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26 June 2023

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How embedded finance elevates the customer experience

The global market continually evolves as customers look for ways to better integrate financial services into their daily lives. Consumers now prefer a holistic customer journey rather than siloed transactions. As such, banks and other financial institutions must identify opportunities in this developing ecosystem to stay competitive and drive long-term growth.On a micro-scale, individuals can locally use e-wallets and online banking apps to send and receive money, pay bills, and perform cashless transactions on their mobile phones. These integrated experiences have evolved past digital financial services, bringing us closer to the next economic revolution.NOVEL FINANCIAL EXPERIENCESNon-financial organizations have started recognizing the value of offering seamless financial services to meet the needs of “digital citizens.” These businesses are now capitalizing on customer data and analytics to boost brand loyalty, generate new growth, and refine the customer experience. In this new age of technology-driven finance, services are most effective when delivered conveniently and frictionlessly.Changing and developing customer expectations are driving this new era of integrated finance. E-commerce platforms, online marketplaces, and retailers are starting to embed financial products and services into their end-to-end customer journeys.Fundamentally, embedded finance involves a non-financial services company integrating financial products or services into its value chain to bolster its customer experience.According to an EY market survey, with respondents from 21 technology providers across the Americas, EMEIA, and APAC, 94% of global financial technology leaders said that addressing customers’ needs in real time is a significant feature of financial products. As such, there is a burgeoning interest for financial and non-financial institutions to collaborate and identify opportunities for mutual growth. Additionally, EY financial research predicts the valuation of global embedded finance to grow from $264 billion in 2021 to $606 billion in 2025.THE RISE OF EMBEDDED OFFERINGSBanking-as-a-service (BaaS) providers use modern application program interfaces (API) to provide regulated banking solutions to non-financial institutions. These platforms and related technologies make it easier for financial technologies (Fintechs) to work with brands. The advancement of cloud computing and the omnipresence of mobile devices enables considerable connectivity between brands and consumers.Moreover, other integrated value propositions are on the rise. For example, a local e-commerce platform allows buyers and merchants to transact within its mobile app through its e-wallet feature. This service eliminates the need for a separate, traditional bank account. Another example is what started as a ridesharing app, but which now has transitioned to payments, food delivery, e-wallets, and more. Furthermore, the EY market survey shows that over 70% of respondents think that non-financial institutions will offer more financial products and services in the future.For a non-financial services company, having customer transactional data can help the organization create bespoke offerings for its consumers. Online marketplaces, retailers, and software companies, among others, are expected to play a crucial role in the future of the finance sector. Hence, organizations must rethink their positioning, strategic vision, and value propositions to capitalize on this nascent market opportunity.THE VALUE OF PAYMENTSEmbedded finance is manifold, but payments are the most significant in terms of revenue. According to EY research, the value of embedded-channel payments will grow to $6.5 trillion by 2025 from $2.5 trillion in 2021. Non-financial businesses make use of payments as the first touchpoint of customer transactions. With various offerings like discounts, gifts, and pre-orders, payments can help an organization create new experiences and increase customer retention. Furthermore, brands can integrate other services like insurance into this transactional flow the further it evolves.Likewise, consumers worldwide have increasingly adopted the use of digital wallets. This development has revolutionized the payment process for customers and merchants. According to an EY report, The Rise of Paytech — seven forces shaping the future of payments, mobile commerce comprised 52% of e-commerce spending, surpassing that of desktop users. Mobile wallets also held a 49% share in worldwide e-commerce payments in 2021. Finally, according to Juniper Research, an analyst house specializing in digital technology market research, the number of digital wallet users globally may exceed 5.2 billion by 2026, up from 3.4 billion in 2022.THE ROLE OF FINANCIAL SERVICES PROVIDERSEmbedded finance is a disruption that forces traditional financial institutions like banks to embrace this development. It is crucial for banks to adapt, as non-financial institutions have shown that they can now occupy the traditional role of banks. Brands that integrate finance into their customers’ end-to-end journeys create a convenient and robust user experience, which can cement their place in the global market.Once organizations clearly grasp their capabilities, leaders can devise strategies to incorporate embedded finance in the following ways:1. Customer- or product-centered approach This is a traditional model where banks can extend their services to others while innovating their core offerings. This approach means financial institutions are agile and introduce new products that will retain their customer base as market conditions evolve.2. Enabler approachThis approach centers on banks extending their products and services via a platform business model. Additionally, they must set up a digital set of core offerings while embedding services into other third-party platforms. By doing so, banks must understand which products and services could synergize with third-party platforms. They also need to consider various partnership models based on their existing capabilities.3. Builder approachThis technology-heavy approach involves the creation of platforms that house internal and external products. This method relies on agility and functionality as the model continuously adapts according to third-party functionalities. The bank must consider what offerings they can build in-house and which ones they must outsource. 4. Owner orchestrator approachIn this scenario, the bank owns the platform and customer distribution channels while also delivering its products. As such, it must invest in the right technology to bolster customer interactions. This method requires a scalable operating model that continuously improve the functionalities. The bank needs to measure the platform’s success and identify ways to increase brand recognition and retain customers.The conundrum that banks face is that consumers are opting for embedded channels to tap financial services. Financial institutions must find ways to innovate their products and services, lest they fall behind. As the digital age progresses, banks and other institutions should seize the opportunity to differentiate themselves from their competitors. Ultimately, innovation will drive the advancement of financial services toward integrated customer experiences. The discrepancy between what brands offer and what consumers want creates an opportunity for organizations to develop a new strategic vision to drive long-term growth. Banks and other organizations can explore new options, reimagine offerings, and embrace non-traditional revenue channels as they pivot to a financially embedded world. 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.Janet A. Paraiso is an assurance partner and the FSO assurance leader of SGV & Co.

