For a brief period at the height of the pandemic, many Philippine banks waived fees for interbank transfers so that people need not have to go out and could do their banking and many other activities online instead.

Today, four years removed from the health emergency that brought strict stay-at-home orders, people can again move freely – and the fees are back.

However, in the not-so-distant future, these InstaPay and PESONet fees that Filipinos grudgingly pay for transferring money between banks could vanish overnight.

The catch? It hinges on whether the Bangko Sentral ng Pilipinas (BSP) is willing to cut traditional banks a deal.

In an interview, Jose Teodoro “TG” Limcaoco, president and chief executive officer of the Bank of the Philippine Islands (BPI), the country’s fourth-largest lender with 3.1 trillion pesos (US$54.94 billion) in total assets, says if the BSP lowers the reserve requirements for banks that offer free interbank transfers, it would be a “powerful” move that would incentivize bankers like him.

“Cutting reserve requirements is so powerful, since you can lend that money out when today it earns zero,” Limcaoco tells The Asset, adding that he has broached the topic with at least one former central banker, Felipe Medalla, who he says “agreed with the concept”.

“I told him, you cut reserve requirements by 2%, I’m zero, right away, that’s my promise,” Limcaoco adds.

The Philippines currently has one of the highest reserve requirements in the world, requiring universal banks in the country to keep 9.5% in reserves.

High reserve requirements

Despite lowering reserve requirement ratios (RRRs) from a high of 25%, the Philippines still maintains one of the highest RRRs globally. In contrast, neighbouring Southeast Asian countries, such as Thailand (1%), Malaysia (2%), Brunei (6%), and Cambodia (7%) have much lower reserve requirements, while only Indonesia (9%), which has raised its RRR in recent years, comes close.

Reserve requirements, or the mandatory reserves a bank must hold against its deposit liabilities, typically held at the central bank, do not generate income, making them a significant cost factor for banks.

Since high reserve requirements increase the overall cost of banking operations, banks often pass on these costs to consumers in the form of higher fees, including those for interbank transfers.

InstaPay and PESONet, two of the most commonly used electronic fund transfer services in the country, typically cost the end user anywhere from 15 pesos to 50 pesos per transaction.

For consumers, these fees can accumulate, especially in a market where digital financial transactions are becoming increasingly common. Customers have been flocking to digital banks and e-wallets, which periodically absorb these fees to entice new users to jump ship from their traditional lenders.

However, BPI’s Limcaoco says it would be a no-brainer for the central bank to provide some sort of incentive for traditional banks to lower or completely remove their fees, since the BSP has similar agreements with thrift banks and other pseudo-banking entities.

“The same way the central bank incentivizes the thrift banks to lend to the lower segments by giving them a lower reserve requirement, why can’t you incent any bank that does free transfers by cutting reserve requirements? Then let the banks decide whether they will. And all you’re really doing is moving the cost away from the consumer to whoever pays for the lower reserves; lower reserves mean – in effect, the BSP will pay for it,” Limcaoco says.

Across-the-board action

For its part, the BSP’s current leadership seems keen to continue lowering the country’s “ridiculous” RRR.

“I think we should reduce the reserve requirement quite substantially. Right now, it's at a ridiculous level. It needs to go down substantially. But we haven't made any decision of when to do it,” BSP governor Eli Remolona said in mid-August when the central bank reduced interest rates by 25bp to 6.25%, for the first time in nearly four years, ending the 6.5% interest rate, which was the highest the country has seen in 17 years.

However, Remolona says he is also more inclined at the moment to lower the RRR across the board for all universal lenders, something that Limcaoco says won’t be enough to push banks like his to lower their interbank transfer fees.

“We have to differentiate. If you’re going to say everybody gets it, why will I bring my fees to zero? But if it’s conditional, I guarantee you I’m there, and Nestor [Tan, CEO of Banco De Oro] is there also, and Fabian [Dee, CEO of Metropolitan Bank and Trust Company] is there also.”

Banco De Oro is the country’s largest bank in terms of assets, with 4.37 trillion pesos as of 2024, while Metropolitan Bank and Trust Company, or Metrobank, is second, with 3.27 trillion pesos in total assets.

