Winston Damarillo, CEO of Manila-based startup Higala, has raised a Series A round of unspecified size, led by Singapore-based fund 1982 Ventures, with the modest ambition of creating an Asian equivalent to Brazil’s neobank Nubank and its state-backed mobile payments infrastructure, Pix.
In practical terms that means taking an existing but overlooked real-time payments network in the Philippines, called InstaPay, and transforming it to better serve the country’s many community, rural and thrift banks, which to date have lacked the resources to embark on their own digitalization.
Damarillo, who divides his time between Manila and the US, is an experienced operator. He has run venture capital for Intel and for Philippine telecom company PLDT. He currently runs his own venture business, Talin Venture Lab (which put seed money into Higala). He is also a serial entrepreneur: Higala is his 14th startup.
Engineered exit
He has big ambitions for Higala, which he thinks has the potential to scale internationally, and become big enough to justify a US stock market IPO.
“I built Higala with an engineered exit,” he told DigFin. “TAM is not a problem.” (TAM refers to total addressable market, a typical VC term to gauge a startup’s potential to scale.)
That’s because Higala will use InstaPay’s existing rails and userbase, instead of trying to build its own. He says it already processes 156 million transactions a month. Higala would charge 75 centavos per transaction on the network. And there’s plenty of room to grow, given InstaPay accounts for a mere 1.5 percent of payment flows in the Philippines.
Damarillo says he was inspired to launch a payments service after seeing how the industry has evolved, with the likes of Pix, India’s United Payments Interface (UPI), Singapore’s PayNow, and in the US, Zelle, a peer-to-peer network among commercial banks.
Open loop
What these have in common is that they represent open payment networks that with a single QR code are open to many banks and other institutions. This is in contrast to the current dominant networks in the Philippines, closed-loop systems run by successful mobile wallet operators such as GCash and PayMaya. A person transacting with a local merchant must rout their payment through such a closed-loop player, while open networks are peer-to-peer for all.
Damarillo says he’s not taking a swing directly at the wallet operators (adding that, as head of VC at PLDT, he was an early backer of GCash). But the status quo leaves out hundreds of small, rural banks. They can’t afford the kind of digital upgrades necessary to integrate with the top wallets – nor with InstaPay.
InstaPay is the country’s sole ‘switch’, a payments term meaning a controlled network. Currently only one group is using InstaPay, a consortium called BankNet, with its technology provided by Mastercard.
Higala is now going to be a second operator on InstaPay, via a connecting rail called SynerFi. (So SynerFi is the equivalent of BankNet but for different users.)
From rails to platforms
Damarillo says SynerFi is purpose-built for instant payments, which makes it cheapest to use. This contrasts to BankNet, which relies on tech developed for card payments. Damarillo and his bank partners, notably Rizal Commercial Bank Corporation (RCBC), are now in talks with the central bank, Bangko Ng Pilipinas, to ensure SynerFi operates on InstaPay, including meeting compliance and security needs.
Next, Higala wants to introduce a second rail alongside InstaPay, called Mojaloop, which will adapt payment systems to create a peer-to-peer network, similar to the way Singapore’s MAS deploys systems to support PayNow. This second rail will have to meet the same standards as InstaPay.
The work doesn’t end there. Just because Higala can build rails on top of and alongside InstaPay doesn’t mean most Philippine banks can take advantage of them. Banks need an app, a digital platform, special licenses, and a treasury system that can integrate these payment flows. The costs involve are why few banks connect to InstaPay in the first place. Their absence also limits the scale available to fintechs and microlenders that do connect to InstaPay.
Higala is therefore offering a combined platform to banks: a core banking systems app, license sponsorship, and treasury tools, all of which enable banks to accept payments from InstaPay via SynerFi.
The first bank to trial this is RCBC.
Revenues and reinventions
Higala will charge RCBC a transaction fee, but it also expects to generate new revenues for the bank. RCBC is getting connected to instant payments for zero capex and without having to seek a digital banking license. It can focus on developing its own services, which should encourage its customers to transact more; with cheap access to instant payments, that can open doors to other financial services, or at least help small merchants manage their working capital.
“We lower cost and enable innovation on our platform,” Damarillo said. “It’s still the InstaPay system, but how with two providers, BankNet and Higala.”
Noting that InstaPay today is only 1.5 percent of domestic payments, he added, “We are the underdogs” who will compete on price. But he colors this competition with the wallets as bringing resiliency to the overall market.
That innovation should include enabling Higala bank users to introduce low-cost loans, payroll, disbursements, micro insurance, and group buying via InstaPay. Such products have been out of reach or modest in scope for smaller banks.
Higala relies on good relations with GCash, PayMaya and other wallets. He needs to ensure his banks’ customers can move money in and out of those wallets and bank accounts. Damarillo says that he does not compete with the wallets on the payment rail side of the business.
Vs digital banks
He does compete with them on the bank platform side. There, Higala is building a classic four-pillar payment services network, just like a Mastercard or Visa. It will charge a merchant discount rate (MDR, paid by merchants) that gets split between banks representing card issuers, acquirers (the merchants), the platform bank (RCBC), and the Higala network (SynerFi).
But Higala intends to charge MDRs of only 1.5 percent, half or less of what card payment networks charge. Also, by riding InstaPay instead of the Mastercard network used by BankNet, those payments settle almost immediately, rather than days or weeks later. By being cheaper and faster, Damarillo expects to win on price and therefore on scale. “This yields a result that is venture-investible,” he said.
Wallets aside, Damarillo says his real competition is the young crop of licensed digital banks.
“They are not serving the purpose of financial inclusion,” he told DigFin. “They are focused on savings and lending.” Rural and community banks have been left behind, but if they can access digital payments, they can expand their services while also maintaining their physical branches.
“Digital banks are relevant,” Damarillo said, “but Brazil and India show that their payment infrastructure enabled the creation of many more financial institutions that aren’t necessarily banks. [The digital banks] lack foundational banking, they have good tech and a good user experience, but they aren’t true banking businesses.”
Pix-ure this
In contrast he sees Pix and UPI enabling many micro and small financial businesses and services to flourish, which is enabling mass digital adoption across the population. But unlike those payment networks, Higala is also building the banking platform. It’s not exactly like launching its own digital bank (like a Nubank), but it creates a platform for RCBC and potentially hundreds of small institutions to leverage for their own services.
Damarillo says he is already in preliminary talks with partners and regulators in Latin America and Africa, as he believes Higala’s offering is scalable across emerging markets. But for now, operationally, he’s focused on getting established in the Philippines.
“We’ll be large enough for an IPO, starting at the country level,” he said. A startup needs to reach a market cap of $15 billion to graduate to Nasdaq, although in the interim he might consider listing American depository receipts (a synthetic replica that trades in New York). But as Higala deepens its network and is able to add new markets, he believes it will one day be ready to do its own New York IPO, at a much greater valuation.
His main challenge might be breaking up the company, or raising internal firewalls, because some regulators might be wary of allowing a Pix+Nubank player in. That’s the kind of problem a startup founder would like to have.