05 June 2023

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Rethinking value: The evolution of consumer spending (Third Part)

Third of three partsAfter learning to live with less during the height of the pandemic, many consumers have shifted to pursuing simpler, less consumerist values, according to the EY Future Consumer Index. The study surveyed over 21,000 consumers in 27 countries to determine how consumers see changes in their values and how they look at life. With consumers less willing to spend, businesses have the opportunity to rethink the concept of growth and how to evaluate it.In the previous parts of this article, we discussed the drivers that could reshape consumption patterns, the significant changes in those patterns that are predicted to occur over the next few years, the factors affecting drivers of growth, and their implications for consumer companies.In this last part, we discuss how redefining success will reshape business as we know it and how companies can further understand changing consumer expectations.HOW REDEFINING SUCCESS WILL RESHAPE BUSINESSConsumer companies will need to examine their strategies, business models, and operational structures for them to adapt to this shifting consumer climate and make sure they are relevant to the evolving definitions of value. While not all potential changes will occur suddenly, the current trends already show significant changes in how consumer companies will define and assess success.The Future Consumer Index identified the following drivers that can reshape the existing measures of success:Peer-to-peer models. Peer-to-peer activities are expanding quickly thanks to community platforms, online marketplaces, social selling, and agile payment systems. This makes it possible for customers to independently sell, buy, trade, exchange, and gift goods and services. While this is not a new concept, the sudden growth of backyard businesses during the pandemic, as we have seen in our Philippine market, has given rise to a new generation of microentrepreneurs.Pricing at ‘true cost’. The desire for “true prices” that take into account social, environmental, and health concerns is growing despite the fact that algorithms can already optimize prices in real time for commercial impact. Product pricing may become more individualized to user profiles as data quality and analytics capabilities continue to advance.Well-being as status. As consumers promote lifestyles that emphasize well-being instead of wealth, exercise, sports apparel, healthier meals, and wellness getaways serve as status symbols.Co-creation with consumers. Through social influencers and crowdsourcing, interactive media has given rise to a wave of user-generated content. According to the Digital 2023 Global Overview Report, a social media study produced in partnership with social media agencies Meltwater and We Are Social, Philippine social media users account for as much as 72.5% of the population. Less restrictive intellectual property laws, 3D printing, and open-source tools may also potentially make it easier for customers to collaborate with brands to co-design, manufacture, market, and share the value of goods and services.Enhanced leadership through AI. The delivery of optimized insights that support operational and strategic direction will come more frequently via AI and automation. When business leaders outsource certain judgments and make more decisions based on facts and data, this could ultimately redefine functional positions within boardrooms.UNDERSTANDING CHANGING CONSUMER EXPECTATIONSCompanies will need to adapt to a world where growth and wealth are no longer the exclusive measures for development and success. Businesses will have the ability to control what lies ahead for them by recognizing what factors can potentially influence consumer expectations and behavior through the following points of action:Developing fresh value pools. While some existing value pools will provide revenue, others will make additional contributions that will help to create a more comprehensive understanding of how “good” is defined. Having strong financial balance sheets alone will not help a business succeed in the market, especially if they come at the expense of other factors, such as environmental, social, and governance (ESG) considerations. A company’s success cannot be determined solely by how many or how much of a product it can sell, but also by the services it can provide, the impact it can make, and the values or communities it can support.Innovating ways to meet consumer needs. Through scaling AI, releasing new manufacturing techniques, and unlocking efficient operating constructs, technology will allow consumer companies to deliver personalization at a lower cost and with less resource use. By enabling customers to participate in value creation through peer-to-peer selling and brand collaboration, service-based models that span several categories and industries will become more prevalent in order to meet consumer expectations. A new corporate mission that satisfies expectations for wellbeing by evaluating the true costs and benefits beyond those measured in financial currency will be foundational for this development.Reviewing impact and contribution. Retailers can offer more value in terms of the insights and data they share back to brands, their contributions to employee wellbeing, and their position in the community on top of the revenue generated by their stores. The success of consumer goods companies may also depend just as much on their capacity to address systemic environmental problems or enhance consumer health as it does on their capacity to persuade customers to buy their goods.REDEFINING SUCCESS TO BUILD LONG-TERM VALUEOf all the factors discussed, long-term value remains the most important. As social and environmental key performance indicators join financial metrics as drivers of long-term value, intangible assets are likewise becoming more significant in driving value. New definitions of success will challenge the prioritization of growth as stakeholder knowledge and influence expands through increased connectivity and transparency.Growth and profitability are currently viewed as indicators of how well consumer companies are able to meet the demands of the market. However, given rapidly and dramatically changing consumer behavior and priorities, companies will need to reimagine new strategies to build long-term value and sustainably deliver the products and experiences that consumers, both today and in the near future, truly want. 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.

