part series, we discussed the key themes anticipated within the next two years in the fintech market in Asia. In the second, we looked at tax considerations in the Philippines. In this last part of the series, we take a look at a few of the tech trends that are worth keeping an eye on as the industry continues to experience dramatic change.WHITE LABEL FINTECHWhite labeling allows firms to sell products without incurring significant development expense, time or navigating regulatory compliance. Also referred to as “Banking as a Service,” it is an authorization to brand and sell products or services developed by another company. This allows fintech firms to create a branded front-end offering layer over white label application programming interface or API-enabled platforms.This solution leverages the innovation ecosystem without the need to reinvent, reinvest in and go through the entire technology development life cycle. It significantly reduces go-to market offerings to customers and seamlessly integrates technology innovation, creative product offerings and compliance requirements in a highly regulated industry to better serve customers.White labeling is a great and attractive option for businesses to leapfrog into the modern digital world. It is a strategy for emerging companies to reduce risks and free up resources to focus on what they’re good at — develop products, build the brand, and grow their client base. For fintech startups, white label solutions allow them to meet the demands of customers, minus the learning curve. Companies availing of these solutions, however, will have limited control over product development, and the drawbacks can range from bugs and security weaknesses to failure to observe the law.DATA AGGREGATORSA customer’s financial footprint is distributed across various institutions, instruments, and platforms, making it difficult to have a full view of their transaction history. Data aggregators collate customers’ bank accounts, mortgages, brokerage accounts, and credit card data, among others, so they could provide one financial view of customers, irrespective of channel and the businesses the customers transact with. They accomplish this through APIs used by fintech firms through which customers log in to their platforms.This aggregation of data at scale is also the backbone of open banking and a free-flowing financial ecosystem. Data aggregation powers a wide gamut of fintech applications to provide financial services on demand like advising, lending, quicker money transfers etc. The portability enabled by data aggregators cuts down paperwork and allows customers to improve eligibility and access to better products/services. With a free flow of data in the financial ecosystem, firms can have a better view to offer personalized products in real time.Data aggregators’ connection with many institutions, however, can equate with multiple points for possible breaches and leaks. Security risks can also arise from web data scraping, a process that involves a computer program logging into a bank’s website using a client’s credentials and reading code to extract financial data. The industry though continues to look into superior ways of aggregating data without compromising the protection of customers. This, nevertheless, brings to the fore the question of greater regulations that establish guidelines on how financial data is accessed and stored safely. ROBOTIC PROCESS AUTOMATION OR RPACustomer experience drives loyalty to brands. Financial institutions, in turn, grow revenue and margins based on customer loyalty. Hence businesses are increasingly automating core operations to focus on enhancing customer experience and loyalty.Robotic process automation or RPA accomplishes mundane and repeatable backend processes better, faster, and more accurately. RPAs are easy, flexible, budget friendly, and quick to deploy, improving productivity while enhancing serviceability and incremental revenue. RPAs ensure mistake proofing, compliance, real-time reporting and insights in a highly regulated fintech sector.Automation is a great boost to operational efficiency. RPA’s future popularity in the world of fintech will likely be borne out of its utility to compliance and regulatory needs. With automation, businesses are able to efficiently keep audit trails for every process, supporting high compliance.VOICE-ENABLED PAYMENTS (VEP)More and more people get recommendations, shop for the best deals, and perform tasks using rapidly evolving voice assistants (e.g., Alexa, Siri, Google) backed by sophisticated natural language processing and artificial intelligence. Digital voice assistant-enabled devices are estimated to double to 8.4 billion by 2024 providing a smarter and more connected ecosystem than ever before.Many banking services are rapidly being integrated and are accessible through voice assistants. As voice encryption, voice-biometrics, multifactor authentication and voice tokenization advances, a secure voice assistant has the potential to disrupt how customers will pay in the future. The pandemic and millennials comfortable with voice over typing will accelerate adoption. VEP is projected to be used by 31% of the US adult population in 2022.This technology allows seamless, end-to-end, integrated concierge-like experience, allowing customers to multi-task better. As digital payment is the largest segment within the global fintech sector, voice integration with digital touch points will separate fintech leaders from laggards. To drive new opportunities, growth and leadership, fintech players will need to continue to rapidly adopt disruptive VEP technology.As we keep an eye on these and many other tech trends, we will continue to witness the evolving behavior of consumers, which in turn will feed into the appetite of organizations to embrace and capitalize on this wave of technological innovation. There is, however, an element of uncertainty in technologies that, although disruptive, have yet to pass regulatory scrutiny. Financial firms will have to look at how best to jump onto the bandwagon, so to speak — to work on their own projects or fire up their collaborative spirit and forge alliances with industry peers to push new technologies to wider adoption.The potential of these tech trends to help make a world of difference in how processes are improved and productivity raised can be astounding. At the end of the day though, leaders will have to go back to what matters most when embracing innovation — enhanced customer experience, services transformation, and a proven track to successful business models. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co. Anurag Mishra is a technology consulting principal of SGV & Co.

