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Asia • Philippines

Smart Communications: Low-cost Money Transfers for Overseas Filipino Workers Prepared by • Elvie Grace Ganchero (Philippines) Sector • ICT Enterprise Class • Large national

Summary Smart Communications, Inc. (Smart) is a leading wireless telephone services provider in the Philippines and a subsidiary of the largest and most diversified telecommunications company, the Philippine Long Distance and Telephone Company (PLDT). Smart has been widely cited for its innovations in product development targeting the “base of the pyramid” (BOP) market. This case looks at the latest innovations of the company’s business model, particularly the products and services that directly respond to the needs of the Overseas Filipino Workers (OFW). OFW have been instrumental in helping to buoy the Philippine economy through remittances, totaling US$10.7 billion through formal channels in 2005, an amount estimated to be at least matched by money sent through informal channels.1 Smart pioneered a cheaper, faster (in real time) and more convenient way of sending remittances using the short messaging system (SMS) technology. This, and other product innovations described in this case, allowed Smart to serve OFW, including the poor segments of the OFW community and their families. For OFW, low-cost communication and remittance services enable them to maximize the impact of their hard-earned income.

The Philippine mobile phone market The Philippines is home to more than 81.4 million people2 in an archipelago composed of 7,100 islands. Forty percent of the population in 2001 was estimated to live below the poverty threshold.3 The archipelagic topography of the country, and the closely-knit family ties that characterize Filipinos, means that access to communication is very important. Filipinos have not been able to connect as much as they wish, especially when family members live in distant places with poor or non-existent telecommunications service. Smart has led innovations in wireless technology, offering a wide array of cellular products and services in the Philippines. Established in 1991 when it acquired its congressional franchise, Smart started commercial operations in 1993 and since then, has contributed to the growth of the PLDT4 group. By end of 2006, the company employed more than 5,000 people. Over the past 14 years, the company has grown to dominate its industry with an impressive market share of 58 percent (as of year-end 2006).5 The company has the most extensive and modern digital communications Global System for Mobile communications (GSM) network and infrastructure in the country, covering over 99 percent of the population. Smart contributed US$1.542 billion in PLDT revenue in 20066 (see Appendix A and B for more on Smart and PLDT’s Financial Report). The key success factors have been the following: the technological innovations developed and

1 BSP (2006), Available at http://www.bsp.gov.ph/statistics/spei/tab11.htm 2 CIA World Factbook, July 2006 estimates. 3 The Economist, Pocket World in Figures (2007 Edition), Profile Books Ltd., London. 4 PLDT is a publicly listed corporation in both Philippine Stock Exchange and the New York Stock Exchange. 5 PLDT corporate website, investor relations section. Available at www.smart.com.ph 6 2005 PLDT Annual Report.

Case Study • Smart Communications: Low-cost Money Transfers for Overseas Workers 2

successfully applied; and a focus on the needs of the lower-income population as the primary target market. Smart has transformed the cellular phone industry in the Philippines and changed the way Filipinos connect to each other, from the countryside communities in the far-flung barangays7 to the Overseas Filipino Workers (OFW) living in nearly every country around the world. The impact of Smart’s focus on the low-income market to its bottom line is apparent through its dramatic growth: from 191,000 subscribers in 1999, to over 2.6 million in 2000, to about 24.2 million by the end of 2006.8 This impressive growth can be attributed to its aggressive marketing and distribution effort coupled with an unprecedented expansion of Smart’s GSM network in the country and abroad, and, most importantly, its ability to continuously introduce innovations to wireless services in response to the needs of a robust but untapped low-income market. Figure 1 illustrates the growth of the company in relation to the total growth of wireless industry in the Philippines.

Figure 1: Smart Subscribers Growth versus Competitors (1999-2006)

Smart

0

5,000

10,000

15,000

20,000

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30,000

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1999 2000 2001 2002 2003 2004 2005 2006

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Smart takesGSM Marketleadership

14%

11.9M

44%

42%

13%

1% 27%

9%

14%

33%

46%

13%

7%

15.2M

TNTlaunched

TNTlaunched

33.0M

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41.8MSun

5%

4% 5%

4%

17%

12%

41%

26%

121%

44%

51%

48%

6%

18%

Smart

0

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1999 2000 2001 2002 2003 2004 2005 2006

Num

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Globe1.3M5.4M

33%

44%

PiltelSmart takesGSM Marketleadership

Smart takesGSM Marketleadership

14%

11.9M

44%

42%

13%

1% 27%

9%

14%

33%

46%

13%

7%

15.2M

TNTlaunched

TNTlaunched

33.0M

44%22.5M

38%6%

45%

12%

34.7M

41.8MSun

5%

4% 5%

4%

17%

12%

41%

26%

121%

44%

51%

48%

6%

18%

Source: Smart Communications

FINDING A UNIQUE MARKET POSITION Smart offered GSM in 1999, five years after its main competitor, Globe Telecommunications (Globe). Before 1999, Smart offered an analog service. “In a way, coming a bit late in the marketplace allowed us to study and understand the dynamics of the market better,” said Smart’s President and CEO, Mr. Napoleon Nazareno. One of the key challenges that the company wanted to address early on was the serious lack of access to telecommunications in

7 Barangay is the second smallest political unit for local governance in the Philippines, sitio being the smallest. 8 Source: PLDT MD&A