29 May 2023

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Rethinking value: The evolution of consumer spending (Second Part)

Second of three partsPeople are buying less and/or buying better in various ways, a trend that is creating new consumption patterns. While consumption is still crucial for economic growth, companies will need to adapt as customers increasingly prefer experiences and digital goods over tangible items. To remain competitive, companies will need to know what is causing those changes, how they will affect their goods and services, and what future success will look like as redefined by evolving consumer needs.With consumer spending such a large source of economic growth, the consumer is truly king. While it has become widely accepted that consumption drives growth, two years of lockdowns have left a lasting impression on consumer preferences. According to the EY Future Consumer Index, which surveys over 21,000 consumers in 27 countries, many consumers have developed simpler, less consumerist values as a result of learning to live with less during the height of the pandemic. Whether by preference or circumstance, we’ve seen the Filipino consumer become more selective in where and how they spend their money. With consumers demonstrating a decreasing appetite for spending, businesses are faced with the opportunity to redefine the concept of growth and how to measure it.In the first part of this article, we discussed the drivers that could reshape consumption patterns and the significant changes in said patterns that are predicted to occur over the next few years. In this second part, we discuss the factors affecting drivers of growth and their implications for consumer companies.DRIVERS AFFECTING PERCEPTIONS OF GROWTHTraditionally, businesses are evaluated by how much they can increase their revenue and profit margins, while entire economies are measured by how much they can grow their GDP. This makes changes in consumer values and spending habits crucial to their success. The measurements used to gauge development and growth will inevitably change as the foundations of consumption change as well.Growth defines progress; strong GDP growth or increases in revenue both indicate that things are moving in the right direction, and when they are declining, they raise red flags. However, the importance of growth is being questioned, with increasing pressure to switch national development indicators from financial measurements to a “well-being economy,” which measures success by the well-being of the environment as well as consumers.Wealth and well-being have long been correlated with each another, and focusing on well-being instead of assuming that wealth itself delivers well-being creates a significant change in how economies develop. This is being increasingly reflected in the development of business strategies. Environmental, social, and governance (ESG) concerns are further influencing investment choices, and ESG goals are being reported more often alongside financial ones.The EY Future Consumer Index identified the following drivers that could reshape existing perceptions of growth and progress.Alternative business models. As resources become scarcer, investments are being driven to find alternatives. This will open up new opportunities, reducing related costs and delivering a new wave of goods and services as a result of rising technologies, data proliferation, alternate food sources, and renewable energy.Immersive virtual economies. As consumers spend more time and money online, alternative digital economies are emerging and becoming larger, more numerous, and more complex. This will open up new opportunities for the creation of value-utilizing digital assets or currencies that are transferable between the real world and the virtual one.Well-being economy. Alternative metrics that produce better social and environmental results are beginning to replace the emphasis on using financial growth and wealth to measure progress and development. There is also the previously mentioned increasing pressure to replace metrics like GDP with ones that instead focus on enhancing the well-being of the environment and the general populace.Social evaluation. Algorithms that monitor factors such as social conduct, consumer spending patterns, media consumption, and credit history can produce holistic and comprehensive ratings that reflect the social value of individuals and organizations. As these scores become more widely used, they may be used to determine who has access to financial, travel, and healthcare privileges.Converging public and private services. The gap between businesses and governments is narrowing as corporations use resources and infrastructure for functions previously performed by the public sector, such as taking back and recycling waste, providing healthcare or education, or using social media for emergency communications. Local fashion corporations in particular have employed ongoing recycling initiatives, incentivizing their customers to adopt more circular lifestyles.IMPLICATIONS FOR CONSUMER COMPANIESThe previously discussed factors show that simply measuring financial growth may not be sufficient anymore when it comes to measuring overall progress. For example, value creation will shift away from physical economies and toward virtual economies due to the scarcity of certain resources and the growing availability of others. Non-financial goals will take precedence over hard currency, pushing back the impact on time, people, and the environment.The well-being of our planet and its inhabitants will be combined with financial security and economic growth on national agendas. The demographic dividend that has sustained economic advancement for centuries will be undermined by declining population growth, while technology may result in shorter workweeks and the need for new welfare programs.In the last part of this article, we discuss how redefining success will reshape business as we know it and how companies can further understand changing consumer expectations. 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.