06 June 2022

Allenierey Allan V. Exclamador

Fintech: Powering digital transformation in financial services (Second Part)

Second of three partsOver the past five years, the Philippines has gained traction in financial technology (fintech), growing from strength to strength and quickly earning the attention of the global fintech community. The Global Fintech Index 2020, the fintech ecosystems ranking created by Findexable, grouped the Philippines along with a few others as countries to watch because it is one of the fastest growing fintech destinations.In the first part of this article, we discussed the key themes expected to dominate headlines in the fintech market in Asia and the Philippines. In the second part of this series, we look at the taxation issues in a market that is experiencing phenomenal growth.The dramatic change in the financial services industry landscape reflects the Philippines’ astounding growth as a fintech destination. In 2017, the Philippines had only 115 fintechs, which is tiny when compared with Singapore, which had the highest concentration (490) out of the 1,268 fintechs in ASEAN, and Indonesia (262). However, the Philippine total nearly doubled to 212 by the end of 2020. Growth in the Philippine fintech industry has since slowed, but a study by the Philippine Institute for Development Studies notes that investment surged 762.5% from 2016 to 2018.In its rankings, Findexable also found that the Philippines excelled in fintech categories like payments, enabling processes and technology, and banking and lending. Stunning growth in numbers posted by the largest mobile e-wallet service supports this observation as it breached its initial full-year target of P3 trillion in gross transaction value for 2021, or three times the record set in 2020.Much of the growth of in the fintech market stems in part from a supportive regulatory environment. Financial regulators in the Philippines have been equally aggressive as their peers in the region in pushing for fintech innovation even as they strive not to lose sight of their responsibility to foster financial stability. The Philippines is among a few economies in Southeast Asia where regulators have issued licenses for digital banking, an area that is anticipated to post significant development that will alter the financial landscape in the next few years.There can only be progress by leaps and bounds for the fintech industry in the years to come as the market nears a point where very few in the workforce will have known of life before the internet. Banks have had a good look into the digital space due to the limitations that the pandemic imposed, and this can only lead to more confident steps in incorporating fintech products with their offerings.TEAMING UP ON REGULATION AND TAXIn anticipation of a further surge in fintech activity, regulators have begun to set standards for the industry. All eyes have been on the tax agency for an issuance that will provide guidance in connection with the tax regime for the industry.At the end of 2021, the Bureau of Internal Revenue (BIR) and the Securities and Exchange Commission (SEC) said they were working together to ensure that fintech companies are properly regulated and taxed even as the government encourages their growth and continued innovation. The Department of Finance instructed the two agencies to closely monitor fintech firms and find out what new digital business models they have been adopting to determine how they should be regulated and taxed.Given the dramatic changes that fintech has brought into the financial services landscape, market participants have been on the lookout for clear guidelines or revenue regulations that explicitly apply to them. In the absence of such rules, fintech companies may have been advised to assess and analyze their transactions and apply the basic taxation principles and procedures to comply with tax obligations.The tax agency said it will continue to impose the current Tax Code rules on compliance and taxation based on actual activities of fintech companies, which are similar to those of ordinary corporations or financial institutions. In the same vein, a previous article by this column titled “Taxation of fintech companies in the Philippines” noted that fintech companies are subject to regular income tax based on net taxable income at the rate of 25% effective