the country. The advent of mobile phone technology presented an opportunity to address the problem; however, in 1993 the high cost of mobile handsets and subscription rates meant cellular was unaffordable to the majority of the population. Globe products and services centered on the needs of higher-income population segments, mainly business executives and professionals, until Smart challenged that business model. Smart developed its business model around the corporate mantra “to make mobile phones as affordable and accessible to as many Filipinos as possible”. Looking back, “the mantra provided us direction, inspiration, and an incredible amount of creativity,” said Mon Isberto, PLDT and Smart’s Public Affairs Group Head. “Our drive to broaden the market for cellular phones defined our ‘bottom of the pyramid’ orientation. We changed the old mindset that mobile phones were only for affluent people on the go. We defined the market as everyone looking for affordable telephone service, including the large number of people who had been waiting for years for a landline phone,” Mr. Isberto added. The leadership of the company had the foresight to see the significant business opportunity in targeting the untapped potential of the low-income populations as its primary market segment. In the Philippine context, where access to telecommunication was a perennial problem, this business model served as a subtle form of social inclusion of the poor. Smart’s strategy was then an uncharted approach in the Philippine business environment. See Appendix C for Awards and Recognition received by the company for its innovative products and services. REACHING THE MARKET OF THE MAJORITY One of the key factors of success of the company was its ability to understand the needs of its target market. The primary barriers in reaching the low-income market included affordability of wireless products and services, as well as the ability of the poor to comply with the requirements needed to own a mobile phone, for example credit-worthiness. In 1996, the company launched Smart BillCrusher, the first pre-paid wireless service in the country that enabled users to access wireless service without any documentation. Until BillCrusher, applicants were required to produce documents to establish their financial status, such as a credit card, utility bills, proof of employment, a three-month pay slip, or income tax certification. In October 1999, the company introduced Smart Buddy, its prepaid GSM service that enabled subscribers to purchase airtime cards at an affordable cost, in denominations of 6, 10, and US$20. By May 2003, Smart further increased affordability with Smart Load, a revolutionary over-the-air, micro, prepaid, top-up service that offered units as low as US$0.60. Napoleon Nazareno, President and CEO of Smart Communication, described the birth of Smart Load in the following way, “The idea for that revolutionary product was born when I had lunch with some of our employees at the company canteen; as I was having chicken soup, one of our field salesmen asked what turned out to be the right question: Why can’t we sell phone credits in very small amounts - like sachets for soap or shampoo? Our lowest-priced phone card at that time was 300 pesos, roughly US$6. Affordable, yes. But it was too high for many Filipinos”.


The economies of scale in the low-income market allowed the company to lower the price of subscription rates and handsets, thereby making their services more accessible to a larger number of people. Handsets first priced at over US$100 became available at less than US$50, as used units became available in the market. The success of Smart Buddy, Smart Pasa Load (and its predecessor Smart Load), as well as Smart Money gave the company the confidence to further explore the needs of the low-income market (see Appendix D List of Smart Products and Services). Most recently, Smart looked at OFW and their families as an opportunity for further growth in an underserved market.

Box 1: Key Innovative Products from Smart

Smart Load: Connecting people in massive proportions Since the launch of Smart Buddy, the company continuously developed a series of cutting-edge innovations directed towards low-income customers. In May 2003, Smart Load was launched. It was an over-the-air prepaid reloading service offered in units priced for as little as US$0.60 (versus the conventional US$2 to $10 prepaid card). Smart Load allowed millions of poor Filipinos to gain access to cellular phone services (as of December 2006, almost 50% of the Philippine population had wireless phones, and over 50% were Smart subscribers). In 2006, about 99% of Smart's subscribers used the company’s prepaid service. Smart’s distribution system for Smart Load (using short messaging system [SMS] technology) was a departure from the traditional system of producing cards to sell airtime. By cultivating small and micro-entrepreneurs to re-sell airtime, Smart spawned a distribution network of over 800,000 entrepreneurs nationwide (as of September 2006). These small-scale distributors generate a 15% commission directly from the company for airtime sales. Smart Pasa Load: Miniaturizing pre-paid airtime Capitalizing on the unique Filipino culture of sharing, the company further revolutionized access to airtime by launching a new product in December 2003, called Smart Pasa Load (pasa translates to “pass on”). With this service, one person could buy airtime and share it with friends and family in units as low as US$0.10. More important for the entrepreneurial poor was the opportunity to resell airtime to their friends through SMS. This spread the company’s distribution system to the household level. As cited in a New York Times article, this was a way of miniaturizing prepaid cellular packages. “This is telecommunications in sachets,” said Mr Isberto.1


Smart Money: Cutting edge e-solutions In December of 2000, in partnership with MasterCard, Smart launched the world’s first electronic cash card linked to a mobile phone - called Smart Money. It allowed users to transfer money from a bank account to a Smart Money account or from a Smart Money account to another Smart Money account. Once loaded with cash, the Smart Money subscriber could perform the following: ▪ Mobile Banking. Subscribers with enabled mobile banking accounts can enroll their mobile phone and Smart Money wallets. Once linked, they can do PIN-based (personal identification number) bank transactions such as fund transfer, balance inquiries and loading Smart Money cards. ▪ Wallet-to-wallet transfers. The subscriber could transfer funds from one e-wallet to another. ▪ Reloading of prepaid airtime. Subscribers could use Smart Money to reload pre-paid phone credits. ▪ Terminal purchases/Debit card. As an option, the subscriber could get a Smart Money MasterCard Electronic card and use it as debit card in MasterCard Electronic establishments in the Philippines and abroad. ▪ Automated Teller Machine (ATM) withdrawals. Subscribers can use the physical Smart Money MasterCard electronic card to withdraw cash from an ATM. ▪ Debit card. Smart Money MasterCard could be used as a debit card, acceptable in all establishments that accept MasterCard.

Profile of Overseas Filipino Workers Overseas Filipino Worker, or OFW, was coined in reference to a Filipino who lived and worked abroad. Diaspora of Filipino labor and large remittance flows have been prominent features of the Philippine economy for decades. Over the last 30 years, remittances have helped to stabilize the economy by strengthening the currency and keeping balance of payments even with the magnitude of its inflows. The data varies from one source to another, but it is safe to say that at least eight million Filipinos work and live abroad. This represents about one-tenth of the country's citizens, equivalent to almost one quarter of the domestic labor force.9 The Philippines is the second-largest migrant exporters, from the oil fields of Africa and the Middle East, to the cargo ships in the Atlantic and Pacific oceans or luxury ships in Europe, private homes in Singapore, Hong Kong and Canada, or the villas of Italy and Spain, all the way to the deep jungles of Kalimantan and the thick forest of Sumatra; Filipinos are there working, apart from their families, to provide a decent and comfortable future for their children (see Appendix E for the Top Ten OFW Destinations in the World). The Philippines was the third largest recipient of remittances, behind India and Mexico at a record high of US$10.7 billion in 2005. This was about 12.5 percent of the GDP, five times

9 Burgess, Robert and Haksar, V. 2005. Migration and Foreign Remittances in the Philippines – IMF Working Paper. IMF.


bigger than the country’s Foreign Direct Investment (US$2.1 billion).10 Banko Sentral ng Pilipinas (BSP or the Central Bank of the Philippines) reported that 2006 OFW remittances hit an all-time high of US$12.8 billion11 (breakdown for 2006 figures in Table 1 was based on the mid-year data from BSP).