22 May 2023

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Rethinking value: The evolution of consumer spending (First Part)

First of three partsConsumer spending serves as the cornerstone of the world economy and society, and both businesses and governments depend on it. It currently accounts for more than half (60%) of the world’s GDP, according to the Global Economy, an online database that compiles over 500 indicators for more than 200 countries since 1960. In the Philippines, private consumption accounted for 75.4% of nominal GDP in December 2022.When consumers spend, the economy grows; when they do not, the economy shrinks — showing us how the consumer is truly king. Even during a recession, consumers always manage to find a way to spend their way back to growth, with methods employed for recovery nearly always centering on getting consumers to spend more money by lowering debt payments and raising wages.Two years of lockdowns in particular have left a lasting impression on consumer preferences. As much as 54% of consumers have noticed changes in their values and outlook on life, according to the EY Future Consumer Index, which surveys over 21,000 consumers in 27 countries. Many consumers have developed simpler, less consumerist values as a result of learning to live with less. An increasing number of reselling, renting, and repair services made possible by technological platforms and new business models also enable consumers to restrict their consumption without affecting their lives.The pursuit of economic growth is also receiving more criticism, with questions raised about the potential social and environmental consequences of economic expansion. Consumption is under pressure due to current macroeconomic instability, rising interest rates and continuously higher than average inflation rates. This in turn is reducing the appetite for consumers to spend their way out of a crisis, possibly redefining the concept of growth and how to measure it.CHANGING CONSUMER BEHAVIORFor many years, encouraging people to consume more has been the source of growth. The introduction of new products, seasonal fashion, bigger portions, and an abundance of options have previously increased consumer spending. However, with increasing signs of consumption fatigue, brands must reevaluate their value proposition to motivate consumers to consume better instead of consuming more.At the same time, consumption is not going anywhere; people still need to eat and drink, although they may purchase food and drink in various ways. Clothing and other necessities will still be in demand, though perhaps in less quantity. Even though consumer aspirations may be less centered on tangible objects, they will still have goals that depend on products and services.The Future Consumer Index identified five drivers that could reshape consumption patterns:Household evolution. With the increasing number of single-person and single-parent homes, household sizes are decreasing. According to a study funded by the World Health Organization and conducted by the Department of Health (DoH) and the University of the Philippines-National Institutes of Health, the number of solo parents in the Philippines is currently estimated at 14 million to 15 million. Longer life expectancies, alling fertility rates, and children staying at home longer also contribute to evolving household compositions, creating new consumption patterns in the types and volumes of products purchased.Experiences over products. Spending on material things will reach a saturation point as consumption rises, lowering the value of tangible commodities. Instead, consumers will start to spend their discretionary income on activities that enrich their lifestyles through experiences.Extended product lifecycles. Companies and customers are under increasing pressure to improve and repair items instead of replacing them. The frequency of new product introductions will decline as the concept of “planned obsolescence” gives way to the “right to repair,” and repair or enhancement services will create new revenue streams.Digital goods and services. With more time spent online, consumers find less need to own or use physical goods and services. While many essential needs will continue to be met physically, the growth of digital goods and services is expanding consumer spending and opening up new possibilities for innovation and value creation.Impact transparency. Consumer awareness of the broader effects of the goods and services they use — on both people and the planet — will only continue to increase. More readily available product information will affect the decisions they make.THE FUTURE OF CONSUMPTION PATTERNSSignificant changes in consumption patterns are predicted to occur over the next few years, according to learnings from the EY Future Consumer Index.Consumption of physical goods as a percentage of total consumption will drop. Less tangible consumables are seeing an increase in consumer preference. In particular, the total amount of physical products will decline as a result of consumers choosing experiences, digital products, and longer product life cycles.Asset-light lifestyles will change basket and product sizes. In a future world when being frugal is commended, less will be more. Everything will be available for rent or subscription, and fluctuating household sizes will determine how much people buy. Bulk purchasing will decline as the number of one-person homes rises, while the practice of purchasing better quality items instead of more and renting the remainder will increase as consumers reevaluate whether they really need certain products.Simplicity and transparency will enable consumer choices. Consumers will be able to cut through complexity with the help of artificial intelligence (AI), enabling purchase decisions to be defined by seamless convenience as much as price. However, consumers will also make decisions that consider the impact of those decisions on their values. They might not give as much thought to daily essentials as long as the items meet expectations in terms of price and use, but consumers will prefer to invest their time and money in the goods and services they genuinely value.In the second part of this article, we discuss the factors affecting drivers of growth and their implications for consumer companies. 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.