Incentivizing certain banks to lower their fees by cutting their RRR is a win-win for all involved, Limcaoco asserts, adding that the BSP has no liquidity-related reasons to require such a high percentage.

“As I have always argued with them, if you cut my reserve requirements, that means I have more money to lend to the consumer. Why do you need money in the BSP vault? Because they said so. It doesn’t do anything for liquidity,” he says, adding that the rationale for keeping a high level of reserves has long passed.

Citing the collapse of the US-based Silicon Valley Bank, which failed after an announcement that it had to sell bonds at a significant loss to meet withdrawal requests led to a bank run, Limcaoco says if such a thing were to happen in the Philippines, “with electronic banking, it disappears right away, anyway, so this reserve requirement doesn’t do anything, and the BSP governor agrees with that”.

“The reserve requirement is just a monetary tool – it’s not for bank safety or anything, it just siphons money away [from banks],” he adds.

Fintechs at a disadvantage

Limcaoco says that since the central bank has signaled it is ready to cut interest rates, theoretically, reserve requirements could be next.

This potential shift, however, raises significant questions about its broader impact – not just on traditional banks, but also on the thriving fintech industry in the Philippines. E-wallets and other digital payment-focused fintechs, which currently attract consumers with low or no interbank fees, could face substantial challenges if traditional banks start offering fee-free transfers. These fintech companies, which are not subject to reserve requirements as non-bank entities, may find their competitive edge threatened.

Should the BSP decide to cut the RRR of banks that offer zero interbank transfer fees, it could spell doom for super apps and e-wallets such as GCash, the Philippines’ largest and most successful fintech unicorn.

As a non-bank entity, GCash, which currently holds an electronic money issuer (EMI) licence from the BSP, as well as associated remittance agent licences, has no reserve requirements.

When GCash was on the road to amassing its impressive 81 million active users, it did so by offering numerous promotions, chief of which was enticing users with free bank-to-e-wallet transfers, and vice versa.

As its customer base grew, GCash slowly removed these come-ons, passing the fees, like its traditional bank counterparts, back to the consumer.

If the BSP agrees with the big banks on lowering their RRR in exchange for bringing down interbank fees to zero, BPI’s Limcaoco says e-wallets like GCash will then “have a problem”.

“Because how can they remain at 15 pesos [per transfer]? No one will use them, but they don’t have reserve requirements, so there is no benefit [to them lowering transfer fees],” he says.

Competitive balance

While the idea of fee-free interbank transfers is appealing, it could have profound implications for the competitive dynamics between traditional banks and fintech companies, which have gained significant market share in the Philippines by offering consumers low or no fees for interbank transfers, a key differentiator from traditional banks.

Since these fintech companies are not subject to the same reserve requirements as banks, they are able to operate with lower overhead costs.

The elimination of interbank transfer fees by traditional banks could undermine the business model of these fintech companies, creating a more challenging operating environment for them.

This is especially true if consumers begin to migrate back to traditional banks for their financial needs, particularly since traditional banks themselves have begun to embrace the digital shift that consumers in the Philippines crave and have started to offer services such as streamlined account opening, at-home check deposits, and one-click loan applications, which used to be the domain of fintechs alone.

At present, the possibility of eliminating interbank transfer fees in the Philippines is not just a question of regulatory incentives but also of competitive balance. While traditional banks could benefit from reduced reserve requirements and the ability to offer fee-free services, the BSP will also likely ponder its potential impact on the fintech sector, which could be significant.

If it does happen, e-wallets and other fintech companies that have thrived on offering low-cost transfer services may find themselves at a disadvantage, leading to a potential reshaping of the financial services landscape.

However, it’s not all bad. A little less than a decade ago, fintech firms in the country zeroed in on the hefty fees consumers pay when using traditional banks and have shaped a unique value proposition around it, and it’s not far-fetched for them to pivot further if said competitive advantage erodes.

It then falls on the BSP to carefully consider the broader implications of lowering the reserve rate requirement for banks on a conditional basis. The success of such a policy would depend on finding the right balance between encouraging consumer-friendly practices among traditional banks and maintaining a level playing field for fintech companies, a balance that is crucial for fostering innovation, competition, and financial inclusion in the Philippines.