Table 1: Five Year OFW Remittances by Region of Origin

(in thousands of US$)12

REGION 2002 2003 2004 2005 2006 (as of

August) ASIA 1,116,336 894,310 918,329 1,172,373 954,401 AMERICAS 3,537,768 4,370,705 5,023,803 6,605,231 4,652,894 OCEANIA 34,793 44,470 42,600 54,573 50,858 EUROPE 889,094 1,040,562 1,286,130 1,433,904 1,284,323 MIDDLE EAST 1,242,809 1,166,376 1,232,069 1,417,491 1,149,246 AFRICA 3,959 11,371 3,439 4,546 5,968 OTHERS 61,397 50,664 44,001 887 478

TOTAL 6,886,156 6,684,148 8,550,371 10,689,005 8,316,140

Source: Bangko Sentral ng Pilipinas (2006) The main reason for the exodus of Filipinos abroad is poverty. There is a lack of opportunity, evident by the high unemployment rate (8.9 percent13) and the poor economic situation in the country. As a result, many Filipinos seek employment abroad in the hope that they are able afford a good education for their children, which, for most Filipino parents, is seen as the best passport to a better future. Being extremely family-oriented, Filipinos face hardships by being away from their families, but do so to be able to remit earnings to their families that they left behind. The advent of mobile technology and the innovations of Smart have become an intrinsic part of the Filipino life in keeping families separated by geographic distances connected.

10 National Statistics Coordination Board (NCSB). Available at http://www.nscb.gov.ph/fiis/2006/3q-06/Default.asp 11 International Herald Tribune. Published: February 15, 2007.

Available at http://www.iht.com/articles/ap/2007/02/15/business/AS-FIN-Philippines-Remittances.php 12 Data is based on bank reports submitted to BSP as contained in FED Form 1 prior to April 1999 and FX Form 1 from May 1999 onwards. Beginning 2001, transactions reported by thrift banks, OBUs and FOREX companies are likewise included. The data is not truly reflective of the actual country of deployment of OFW due to the common practice of remittance centers in various cities abroad to course remittances through correspondent banks mostly located in the U.S. Since banks attribute the origin of funds to the most immediate source, the U.S. therefore appears to be the main source of OFW remittances. 13 Data from the National Statistics Coordination Board (NCSO). Available at http://www.nscb.gov.ph/secstat/d_labor.asp, accessed on January 5, 2007.


http://www.bsp.gov.ph/statistics/spei/tab11.htm

OFW include all socio-economic classes, but the majority are from households earning less than US$600 per month. A study conducted by ADB in 2004, showed that 44 percent of OFW were from low-income families (household monthly incomes of less than US$160) and 39% were from lower middle class families (household monthly incomes between US$160 and $600) (see Appendix F for Profile of OFW Socioeconomic Class). The low-income profile was also matched by a low education level. Data from National Statistics

Office from 2000 showed that only 30 percent of OFW had either attended or finished high schools, and only 20 percent completed elementary school. The distribution between males and females varied from year to year, but at least half were women. Most women work as domestic helpers, service providers, and entertainers, and most men work as seafarers, skilled and unskilled laborers.14

Women from poor provinces are recruited as domestic helpers. While waiting for their work documents, four to five women stay in a small room shown here (photo courtesy of Greg Fanslow)

THE NEED FOR BETTER MONEY TRANSFER SYSTEMS FOR OVERSEAS FILIPINO WORKERS For OFW, communication with families left behind in the Philippines and sending remittances was difficult. Thousands of OFW were disenfranchised by the remittance service system. The formal channels15 were often regarded as expensive and slow. As much as 45 percent of their hard-earned wages went to wire transfer fees and charges. A host of issues forced disenfranchised OFW to use unregulated channels with long delivery times and no banking access for the beneficiaries. In spite of the government’s rhetoric to give due recognition to the OFW as “the modern day heroes” of the country, the fact remained that hundreds of thousands, perhaps even millions of OFW, needed reliable, affordable, speedy and convenient remittance system. Marilyn Dabo, a professional midwife from Composela Valley in Mindanao, served as the guardian of her niece’s (a single parent) three year old daughter; her experiences were illustrative of the problems faced by many: “it took three months for the bank to clear the check, and when I was supposed to get the money, I was told that the check has to be sent back to Kuwait because of some problems. It was very frustrating.”

14 Ericta, Carmelita (2003). Profile of Filipino Overseas Workers. Available at http://www.ancsdaap.org/cencon2003/Papers/Philippines.pdf. 15 ADB refers formal channels to banks and informal channels are non-bank money transfer agencies, which are registered or regulated by authorities to engage in money transfers. Unregulated channels are those outside the regulatory environment -- usually made through unlicensed money transfer agencies, or occur when money or goods are sent through friends or brought home personally by the migrant.


Smart response to Overseas Filipino Workers needs

Smart Pinoy Center in Hong Kong

Recognizing the importance of OFW in the country’s economy and the unmet needs of that market, the company launched Smart Pinoy16 in 2004. It was the umbrella brand of the company’s programme designed solely to address the unique needs of the OFW. “Smart Pinoy is our way of recognizing the sacrifices made by our OFW in working abroad,” said Smart’s CEO. Under Smart Pinoy, Smart created various products and services to address the communication and remittance needs of the OFW including Smart Padala and 1528 Smart Service.

