AMONG several key lessons the global community has learned from the Covid-19 pandemic, the exposure of the financial sectors’ vulnerabilities and the appropriate government and industry responses to prevent a catastrophic collapse of critical institutions occupy the top tiers.
Racing against time, regulators and industry players have scrambled to decisively implement policies and contingency measures to temper the adverse effects on financial institutions, the bedrock of a country’s economic infrastructure.
To better plan for the eventuality of another international crisis, the emergence of advanced technology such as artificial intelligence (AI) and the insights offered by data science, the legislature, in particular, plays an indispensable role to ensure continuity of economic activities, institute novel approaches, and reinforce reliability and public confidence toward the financial systems and services.
Despite its limited application and effectiveness, Republic Act (RA) 11469, or the Bayanihan to Heal as One Act, illustrates how the government may use legislation as a tool to effectuate reforms responsive to the needs during a widespread crisis.
Taking the cue from the initiative of the private financial sector at the height of the pandemic, RA 11469 directed all public and private banks, quasi-banks, financing companies, lending companies and other financial institutions to implement a minimum of a 30-day grace period or moratorium for the payment of all loans and residential rents, falling due within the period of the enhanced community quarantine without incurring interests, penalties, fees or other charges.
The law has, likewise, authorized the lowering of effective lending rates of interest and reserve requirements of lending institutions. The Bayanihan law can be the basis for subsequent enactments in case another crisis occurs.
Another significant law that has been passed by Congress with the goal of future-proofing the economy is Republic Act 11967, or the Internet Transactions Act (ITA). This law — which I have personally advocated for as its principal sponsor and author and as the former chairman of the Senate Committee on Trade, Commerce and Entrepreneurship — may serve as a blueprint for legislating measures toward a resilient economic and financial ecosystem amid the unexpected acceleration of digital commercial transactions.
With its ultimate objective of strengthening consumer protection and protecting online businesses primarily dominated by micro, small and medium-sized enterprises, ITA fills the void by providing an effective regulatory framework where there is none with the help of data science insights.
This is particularly important since empirical data show that the gross merchandise value of the digital or e-commerce of the country is expected to hit $35 billion this year. In 2022, the number of people purchasing consumer goods via the internet was 43.31 million with around $16 billion being spent on online consumer goods purchases yearly.
Other legislative innovations introduced, which complement the evolving modes of economic transactions now conducted online, include giving additional regulatory powers to the Department of Trade and Industry, compelling digital platforms to implement self-policing and oversight mechanisms to avoid penalties, and expanding its extra-territorial application for cross-border transactions, which is a preeminent feature of the digital economy.
Most notably, and with the clamor for legislative action, attention must also be paid to the inevitable dominance of AI and machine learning (ML), which has immensely affected the world order and has since influenced the operations of the financial services industry.
The comprehensive review conducted by the Bangko Sentral ng Pilipinas or BSP, called Project Sapiens, reveals that AI and ML are revolutionizing the financial sector in the Philippines. Financial institutions are using AI and ML to provide personalized product recommendations and to determine if a customer is a real person through electronic Know-Your-Customer, which is short for e-KYC or digital onboarding.
To assist in detecting and even avoiding fraud, banks and similar entities are also using advanced fraud management systems or FMS to determine patterns indicating fraud. Generative AI such as ChatGPT has helped financial experts and consumers decide and navigate the changing world of finance through its financial research and data analytics. If used properly and data is updated regularly, AI and ML promise accurate decision-making and informed choices for financial institutions.
However, as in any other industrial revolution in the past, the use of AI and ML is not without its risks to the financial sector. There is the imminent threat of more elaborate and convincing fraud using AI, including the widespread manipulation, disinformation and AI hallucinations; the lack of explainability, leading due to poor data quality; the possibility of monopoly of power among a few tech providers, and the invasive privacy concerns or surveillance.
This is where responsive and meaningful legislation is most critical. Existing laws, rules and regulations must be updated and strengthened to enhance consumer protection and cybersecurity, to put in place safeguards against potential use in money laundering and privacy leaks, and to avoid the risk of bias in lending, insurance and access to services; thereby, exacerbating inequality.
The emergence of AI and ML, while offering endless possibilities, can displace thousands of jobs. In fact, there is now a significant reduction of customer service agents in the business process outsourcing industry due to the shift to chatbots and a decreasing demand for artists caused by the accessibility of AI-generated art.
Reports from law enforcement agencies have also shown a dramatic increase in online-related scams and fraudulent activities, which may have also been aided by AI and ML. I would like to provide a caveat that we should welcome technology, but not at the expense of the consumers and the disruption of general public order. It is my firm belief that we should strike a balance between harnessing the power of AI and ML, and the ultimate goal of protecting and serving the public.
Owing to the dependence on newer technology, online banking and digital transactions are at their all-time high. But with this rise, online scams and fraud have also flourished and are now more elaborate and convincing. In the first half of 2024, TransUnion Philippines has reported that almost 18 percent of transactions from the Philippines are suspected of being digital fraud. Additionally, according to the Global Anti-Scam Alliance or GASA, under its “State of Scams in the Philippines 2024,” Filipinos have lost nearly P460 billion in the past 12 months because of text messaging scams.
Recognizing the debilitating effects of criminal enterprises involved in scams not only on digital financial services but, most importantly, in protecting the hard-earned money of Filipinos, I championed the passage of Republic Act 12010 or the Anti-Financial Account Scamming Act (Afasa).
Meant to deter commission of financial fraud through money muling and social engineering schemes, Afasa imposes substantial penalties for those who will be found guilty and offers protection to victims by authorizing financial institutions such as banks and electronic wallet issuers (e.i., Gcash) to temporarily hold funds suspected, reported or believed to have originated from an unknown or illegal source. Financial institutions are also required to put in place adequate fraud management systems that will protect their clients’ financial accounts or otherwise be liable for any loss or damage.
Relative to this, and as the chairman of the Senate Committee on Banks, Financial Institutions and Currencies, I have been actively advocating for the passage of one of my priority bills proposing the creation of a Philippine Scam Prevention Center or PSPC. The proposed center will complement the Afasa by establishing an accessible one-stop shop or Scam Center, which will serve as a coordinating link between the relevant public and private sectors such as financial institutions and law enforcement agencies to facilitate actions and expedite responses for victims of financial scams. This is crucial in my continued push for a legislative agenda that will further fortify our financial cybersecurity and digital commerce.
Reliable and accurate data sets are critical in the crafting of the abovementioned laws and in shaping the legislative agenda. Through data science insights, the legislature best adapts to the evolution in the financial and economic landscape such as fintech advancements, consumers’ digital vulnerability and increasing necessity for financial support in rural areas.
It directs lawmakers where attention is needed, identifies loopholes in policies, and helps identify the kind of intervention required in emergency crises and in navigating emerging trends. All of these are with the end goal of ensuring priorities are given to the critical sectors and addressing the evolving societal needs. Future-proofing the Philippine economy and its financial institutions requires exhaustive studies and effective use of data analytics, which are grounded in reality.