01 April 2023

Bernalette L. Ramos and Charisse Rossielin Y. Cruz

Providing value for the tech-reliant consumer (First Part)

First of two partsThe emergence of disruptive technologies along with ongoing global crises are impacting the consumer product and retail (CPR) sector, and the consumer value proposition working today may not be successful tomorrow. With this in mind, regional and local business strategy, Climate Change and Sustainability Services, and CPR leaders from SGV and EY-Parthenon, along with distinguished industry leaders shared the latest insights on the CPR sector in a seminar on June 20, “Getting ahead of the changing consumer and disruption.”Additional EY research has also found that consumers are attempting to maintain their resiliency in the face of ongoing economic concerns and cost-of-living pressures. This has led to them adopting new technologies more frequently, making changes in the way they purchase, live, and work with the goal of making daily life more affordable.The most recent EY Future Consumer Index, which surveyed over 21,000 consumers in 27 countries, examines how consumers worldwide perceive the personal advantages of technology. Insights from the Index also show that the way people consume as well as what they consume is influenced by their experiences using digital tools. This provides opportunities for brands that comprehend and influence these shifting attitudes and foresee the potentially transformative changes these may bring. However, this goes beyond simply choosing appropriate technologies, overseeing their implementation, and developing the infrastructure necessary to support them.Digital innovation must safeguard and promote the relationship with the customer. Trust, respect, and value in particular are the key factors. Companies must show they can be trusted to use technology securely and responsibly and utilize technology to benefit their consumers. Any innovation a company implements must provide fair value to its consumers. Being unable to strike the right balance between the three factors can result in hard-to-fix damage. However, striking that balance successfully can strengthen relationships with customers and gain their consent to expand and deepen that relationship when new technologies become more widely used.TECHNOLOGY-RELIANT, VALUE-DRIVEN CONSUMERSThe rate of digital innovation and adoption has become so rapid that users can easily become reliant on new tools without realizing how integrated they’ve become in daily life. Consumers are relying on digital technologies more and more to simplify their lives, save time and money, work from home, or lessen their environmental impact. According to Think With Google: Year in Search 2022, a report that shares insights and trends based on billions of Google searches, Filipino consumers are turning to digital services such as electronic payments to simplify offline in-store purchases, as well as online doctor consultations to save time.Consumers use digital for a variety of purposes, including managing their finances, selecting what shows or music to enjoy, keeping in touch with friends, keeping track of their health, and many others. For instance, 42% of consumers use a smart device to measure their health and physical activity, and 33% of consumers use facial recognition on their mobile phones.This disruption from technology presents business opportunities across real and digital worlds, such as providing a seamless consumer shopping experience through an omnichannel, orchestrating a digital ecosystem to best serve consumers along the consumer life journey, and designing a new meta-retail experience through the metaverse. Olivier Gergele, APAC Consumer Products & Retail Leader – EY Parthenon, said at the CPR seminar, “Though the metaverse isn’t ready, it will change the way we do business. It will be especially important to know its implications for us as retailers in the industry.”People are also placing more importance on issues that directly affect them as individuals than those that feel like collective challenges, such as their concern for the environment. Many are trying to cut back on their expenditure, though how they handle their finances depends on where they reside. Consumers around the world are focusing even more on value, with 64% of consumers believing private-label products to be just as good as branded ones and 73% reporting shrinking pack sizes but unchanging prices.The Index indicates that consumers have drastically boosted their use