SMART PADALA Smart Padala17 was launched in 2004. It was the first international remittance service in the world using SMS technology.18 It was developed using the Smart Money mobile commerce platform technology (refer to Box 1 for background on Smart Money). Smart Padala allowed OFW to send cash via SMS to the Smart Money account of the beneficiary from Smart Padala Remittance Centers in over 20 countries (see Appendix G for list of International Smart Padala Partner Remittance Centers). The beneficiary exchanged the electronic money into cash from any Smart Padala Center. They could also go to any other sending and encashment centers, which Smart had partnered with, for increased customer convenience. By 2007, there were about 10,000 locations, including 7-11 convenience stores, Smart Wireless Centers, Banco de Oro (the company’s partner bank) and all Megalink and Express Net ATMs19. In rural provinces, beneficiaries did not have access to major banks. To overcome this challenge, Smart forged partnerships with local pawnshops, pharmacies, rural banks and gasoline stations: “Mabilis at Maaasahan” (meaning fast and reliable), the branding tagline of Smart Padala, guarantees fast, efficient and reliable service. Box 2 describes the remittance process.

16 Pinoy is a Tagalog term commonly used in the Philippines to refer to Filipino nationals. 17 Padala means “to send” in Tagalog. But over the years, padala popularly refers to remittance. 18 PLDT 2005 Annual Report 19 Smart is the only telecommunications company member of an ATM consortium.


Box 2: Remittance sending and receiving process For Sender

Step 1. The sender goes to any Smart Padala Remittance Partner to fill out an information sheet about the beneficiary.

Step 2. The remittance center transfers the remittance to the Smart Money number of the beneficiary. For a first time user, the beneficiary will be assigned a Smart Money number. For those with existing Smart Money cards, the sender simply indicates the beneficiary number when sending the remittance.

Step 3. After a few seconds, the Remittance Center confirms that the transaction has been completed.

For Beneficiary

Step 1. When the remittance transaction is completed, the beneficiary will receive another SMS confirming that the money has been received through the Smart Money number.

There are two ways to cash in remittances:

Step 2. The beneficiary (without a Smart Money card) can go to any of the 10,000 encashment centers nationwide and present the Smart Money number to exchange the electronic money for cash with a percent of the worth, in pesos, of the transaction value.

Step 3. For a beneficiary with a Smart Money MasterCard Electronic card (this comes with post-paid subscription package; or for pre-paid subscribers, the card can be purchased from any Smart Wireless Centers at US$4) he or she can use it as an ATM card to withdraw cash remittance in any Banco de Oro branches with charge fee of US$0.06 per withdrawal) or Megalink member ATM nationwide with a charge fee of US$0.21 per withdrawal.

Source: Smart Communications Smart Padala has made sending money back home much easier for OFW. It also lowered the cost of sending remittances; through this service, the company offered low-cost remittances for as low as 1.2 percent (US$12 charge for US$1,000) of the total amount received to as high as eight percent (US$8 charge for US$100). A comparison to other remittance services is provided later, in Table 2.

Smart Padala’s success encouraged the company to replicate the Smart Padala product for domestic use, following exactly the same mechanics in June 2005. See Appendix A for revenue growth of Smart Money.


1528 SMART SERVICE In August 2004, in partnership with Hong Kong CSL Ltd and PLDT (HK) Ltd/PLDT Global, Smart launched 1528 Smart (read as “fifteen-twenty-eight”), a pre-paid GSM wireless service designed for the OFW community in Hong Kong. 1528 Smart encompasses many of the existing Smart products, including those previously exclusive to Philippine residents such as Smart Money, e-load and Pasa Load. The unique value added by 1528 Smart, aside from the regular Smart Money capability, is that its Mobile Remittance Service allows the subscribers to send remittances directly from their 1528 Smart Money e-wallet to their beneficiaries in the Philippines. The sender simply loads up funds, in pesos, to their e-wallet at the remittance center. Once loaded, the sender can program his or her preferred fund transmittal frequency, for example, once a week. On the preset dates, the beneficiary will receive an SMS about the receipt of fund and can present his or her Smart Money number to any Smart Padala partner encashment centers and exchange it for cash. This product was designed to address the desire of female OFW in Hong Kong to have more control over their money. Eighty percent of roughly 140,000 OFW in Hong Kong are women (i.e. 112,000 potential customers). Stories abound that beneficiaries find it difficult to manage large sums of money. With 1528 services, women have more control over the timing and amount of money sent, so that the money can be spent according to their wishes. Like Smart Load, 1528 Smart has an e-load service feature that offers airtime in sachet-like packages in US$3.90 (valid for 30 days), $2.60 (valid for 15 days) and $1.30 (valid for seven days). 1528 Smart not only enables mothers to frequently communicate with their children and loved ones in the Philippines and manage the family budget virtually out of Hong Kong, but it also opens up business opportunities and additional income for OFW in Hong Kong by reselling airtime to other OFW. About 1,000 OFW resell Smart airtime in Hong Kong.

Impact on the Money-Transfer Industry ADB’s 2004 study, Enhancing the Efficiency of Overseas Filipino Workers Remittance, provided insightful recommendations to the government for improving conditions for remittances. It also encouraged the banking sector and non-traditional remittance channels (e.g. internet and mobile phone technology) to improve the remittance system by closing the gaps that prevented OFW from using the formal channels. Since 2004, actors in the regulated remittance channels have slowly addressed the key barriers to encourage OFW to use the formal channels. Smart Padala’s entry in the marketplace introduced new competition to the banking services industry, with cheaper, more efficient and more accessible money transfer services to OFW customers. After the launch of Smart Padala, telecommunications and banking institutions raced to compete by offering low-rate money transfer services. The company’s archrival, Globe Telecom planned to establish a similar system in the United States’ marketplace in 2007. However, no competitor has been able to compete with Smart Padala’s pricing.


Another advantage of Smart Padala, compared to other competitors, is that the beneficiary did not need a bank account. It was also faster, since it was real time, as opposed to the two-day turnaround time that most other service providers offered. The company has a competitive edge having been the first telecommunications company to explore the OFW market and, so far, building a good market base remitting at least US$50 million per month on average. Table 2 shows the comparative remittance costs using different remittance channels.