July 1, 2020. The tax rate will be lowered to 20% for fintech companies with net taxable income not exceeding P5 million and with total assets not exceeding P100 million, excluding land on which the particular business entity’s office, plant, and equipment are situated during the taxable year for which the tax is imposed. But given the infancy of the industry, in lieu of this regular tax rate, a minimum corporate income tax (MCIT) of 2% may be imposed on a new fintech company beginning on the fourth taxable year immediately following the year in which it began business operations. This MCIT rate shall be 1% from July 1, 2020 until June 30, 2023. Withholding taxes on such income may also apply.The ongoing joint initiative of the BIR and SEC aims to broaden the tax base of fintech-related enterprises by ensuring the two agencies have enough regulatory and collection capability to deal with these digital companies. The Finance department said the BIR will continue to gather information from other regulatory agencies on identifying, addressing and closing the gaps resulting from the development and proliferation of fintech entities not clearly or explicitly covered by existing regulations. In 2021, BIR planned to have a team that will evaluate the tax obligations of fintechs based on categories identified by the SEC and those regulated by the Bangko Sentral ng Pilipinas (BSP).VAT ON DIGITAL TRANSACTIONSLawmakers are also considering a house bill that, once enacted, would subject the value created in the digital economy to withholding/income tax and value-added tax (VAT). House Bill 7425 (previously HB 6765) would impose a 12% VAT on the digital sale of services such as online advertising, subscription services, and the supply of other electronic and online services that can be delivered through the internet such as mobile applications, online marketplaces, online licensing of software, and webcasts, among others.A key provision of the bill also seeks to add a new section in the National Internal Revenue Code of 1997 that would require foreign digital service providers to collect and remit VAT for all transactions made through their platforms.In addressing concerns, the measure could unduly burden small enterprises and freelance workers who are dependent on digital channels to make a living, the BSP recently proposed VAT exemptions for low-value digital transactions and for service fees charged by payment service providers.DIGITAL SERVICE TAXIn light of the infancy of the fintech services industry, it has become imperative for Philippine regulators to also find out what their peers in other countries have done for income tax purposes. The Finance department is monitoring developments in countries where digital services taxes have been imposed on online platforms.In mid-2020, the department focused its efforts on collecting VAT on both local and cross-border digital transactions, similar to initiatives by neighbors in ASEAN. It said, however, that it was looking to review and propose tax reforms to levy income tax on cross-border digital transactions after international consensus has been reached on the taxation of the digital economy. Once passed into law, this digital service tax will come on top of the 12% VAT on online transactions.As we look forward to guidance from the government on the taxation and regulation of fintech companies, the fintech market continues to become more complex, as adoption deepens and its benefits broaden to further impact the lives of consumers.It is imperative for fintech providers, particularly those that handle transactions, to keep abreast of tax regulations and staying compliant, as doing otherwise and relegating tax considerations as an afterthought can be detrimental to their customers, partners and even their own bottom line.Government regulators want regulation that does not to impede growth in this young market that has the potential to power the digital transformation of financial services. However, they are also wary of appearing to provide support that can be interpreted as giving fintechs an unfair competitive advantage. Active engagement with the government on the part of market participants will be key as the policy regime for the fintech market takes shape. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co. Allenierey Allan V. Exclamador is a tax partner of SGV & Co.