of both established and developing technologies at work and at home during a time when consumers are more concerned about a wide range of economic and personal problems. There is a significant pivot toward two concerns in particular: finances and health.When using new technology to engage consumers, retailers and consumer product businesses should keep these financial and health concerns in mind. Digital innovation can play a significant role in enhancing organizational performance by maintaining competitive prices, identifying efficiencies, and enhancing marketing. Trendipedia 2023, a consumer behavior study conducted by Tetra Pak, identifies two new trends in the Philippines, Malaysia, Singapore, and Indonesia: “flexi-shopping” and “eatertainment.” In flexi-shopping, consumers adopt a flexible mindset and reduce spending when needed but indulge in additional benefits they deem valuable, such as those related to health. The eatertainment trend shows that consumers, particularly Gen-Zs, look to be entertained with new flavors and trends in the online space, which brands should explore to reach them.However, it is important to weigh the need to address any ongoing business challenges against a longer-term strategy that already considers the benefits brought about by ongoing technological change. Companies also need to be careful not to take any actions that will prevent them from participating in long-term progress for the sake of short-term advantages. Brands that let their customers down run the danger of losing future digital relationships with them, and consumers will be more likely to reject digital innovations that don’t provide them with what they want. To understand how consumers feel about the digital advances that are permeating every area of their life today, it is crucial to pay attention to how consumers perceive these advances.NEW TECHNOLOGIES RAISE TRUST ISSUESCustomers and new technologies often have contradictory connections — consumers can become very dependent on a tool while also expressing concern about the risks it poses to their psychological and financial well-being. For instance, people take for granted that their mobile devices are always connected, but at the same time, they want to disable notifications and reminders because they can find continuous connectivity to be too much.Familiarity by itself cannot establish trust. For example, the use of AI (artificial intelligence) is becoming increasingly popular in areas such as customer care and an increasingly common part of brand engagement for many consumers. Moreover, disruptive business models leverage AI capabilities for robust decision-making. For example, the CPR presentation at the SGV CPR event revealed that Amazon heavily relies on consumer data it obtains from its platform for marketing and personalization costs. These costs aim to attract a higher wallet share from consumers and increased consumer engagement. However, many consumers are apprehensive about how AI may be used, with 24% of respondents fearing it may fully replace their jobs.Though the availability and accessibility of digital innovation continue to grow, the same cannot be said for trust in technology and its usage of personal data. Each annual release of the Index has seen no significant change in the willingness of consumers to share data with companies or brands. Consumers remain wary over how much data they provide — as much as 55% say they are very concerned about identity theft and fraud, 53% are very concerned about data security/breaches, and 53% are very concerned about companies selling their personal information to a third party. This shows how much consumers want to weigh the benefits of sharing data against the risks and the value they receive in exchange.According to Ashish Midha, Managing Director and CEO of ZALORA Philippines and Indonesia, speaking at the CPR seminar, “What’s important is to show people what’s relevant to them. It is a very fine line to balance between personalization and privacy, and it should be value-adding to the customer. One can very easily do the wrong thing, so it’s better to err on the side of conservatism.”In the second part of this article, we will discuss how technological innovations must prioritize providing tangible benefits to the consumer, how technology will redefine the consumer of tomorrow, and how companies must build trust with, earn the respect of, and provide value that consumers will appreciate. 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.