Table 2: Comparison of Money Transfer Mechanism

Remittance Channel Type of transfer Cost to

remit ($) Delivery Period

Bank Account Required Remitter/ Beneficiary

Credit to account–same bank $ to peso 6-8 Minutes to 48 hours No/Yes

Credit to account – different banks $ to peso

6-15 2-3 days No/Yes

Pick up at bank counters $ to peso 6-12 1-3 days No/No

Door-to-door cash $ to peso (City) Door-to-door cash $ to peso (Province)

10-14 12-14

1-3days 3-5 days

No/No

Philippine Banks

Prepaid, reloadable credit/debit cards 8

Credit to account–same bank $ to peso 7-12 Minutes to 24 hours No/Yes

Credit to account – different banks $ to peso

10-15 12 hours to 3 days Philippine Money

Transfer Offices

Door-to-door cash $ to peso (City) Door-to-door cash $ to peso (Province)

11-12 12-14

2-3 days 3-5 days

Int’l money transfer (e.g. Western Union)

Pick up at MTO agents $ to peso 14-400 minutes No/No

Host Country Banks Credit to account–same bank $ to peso 35-45 3-5 days Yes/Yes

Credit to account–different bank $ to peso 35-45 3-5 days Yes/Yes

Smart Padala* Text remittance through Smart Money 1-8 minutes No/No

Source: Asian Development Bank (2004) and Smart Communications


Development Impacts from Smart Padala OFW AND THEIR FAMILIES Over the past few decades, it became apparent that remittances contribute significantly to economic development in the Philippines. They are also central to poverty alleviation. By lowering the cost of money transfers, Smart Padala enabled OFW to increase their net income and, potentially, the net remittance. A US$10 savings may look small, but for an average domestic helper in Singapore or a construction worker in Angola, with six children left at home, every dollar counts.

Box 3: Some commentary from Smart’s OFW customers

“I worked in Saudi Arabia for over 20 years and our contract before allowed us to see our family only once a year. It was tough not being able to communicate with my family. But today, communication technology provides us the opportunity to be in touch with our families almost on a daily basis as it is very affordable to call or send message back home. Lower cost of communication makes a whole world of difference for the OFW community.” Says Hermie Punzalan, Assistant Plant Director of Equatorial Guinea Liquid Natural Gas Company, a Smart subscriber. Terri Alibarbar, an electrician from Quezon province working in Equatorial Guinea, West Africa, keeps in touch with his wife and four young children through text messaging. All he needs is to maintain a balance of airtime or “load” of US$2 to continuously use his international roaming service. Once he is close to the limit, he sends SMS to his wife or to one of his brothers to send him electronic load and allowing him to stay connected with them. “It can really get lonely sometimes, being in touch with my family through SMS gives me a lot of peace of mind,” says Terri. “It is very important for me to know how my family is doing especially when one of my children gets sick. It is also a way of giving emotional support to my wife as it is tough to be a single parent,” Terri added. “A mobile phone is a must for OFW.”

IMPACT ON THE ECONOMY The high propensity of Filipinos to use mobile phones and the wide reach of Smart subscription helped the government advance its agenda to popularize the use of formal money transfer channels. The entry of money transfer mechanisms, such as Smart Padala, provided convenience, affordability, security and timely service both to remitters and their beneficiaries and encouraged more OFW to use the formal channels. ADB20 pointed out that the formal remittance channel has several development, economic and security impacts. This was particularly important in relation to the macroeconomic landscape of the country. The use of unregulated money transfer channels undermined the integrity of the remittance system and made it vulnerable to money laundering, terrorist financing and capital flight. It also had 20 Asian Development Bank (2004)


indirect effects on exchange rates and monetary policy. Moreover, remittances through unregulated channels can cost a government and the private sector potential income, not to mention the human development value of the remittance. Finally, there was the difficulty, if not impossibility, of obtaining reliable estimates of the volumes of unregulated remittances, which distorted the balance of payment figures for a sending country and precluded the formulation of sound monetary policies.

Future Prospects for Smart MONEY TRANSFER SERVICES For Smart, the BOP will continue to be the company’s primary market, including the OFW with newfound disposable income. Focusing on the OFW as a unique market segment opened enormous opportunities to develop new solutions to serve these customers. The success of Smart Padala and Smart 1528 provided the company with a foundation upon which to pursue more innovations. One of the traditional problems faced by OFW is determining how to direct and control the money sent to beneficiaries in the Philippines. A classic complaint is that beneficiaries spend the remittance on consumables, instead of on intended uses, such as paying children’s school tuition fees. Once remittances start flowing, most of the OFW beneficiaries find it difficult to manage the income. This was particularly true when the OFW was the mother of the household. It was mostly female OFW that complained that they need to have more control over their remittances. To address this concern, the Smart President and CEO announced21 at the 2007 3GSM World Congress in Barcelona that the company will widen the coverage of its mobile-phone-based remittances service for OFW in 2007 in more countries in the Middle East and Europe. This global remittance service will be marketed by partner telecommunications companies and banks and powered by Smart’s existing Smart Padala platform.

For the purposes of branding with other telecommunication companies

abroad, the expansion will be dubbed the Smart Service Hub. This financial and telecommunications hub model is also based on an upgraded Smart Money Mobile Commerce platform. In effect, Smart will be a global financial service applications provider for telecommunications companies in other countries. “The Smart Service Hub is designed to help telecommunication companies and banks to work together to serve the remittance needs of migrant populations in their respective countries,” said Mr. Nazareno. As far as its marketing

21 Press Release: Smart Services Hub to help banks and telecommunications companies work together to serve migrant workers worldwide. February 13, 2007/ Barcelona, Spain. Smart Communications, Inc. Corporate Affairs Group.


strategy amongst OFW and their beneficiaries, all products and services that address the needs of OFW will continue to fall under the Smart Pinoy platform. These new partnerships, with global reach, will enable Smart to serve not only OFW, but to eventually serve other migrant workers from other nationalities, as well. Smart is also currently working on a pilot programme in the Philippines to use SMS technology for OFW to directly pay specific expenses, such as school tuition, insurance premiums, utility and hospital bills and mortgages. With an enhanced remittance system and technology, the company envisaged that OFW will be able to remit money during any time of the day, wherever they may be. There would no longer be any need to spend time and money traveling to and from the bank or remittance offices. Like Smart 1528, Smart hopes that future remittance services will give Filipinos, particularly women, greater control over how their monies are spent. Because the fees are lower and remittances can be done by phone, they now have the option of sending smaller amounts at the time the funds are needed very much like just-in-time delivery.