30 May 2022

Vicky B. Lee-Salas

Fintech: Powering digital transformation in financial services (First Part)

First of three partsWhen the smartphone became commonplace more than a decade ago, it was inconceivable for many consumers to make online purchases using their credit cards. It felt way too risky to give away sensitive credit card information in an online transaction, especially when done on a mobile device. Today, we’re faced with yet another inconceivable wave: that of opening our banking data to entities other than the bank itself.Fintech services have become widespread in Asia and the eastern Pacific Rim. Advanced fintech systems are now woven into the fabric of daily life practically in all markets in Asia where the majority of consumers have smartphones that provide them access to a growing range of virtual financial services.Asia is seen to be taking the lead in the development of fintech. Due in part to significant concerns with financial inclusion, economies in Asia are seeing a rapid pace of fintech growth. Consumer use of fintech-powered services have doubled in only two years across key Asia-Pacific markets. Fintech adoption has been at 67% in Hong Kong, Singapore, and South Korea, based on the latest EY Global FinTech Adoption Index. China, which leads with a penetration rate of 87%, sets the pace for fintech innovation. The index found that 99.5% of Chinese respondents are aware of online apps that facilitate money transfer, mobile payments, and non-bank money transfers.Many more changes are anticipated in Asia’s financial services landscape. We expect three dominant themes in Asia-Pacific markets over the next two to three years: financial regulation taking on a more active role in encouraging innovation; increased competition among virtual banks; and, increased adoption of open banking, a system that requires banks and clients to give third-party providers access to a most guarded information – clients’ banking data.REGULATORS’ OPENNESS TO INNOVATIONFinancial regulators have to weigh competing priorities, and in relation to fintech development, they have to strike a good balance between ensuring regulatory processes preserve stability and fostering financial innovation. In many parts of the world, regulators are reported to be trying new approaches to regulation so they could significantly boost oversight.In a study, leading science and technology think tank Information Technology and Innovation Foundation (ITIF) observed that many governments, seeing the value of fintech transformation, are taking steps to promote financial innovation. It cited Singapore’s creation of a fintech and innovation group to facilitate deployment of technology in its financial sector. It also took note of the launch of fintech promotion strategies in Australia and the UK. The level of stringency differs across economies, but the common thread is that they are “taking novel and interesting approaches to financial innovation with an eye to maximizing their relative competitiveness in financial services,” according to ITIF.It’s a role that regulators are embracing as markets continue to deregulate. Where before financial regulators in Asia tended to be the gatekeepers of banking and other financial services, now they are becoming advocates for flexibility, innovation and inclusion.VIRTUAL BANK COMPETITION HEATS UPFinancial regulators in the Philippines have been equally proactive as their peers in the region in pushing for fintech innovation even as they strive not to lose sight of their responsibility to foster financial stability. FinTech Alliance Philippines has been appreciative of the role of regulators, citing the creation of the Financial Sector Forum that brings together representatives from regulatory agencies as a means to rationalize regulations.The Philippines is among a few economies in Southeast Asia where regulators have issued licenses for digital banking, one area that is anticipated to record significant developments that will contribute to altering the financial landscape in the next few years. The Bangko Sentral ng Pilipinas (BSP) has already approved several digital banks’ applications. The emergence of these new entrants is seen as a game-changer in the delivery of financial products.The BSP sees the rise of digital or branch-less banks potentially driving the digital transformation of incumbent banks to stay competitive and to innovate their service offerings. Digital banking, which essentially does away with the need for customers to physically visit a bank branch to open an account or make transactions, is an important component of the central bank’s Digital Payment Transformation Roadmap. The level of encouragement from financial regulators varies across markets in Asia-Pacific, which may relate to the goal of financial inclusivity, a key theme in Southeast Asia.While the entry of virtual banks is fueling competition in banking in the region, their impact on the banking landscape is not expected to be dramatic in the short term. But in the long run, they can drive meaningful change. The traditional big banks are taking notice. In the case of Hong Kong, incumbent banks are lowering deposit minimums and sweetening account offers in anticipation of the launch of new digital banks.OPEN BANKING IN ASIAWhile virtual banking does deserve all the attention it is getting, some industry observers also see the future in open banking, a system that allows fintech providers access to banking data with customer consent to provide the latter additional services or perform transactions on their behalf. Open banking is foreseen to dramatically improve the customer digital experience.It goes far beyond the convenience of digital banking in which the set-up of bank branches is no longer required save for an office to receive customer complaints. In open banking, a mobile wallet platform or a ride-hailing service can be a super-app with expanded services to include lending, for instance, and can evaluate loan applications quickly by having pre-approved real-time access to a customer’s banking data. It can also be a personal finance app that lets you program it to “manage” your finances and tell you how much you can invest in stocks according to how much money goes into your linked bank accounts at any given month.Access is granted through open application programming interface (API), which establishes a connection between third-party providers and users’ bank accounts. This allows for banking data to be gathered and leveraged to perform a service for the customer.International Data Corporation and Finastra’s Open Banking Readiness Index found Hong Kong, Singapore, and Australia to be the top three markets in Asia in terms of progressive open banking. In the case of the Philippines, the BSP is laying down the foundations for open banking with the release of the first version of the draft Circular on Open Finance. Released in December 2020, the draft circular proposes the creation of an Open Finance Oversight Committee, an industry-led self-governing body overseen by the central bank. It would supervise open banking practices and set procedures and standards, including API architecture, data, security, and outsourcing standards.In January, the Bangko Sentral once again reinforced its support for innovation with the presentation of its three-year strategy to get open finance off the ground to boost innovation and competition in the Philippines by enabling third parties, such as fintech companies, to access and use customer finance data to develop new apps and services. Increased fintech adoption and innovation will continue to benefit most markets in Asia, contributing immensely to transforming the financial services landscape in ways that improve financial inclusion in emerging markets.There can only be progress by leaps and bounds for the fintech industry in the Philippines in the years to come as the market nears that era when very few Filipino workers would still know life before the internet. Banks have already had a good peek into the digital space due to the limitations that the pandemic created, and this can only lead to more confident steps to incorporating fintech products into their offerings.In the second part of this article, we discuss issues on taxation of fintech companies in the Philippines. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Vicky B. Lee-Salas is a markets leader of SGV & Co.