13 February 2023

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Understanding the implications of the EPR Law (Second Part)

Second of two partsThe circular economy concept has been given more and more attention through the years and has now materialized in the Philippines through the Extended Producer Responsibility (EPR) Act of 2022 and its Implementing Rules and Regulations (IRR). In fact, the Philippines is one of the few countries around the globe with active regulations or national programs on the circular economy, counting itself among Scotland, Canada, South Africa, China, Japan, Singapore, and the European Union.Because of the huge potential of the Act to accelerate the transition of the Philippines to a more circular economy, all companies, not just obliged enterprises, can play a critical role in this ambition.In the first part of this article, we discussed six recovery programs, six reduction strategies and additional steps that obliged enterprises can undertake as part of their EPR programs. In this second part, we discuss EPR registration, EPR implementation, and keeping confidence through third-party assurance.FROM EPR REGISTRATION TO EPR IMPLEMENTATIONThe EPR registration with the National Ecology Center due on Feb. 13 is just the prelude to a long-term transformation process for plastic waste management. Mobilizing large enterprises in an action-oriented approach would lead to greater positive impact, which can also influence the micro, small and medium enterprises (MSMEs). MSMEs may voluntarily comply with the law by introducing small-scale EPR programs, but the real challenge lies in implementation.Since both reduction and recovery methods are required to fully comply with the law, investment in technology, innovation, facilities and product development are needed. Partnerships with local governments and the informal waste sector are also highly encouraged to ensure the engagement of key stakeholders in EPR programs. Because the EPR requirements set forth in the law may be demanding for some, authorizing a Producer Responsibility Organization (PRO) can serve as a viable additional platform for EPR program implementation.Obliged enterprises are required to have a system in place to account for their plastic footprint and engage an independent third-party auditor to certify the veracity of their reported plastic footprint, recovery and EPR program compliance using uniform standards established under the law. In this case, it would be advantageous to set up an internal auditing system as early as now to avoid delays and setbacks in the future. This will also allow obliged enterprises to thoroughly review the strategies and schemes that best suit their company.KEEPING CONFIDENCE THROUGH THIRD-PARTY ASSURANCEThe initial waste footprint to be submitted in time for the EPR registration can be self-declared by the obliged enterprises. However, after the first-year implementation of their EPR programs, obliged enterprises would need to report their compliance and recovery targets achievement, assured by third-party audit.While the submission of an EPR Law Compliance Audit Report (ECAR) is required for the government to monitor and evaluate the compliance of the obliged enterprises with their respective EPR programs, having third-party assurance provides transparency and confidence to businesses and their stakeholders that their efforts are contributing to a greater purpose.The first ECAR submission is still in July 2024 covering the EPR programs implemented in 2023, and the following should be covered in the report:• Footprint declaration for the volume of the obliged enterprise’s plastic packaging brought into the market during the period covered;• Recovery or plastic packaging waste diversion based on third-party audited diversion or credits;• Determination of the equivalent plastic packaging waste footprint reduction resulting from other EPR programs;• Confirmation of confidential information declared by the obliged enterprise.ADVANCING CIRCULARITY IN BUSINESSESEmbedding circular economy strategies in a company’s overall strategy and shifting to a circular model from a linear model can benefit the entire company and positively impact its operations, growth, and legal compliance. A circular economy is a type of economic structure that aims to reduce waste and unending resource usage. It represents a fundamental change in how stakeholders manage the use of goods and resources at their core. The goal is to maintain resources and their value in the loop rather than the present take-make-waste cycle, and to reimagine future business models suitable to creating a more sustainable society.In advancing circularity, companies can reassess their product designs and material options, and target to reduce waste generation in their whole operations cycle. Businesses that utilize durable, renewable, and recyclable materials can lessen its reliance on scarce and expensive resources as well as reduce their susceptibility to supply chain disruptions. Companies can also employ more sustainable procurement.Essentially, deciding to go with the more sustainable choice in applicable aspects of operations can make a huge impact and take the company a step closer to circularity. Additionally, shifting to a circular economy creates new jobs and revenue sources within the process of looping materials back into the system, including sorting, collecting, refurbishing, and remanufacturing, which is uncommon in the linear economy and opens businesses to new ways to drive growth.BEYOND COMPLIANCE: TAKING STEPS TOWARDS A CIRCULAR ECONOMYTaking into consideration the target timeline in the EPR, companies should now be ready for their plans and strategies on the implementation of their EPR programs for 2023. The first submission of the ECAR will cover the 2023 EPR programs. Obliged enterprises or PROs are required to establish and implement accounting, data recording, and auditing systems for their respective EPR Programs.The implementation of effective EPR programs goes beyond compliance — it also benefits companies through cost and tax reduction, energy savings, and favorable investor and consumer perception of their brands.The EPR Act of 2022 is an opportunity for businesses to contribute to tackling the growing volume of plastic waste in the country, preventing the loss of valuable resources and reducing environmental degradation. Since the IRR has been published, businesses must now step up and act to monitor and evaluate their plastic waste generation. By beginning to build partnerships and strategies for EPR program implementation, they can take a significant step towards a circular economy. 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.Benjamin N. Villacorte is a partner and Erica Nicole D. Gomez is a senior associate from the Climate Change and Sustainability Services team of SGV & Co.

06 February 2023

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Understanding the implications of the EPR Law (First Part)