The 2006 launch of the domestic version of Smart Padala is also an opportunity to generate economic activity in rural areas to help alleviate socio-economic conditions through remittances from family members working in the urban centers. In early 2007, Smart also announced that it partnered with two more Philippine banks, Rizal Commercial Banking Corporation and Development Bank of the Philippines, for the development and expansion of Smart Money-powered cards and remittance services.

FORGING PARTNERSHIPS WITH LOCAL ENTREPRENEURS AND FINANCIAL INSTITUTIONS AS CASH REDEMPTION CENTERS Considering that majority of the OFW were from rural areas, Smart saw the need to partner with local enterprises such as local stores, pawnshops, local development and rural banks, non-governmental organizations and micro-finance institutions to play a pivotal role in the delivery of remittance and financial products and services to beneficiary families. The company hopes to replicate its success in working with women-owned micro and small enterprises as a distribution network to re-sell airtime as they multiply the number of cash


redemption centers nationwide. Smart foresees this as an opportunity to further spread the economic impact of Smart Padala to local enterprises and institutions.

Conclusion Smart’s innovative strategies to marry the social objective of providing better services at a lower cost to the poor with the business objective of increasing revenues and growing the company have been overwhelmingly successful. The introduction of products specifically for OFW has positively impacted the lives of Filipinos and the Philippine economy. The Smart Padala programme is an example of how a technology like the mobile phone can be used to reduce the cost of money transfer transactions of OFW, thereby enabling them to retain a greater proportion of their income. As Smart Padala gained momentum, it forced the banking community to improve and reduce the cost of their services. As a result, all OFW, not just those that use the Smart Padala service, benefit from this competition. As the service is further improved, we are likely to see continued innovation aimed at serving the OFW community. Among the innovations will be improved ways to enable OFW to direct and better manage how remittances will be used.


References Asian Development Bank. 2004. “Enhancing the Efficiency of Overseas Filipino Workers Remittance Manila, Philippines.” Available at www.adb.org/Documents/TARs/PHI/tar-phi-4185.pdf. Associated Press. 2007. “Philippine overseas workers sent home US$12.8 billion in 2006, up 20 percent from 2005.” 15 February 2007. International Herald Tribune. Available at www.iht.com/articles/ap/2007/02/15/business/AS-FIN-Philippines-Remittances.php Bangko Sentral ng Pilipinas. “Overseas Filipino Workers Remittance (2002-2006).” Available at www.bsp.gov.ph/statistics/spei/tab11.htm Burgess, Robert and Haksar, V. 2005. “Migration and Foreign Remittances in the Philippines – IMF Working Paper.” IMF. Ericta, Carmen. 2003. “Profile of Filipino Overseas Workers.” Available at www.ancsdaap.org/cencon2003/Papers/Philippines.pdf. National Statistics Coordination Board (NCSB). Available at www.nscb.gov.ph/fiis/2006/3q-06/Default.asp Opiniano, Jeremiah. 2006. “Using text message to send cash—new technology transfers money cheaply and easily.” 18 December 2006. The Mercury News. Available at http://mercurynews.com/mld/mercurynews.16270491.htm Philippine Overseas Employment Administration (POEA). Available at www.poea.gov.ph/docs/STOCK%20ESTIMATE%202004.xls Smart. Connect (Corporate Magazine). Vols. 1, 2, & 3. Available at www.smart.com.ph/smart/About+Us/ Corporate+Mag/ Smart. PLDT Annual Report 2004 and 2005 Smart. Smart Communications corporate website. Corporate Profile. Available at www.smart.com.ph Smith, Sharon. 2003. “What works: Smart Communications – Expanding Networks, Expanding Profits.” World Resources Institute. Available at www.digitaldividend.org/pdf_communications_case.pdf


http://www.adb.org/Documents/TARs/PHI/tar-phi-4185.pdf

http://www.iht.com/articles/ap/2007/02/15/business/AS-FIN-Philippines-Remittances.php

http://www.iht.com/articles/ap/2007/02/15/business/AS-FIN-Philippines-Remittances.php

http://www.bsp.gov.ph/statistics/spei/tab11.htm

http://www.ancsdaap.org/cencon2003/Papers/Philippines.pdf

http://www.nscb.gov.ph/fiis/2006/3q-06/Default.asp

http://mercurynews.com/mld/mercurynews.16270491.htm

http://www.poea.gov.ph/docs/STOCK%20ESTIMATE%202004.xls

http://www.smart.com.ph/smart/About+Us/%20Corporate+Mag/

http://www.smart.com.ph/

http://www.digitaldividend.org/pdf_communications_case.pdf

Social Weather Stations. 2004. “Household Amenities/Facilities Survey. Manila, Philippines.” The CIA World Factbook, Philippine Country Profile. Available at https://www.cia.gov/cia/publications/factbook/geos/rp.html#top Vera de, Roberto. 2006. “Tapping OFW Markets.” Urban Strategies Group, School of Economics, University of Asia and the Pacific. Available at http://ofnews.blogspot.com/2006/03/tapping-ofw-markets.html

Interviews Aldaba, Sally F., Senior Manager for Corporate Communications, Public Affairs Group, Smart, Makati, Philippines, 9 November 2006. Alibarbar, Terri, OFW working for Bechtel in Equatorial Guinea, West Africa, 22 November 2006. Dabo, Marilyn, OFW remittance beneficiary, Compostela Valley, Philippines, 20 November 2006. Flores, Darwin F., Senior Manager for Community Partnerships, Public Affairs Group, Smart Communications, Inc., Makati, Philippines, 9 November 2006. Isberto, Ramon, Public Affairs Group Head, PLDT and Smart, Makati, Philippines, November 2006.

Photo Acknowledgments Smart pictures, courtesy of Smart Public Affairs Group Greg Fanslow, “Woman by the window”. Available at http://www.flickr.com/photos/framefive/234894969


https://www.cia.gov/cia/publications/factbook/geos/rp.html#top

http://ofnews.blogspot.com/2006/03/tapping-ofw-markets.html

http://www.flickr.com/photos/framefive/234894969

Appendix A: Comparative Cellular Data Revenues Performance from Smart 2004-2005

Sources of Revenue 2004 2005 % Change

Text Message (or SMS) Related

570.62 643.48 13%

Value added services22

65.94 72.94 11%

Smart Money 1.22 2.04 67%

TOTAL 637.78 718.46

Source: Smart Communications

Notes: Text messaging related services accounted for the majority (about 90%) of Smart’s total revenue for 2004 and 2005. Smart Money covers revenues from Smart Padala transactions.

22 This includes sales from logo and ring tone download activities, info-on-demand such as news updates, entertainment news, etc.


Appendix B: Financial Statements for PLDT 2004 - 2006

2005- 2006 (Note 2006 up to 3Q only)

2004-2005

Note: In this report, wireless refers to Smart Communications, Inc.


Appendix C: Awards and Recognition

2005 • Most Outstanding M2M Implementation, Gold Prize Winner citation, M2M Value Chain Awards,

Chicago, Illinois, USA • Mobile Operator of the Year, Asian Mobile News Awards, Singapore

2004 • Best Mobile Application or Service for the Consumer Market, (Smart Load), GSM Association,

Cannes, France • Grand Anvil Award and Excellence Award (for PPCRV electoral campaign), Excellence Award (for

Smart Entrepreneurial Program) • Merit Award (for Smart Padala), 40th Anvil Awards, Manila • Finalist (for Smart Padala), Asian Innovation Awards 2004, Far Eastern Economic Review,

Singapore • Business of the Year, Innovator of the Year (for Smart Load), 1st Raul Locsin Award for Business

Excellence • Best Managed Company in the Philippines, (PLDT and Smart) Finance Asia • Asia Pacific Wireless Service Provider of the Year, Most Innovative Application of the Year (Smart

Load) Frost and Sullivan Asia Pacific Technology Awards 2004, Singapore

2003 • Winner (for the Smart Mobile Commerce Platform), 4th Annual Intelligent 20 Awards, Singapore • Philippines' Best Employer, Cited in an Asian-wide study conducted by The Asian Wall Street

Journal and Far Eastern Economic Review, Management Association of the Philippines and Business World; Hewitt Associates

• Top 10 Philippine Companies in terms of Corporate Leadership (Far Eastern Economic Review)

2002 • Top 10 Philippine Companies in terms of Corporate Leadership (Far Eastern Economic Review) • Second Best Employer in the Philippines (Far Eastern Economic Review)

2001 • Top 10 Philippine Companies in terms of Corporate Leadership (Far Eastern Economic Review) • Most Innovative Service (Smart Money), Asia-Pacific marketing awards; MasterCard International,

Sydney, Australia • Top 10 Best Employers in the Philippines, Hewitt /Dow Jones

2000 • Top 10 Philippine Companies in terms of Corporate Leadership (Far Eastern Economic Review) • Most Innovative GSM Wireless Service for Customers (Smart Money), GSM Association, Cannes,

France

1998 • Top 10 Philippine Companies in terms of Corporate Leadership (Far Eastern Economic Review)

1997 • Marketing Company of the Year, Philippine Marketing Association, 18th Agora Awards


Appendix D: List of Smart Products and Services

Products Description

Smart Gold The company’s original, most broad-based postpaid brand introduced in 1999

Smart Buddy

Introduced in 1999, shortly after Smart Gold, it is a popular prepaid wireless services brand of the company comprising 98% of the total subscribers.

Smart Link

Smart’s prepaid satellite telephony service. It utilizes the AceS satellite technology, which covers the entire Asia-Pacific region in three gateways in Indonesia, Thailand and the Philippines. This satellite system has a footprint covering 11 million square miles in the Asia-Pacific region with the capacity of providing telecommunication service for those without access to landline or without cell coverage in remote and isolated areas. This is a very important infrastructure for the company as it provides the platform to develop products to reach far-flung barangays in the country. Smart offers its satellite phone services in more than 10 countries in Asia.

Smart Talk Launched in October 2000, Smart Talk is a pre-paid pay phone service that can send SMS service to GSM mobile phones in addition to voice calls.

Talk N Text Pre-paid Piltel GSM cell phone subscriber service

Smart Infinity

Introduced in January 2004, is a premium postpaid plan that offers round-the-clock dedicated personal concierge service, international assistance service, premium handset packages and exclusive lifestyle content.

1528 Smart Launched in Hong Kong in August 2004, 1528 is a prepaid GSM mobile phone services designed and packaged to cater to the Filipino OFW in Hong Kong.

Smart 25/8 Unlimited Call and Text

Launched on March 11, 2005, a one month promotion which gives Smart and Talk N Text pre-paid subscribers the option to avail of unlimited on-network voice calls or unlimited on-network texts, is Smart’s test for the apparent market demand for fixed rate or “bucket” plans for voice and SMS services.

Smart Load A revolutionary over the air (OTA) prepaid reloading service offering airtime sachet-like packages. The service makes available four types of retail packages: Economy worth US$0.60, Regular worth US$1.20, Extra which sells for US$2.30 and a US$4.00 package

Pasa Load It is s a service that allows Smart Buddy and Talk ‘N Text subscribers to pass on to each other airtime with the following denomination: US$0.30, $0.20, $0.10 and $0.04.

Smart Padala

It is the first international cash remittance services through SMS. Smart Padala Domestic was launched in June 2006.

Smart 3G

On February 14, 2006, Smart 3G was made available to customers on a free trial basis. On May 1 2006 enhanced and enriched Smart 3G services were made commercially available to customers. More than local and international video calling, Smart 3G also offers content that includes real time video streaming of TV shows and downloads of movie trailers, music videos. Anime and vacation spots. Other content includes real time traffic videos in major thoroughfares in key cities.

Smart Click Internet Cage & More

On April 5, 2006, Smart launched Smart Click which serves as a neighborhood one-stop digital shop in places with limited or no provisions for high-speed Internet and other related computer and desktop publishing services. Smart will use a dedicated wireless broadband connection providing speeds of up to 1 MBps. Smart aims to make Internet services accessible in towns in provinces nationwide, even in so-called ‘uncharted territories’.