First of two partsWith the signing of Republic Act No. 11898, also known as the Extended Producer Responsibility (EPR) Act of 2022, obliged enterprises are now engaged in establishing their own EPR programs to meet the deadline for EPR registration on Feb. 13.The Philippines is considered one of the top plastic polluters globally. A 2019 study by the Global Alliance for Incinerator Alternatives shared that Filipinos use a material amount of plastic packaging. Moreover, the National Solid Waste Management Status Report revealed that recyclables make up almost 30% of waste in the Philippines, comprising mostly of plastics and paper. Meanwhile, a WWF Philippines’ study showed that only around 9% of post-industrial and post-consumer plastics are recycled. This is relatively low compared to other countries, but with the Act now being implemented, there is this greater anticipation that the country will see a significant increase in its overall recycling rate. Although the Act only covers plastic packaging in the early years of its implementation, the coverage will be gradually expanded to encompass other materials as well. The Implementing Rules and Regulations (IRR) for the law were issued in January. The IRR provides detailed implementation requirements for the obliged enterprises, waste diverters and verification bodies, among others. Having established the need to implement an EPR program, obliged enterprises should explore what steps to take moving forward to comply.In the first part of this article, we discuss six recovery programs, six reduction strategies and additional steps that obliged enterprises can do as part of their EPR programs.EPR MECHANISMS: WHAT OBLIGED ENTERPRISES SHOULD PREPARE FORAs the country moves towards a more circular economy, obliged enterprises have been given the responsibility of managing their products throughout their lifecycles, starting with plastic packaging covered in the Act, with potential expansion of coverage in the future. By the February EPR registration deadline, obliged enterprises are required to submit their EPR programs with both recovery methods to effectively prevent the leakage of waste into the environment, and strategies to reduce non-environmentally preferable packaging products. The law specifies the recovery targets that obliged enterprises need to meet, beginning with a 20% recovery rate by the end of 2023 until 80% by the end of 2028 and every year thereafter. To do this, the IRR presents six recovery programs that obliged enterprises can do as part of their EPR programs:1. Waste recovery schemes through redemption, buy-back and offsetting with the goal of achieving high retrievability, high recyclability and resource recovery of packaging waste;2. Diversion of recovered waste with the intention of diverting packaging waste into value chains or other value-adding useful products;3. Transportation of recovered waste to proper diversion or disposal sites, ensuring proper tracking for traceability and transparency;4. Involvement in waste clean-up in coastal and public areas, with close coordination with local government and communities;5. Investment in establishing commercial or industrial waste diversion or disposal facilities, backed by a business case or pre-feasibility study to justify the insufficiency of existing facilities in the country; and6. Partnerships with local governments, communities and informal waste sectors for waste recovery-related purposes, ensuring the adequate and proper involvement of key stakeholders in the EPR program implementation.On top of the recovery methods, the Act also requires obliged enterprises to adopt measures to reduce non-environmentally preferable packaging products. While the law does not specify reduction targets unlike for recovery, it still provides six reduction strategies:1. Replacing single-use packaging with reusable ones aimed at improving the packaging’s reusability, recyclability and retrievability;2. Including recycled content or recycled materials in packaging, considering the amount of material effectively recycled and the efficiency of the recycling process including energy used;3. Deploying refilling systems for retailers, basing on the amount of single-use containers avoided as a result of the availability of refilling system;4. Establishing a viable reduction rates plan focused on upstream reduction of used material during the manufacturing of packaging;5. Preparing an information and education campaign during the first year and updating annually; and6. Ensuring appropriate labeling of packaging to facilitate recovery, reuse, recycling and proper disposal, following relevant standards and eco-label processes.TAKING ONE STEP AT A TIMESince the EPR programs are relatively new to most businesses, obliged enterprises may opt to implement their own EPR programs or decide to work with others, i.e., other obliged enterprises or Producer Responsibility Organizations (PROs). A PRO refers to an organization that is either formed or authorized by obliged enterprises with the function of supporting them in the formulation, registration, implementation and audit of their EPR programs.To advance the compliance of obliged enterprises with the provisions of the law, the IRR defines certain incentives. These include tax incentives, consideration of EPR expenses as necessary expenses deductive from gross income, and tax and duty exemptions of donations, legacies, and gifts. However, the law also penalizes non-compliance with fines ranging from P5 to P20 million, with an automatic suspension of a business permit for the third offense.Registering EPR programs with the National Ecology Center (NEC), which works under the oversight function of the National Solid Waste Management Commission, by February is the first official deadline under the law. The NEC is responsible for maintaining an EPR Registry containing all registered EPR programs, and will provide technical expertise, information, training and networking services for the implementation of the law. Registration is imperative for obliged enterprises and failure to do so is the first possible offense.With only a few days left before the deadline, obliged enterprises should also consider that the timely submission of their EPR programs would demonstrate their ability to really implement and operationalize these programs in the long-term. Considering that programs are expected to scale-up and be reported regularly moving forward, obliged enterprises must begin to, if they have not yet, incorporate their EPR programs and targets into their corporate strategies and annual plans.MOVING TOWARDS CIRCULARITYA shift in mindset and action is necessary in accomplishing a more sustainable way of doing business. Companies should start thinking of long-term strategies for implementing their EPR programs in order to reach the target recovery rate of 80% by 2028 onwards. More than compliance and incentives from this Act, the implementation of these EPR programs will also reflect upon the values of the company, as well as its shareholders and stakeholders.The transition to a more circular economy in the Philippines still has a long way to go, but the Act serves as a catalyst to encourage collaborative efforts from the government, companies, communities, and informal sectors to make conscious decisions in reducing the generation of plastic wastes in the country.In the second part of this article, we discuss EPR registration, EPR implementation, and keeping confidence through third-party assurance. 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.Benjamin N. Villacorte is a partner and Erica Nicole D. Gomez is a senior associate from the Climate Change and Sustainability Services team of SGV & Co.