Smart Bro

On April 23, 2006, Smart Bro was unveiled, the new brand for Smart’s wireless broadband offering, marking a move from its earlier Smart WiFi brand. Parent firm the PLDT is also reselling Smart Bro. The launch of Smart Bro underscores the strategy of the PLDT group to provide its customers with the widest range of broadband connectivity solutions and establish its leadership in the broadband market in the country.

Other post paid products

Smart Amazing Phone Blackberry email service Smart Infinity: multiple cell phone lines in one handset Smart Kid: SMS service designed for children aged 5-12 years old to keep them in touch with family members anytime, anywhere.


Services Features

Text: post and prepaid includes

Basic SMS services and Value-added Services

Voice post and prepaid includes

Call blocking Call waiting, forwarding and holding

MMS International Multi-Media Messaging Services

Data post and pre paid service

Includes, WAP or wireless application protocol, GPRS general packet ratio services and mobile data fax (for post paid only)

Smart Money

Post and prepaid services in partnership with MasterCard. Transfers money from bank account to a Smart Money Card in order to: Use card in nationwide shops and restaurants Re-load airtime for Smart Buddy over the air Transfer from one Smart Money card to another Pay utility bills (for Smart Gold subscriber only) Use like an ATM card Get reward points with every transactions Use of the click and browse menu in Smart 64K super SIM

Mobile Banking

Online banking transaction including reloading of Smart Load over air Pay bills through cell phone: water, electricity, post paid subscription, insurance, credit card, etc. Re-load Smart Money 9 Banks including CitiBank, Banco de Oro, East West Bank and Equitable PCI Bank, and others.


Appendix E: Top 10 Countries of OFW Destination

Deployment

TOP TEN DESTINATIONS 2004 2005

1. Saudi Arabia 188,107 193,991

2. Hong Kong 87,254 94,553

3. United Arab Emirates 68,386 81,707

4. Taiwan 45,059 46,714

5. Japan 74,480 42,586

6. Kuwait 36,591 40,248

7. Qatar 21,360 31,418

8. Singapore 22,198 27,599

9. Italy 23,329 21,261

10. United Kingdom 18,347 16,799

TOTAL 585,111 596,876

Source: Philippine Overseas Employment Administration (POEA).

Available at http://www.poea.gov.ph/html/statistics.html


Appendix F: Profile of OFW Socioeconomic Class

Socioeconomic Class

Indicators AB C1 C2 D&E

% of OFW23 2 15 39 44

House or dwelling appearance, location of home

Durable materials, fine workmanship, well-maintained, has lawn and garage, expensive furnishings

Durable materials, maintained, may have lawn/garage, less expensive furnishings

Less durable materials, no lawn/ garage likely, not too well maintained

Materials not long lasting (i.e., nipa), furnishings meager. Relatively rundown, poor neighborhood

Education of respondent and spouse

College graduate or master’s

College graduate or master’s

High school or some high school, some college

Some high school, elementary or some elementary, or none

Household monthly income

$1,000 and up

$600 to $1,000 $160 to $600

$160 and below

House ownership Own house

Own house/renting

Renting, staying with relatives

Renting, staying with relatives, squatting

Ownership of items, i.e., house, vehicle, computers, cell phones, refrigerator, etc.

Several items owned in the Philippines and in country of work

Several items owned in the Philippines and some in country of work

Few items owned in Philippines, and very few or none in country of work

Very few in the Philippines, and very few or none in country of work

Number of household members

Relative to household income, position as household head, and ages of household members

Source: Asian Development Bank (2004)

23 Figures are percentages of OFW sample respondents in the ADB study.


Appendix G: International Padala Centers and Partners

COUNTRY REMITTANCE PARTNER

Australia Pera Padala PTY Ltd., Chartered Forex,

Austria Pinoy Express

Brunei GP Express, Pinoy Express

Belfast CBN Holdings

Dubai Ventaja International Corporation

Dublin CBN Holdings

Canada Global Peso Express, Maharlika Services Inc., Philippine Tropical Express, Quick as a Flash, Reliable Peso Remit, Philsend Inc., Philsend Inc.,

Greece CBN Holdings

Hawaii Remit Plus International Inc

Hong Kong 1528 Pinoy Center, Amazing Communications, Banco De Oro, Far East Remittance, Gen Ex, IREmit Global Remittance, Ideal Pinoy Shop, Pinoy Express, Rainbow, Travelex/Asia Fx, Carlson’s Remittance, PLDT Global

Ireland CBN

Japan CBN Holdings

London/UK CBN Holdings, Direct Money Tansfer, Far East Remittance, Twilight Express Ltd., Swift Cash Inc., IREmit Global Remittance, Philsend Inc.,

New Zealand Cybertalk Limited, Tres Marias Trading Ltd., TLC Remittance,

Palau Pinoy Express

Qatar Al Jazeera Exchange, Arabian Exchange, City Exchange, Future Exchange, Gulf Exchange Mian, Lari Exchange

Saipan Pinoy Express

Saudi Arabia Pinoy Express

Singapore GP Express, Pinoy Express, Travelex/Asia FX

Spain CBN Holdings

Taiwan Iremit Global Remittance

United Arab Emirates Al Ahalia Financial Brokerage (formerly Buset Investment Co.), Al Ansari, Sajmani, UAExchange

United States of America Dollar American Exchange (DAX), New York Bay Remittance (New York), Grammercy, Chartered Forex, Philsend Inc.,

Source: Smart website


http://www.smart.com.ph/products_services/smartpadala

September 2007 The information presented in this case study has been reviewed and signed-off by the company to ensure its accuracy. The views expressed in the case study are the ones of the author and do not necessarily reflect those of the UN, UNDP or their Member States. Copyright @ 2007 United Nations Development Programme All rights reserved. No part of this document may be reproduced, stored in a retrieval system or transmitted, in any form by any means, electronic, mechanical, photocopying or otherwise, without prior permission of UNDP. Design: Suazion, Inc. (N, USA) For more information on Growing Inclusive Markets: www.growinginclusivemarkets.org or [email protected] United Nations Development Programme Private Sector Division, Partnerships Bureau One United Nations Plaza, 23rd floor New York, NY 10017, USA


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