The digital dilemma: How far has the Philippines gone in its journey towards digitalisation?

Find out what bankers have to say about fintech disruption, online banking, and digital KYC.

Whilst banks remain the primary financial services provider for most consumers, they are becoming less relevant for managing finances. More consumers are now turning to non-bank players (fintechs, payment companies, e-commerce firms, etc), for their various needs. Speaking at the Manila leg of the Asian Banking and Finance Retail Banking Forum 2017 held on February 15, Liew Nam Soon, managing partner, financial services ASEAN at Ernst & Young, said around 15% of global consumers see non-banks as their primary financial services provider.

“It is a clear trend because customer expectations are changing. They expect to be able to interact more intuitively and in a quicker, more personalised manner that is not provided by traditional players. Banks are investing a lot of money in the digital space but the question is, is it enough and is it hitting a sweet spot for the customers?,” he added.

EY surveyed around 56,000 consumers in its Global Consumer Banking Survey 2016, which revealed that online and mobile banking are the two most preferred channels of interaction. In India, 62% of respondents prefer online banking and 50% are for mobile banking. In Indonesia, 54% prefer online whilst 53% prefer mobile banking. Ironically, mobile usage is not as much in more advanced economies such as Singapore (44% online, 29% mobile), and Hong Kong (37% online, 25% mobile).

But whilst customers want to transact digitally, there is a perceived lack of such capabilities in traditional banks. Liew noted that slowly but surely, incumbents are falling behind digitally. Addressing the bankers present at the Forum, Liew said, “Your competition is not just your peer banks. Your competition is fintech players which are clearly disrupting the space.”

In response to the fintech disruption, most retail banks are reacting with a ‘kitchen sink’ strategy. According to Liew, banks are considering a host of digital activities to win back customers such as comprehensive mobile banking, wallet offerings, social innovation, branch technology investments, and many others.
“Some of the most successful financial institutions focus on one to three of these propositions, tie it very tightly to the customer segments they want to serve, whether wealth or SME, and align the entire organisation towards that strategy,” said Liew. “You can’t just create artificial innovation. It has to come from the ground up,” he added.

He noted that the fintech market in the Philippines would be worth US$5.5bn by year end, growing at a CAGR (2017–2021) of 19% to US$11bn by 2021. Liew suggested that teaming up with the tech providers could not only prevent banks from being completely disintermediated but also allow them to provide a better service to their clients.

Playing the digital game
Margarita Lopez, head of digital banking group at RCBC, discussed about how banks can get digital right by going beyond first touch. “To get to the heart of digital is to get to the ‘why’ to remain useful, relevant and connected to our customers because it will help us discover, beyond mobile products, what transformation requires behind. It’s not just a question of fewer branches or more apps. It’s the financial products that need to be rebooted. It’s an ecosystem that needs to be put in place inside and outside the banks.”

Meanwhile, Mark Bantigue, head of e-commerce at Security Bank, said whilst he acknowledges that physical branches will continue to be relevant in the Philippines, banks also have to up their game in terms of servicing the consumers online. “Branches will not become irrelevant. The Philippines is a cash-heavy country. It will continue to be," he said, adding that it costs almost US$200m/year to maintain a physical branch in the Philippines.

Bantigue noted that Filipinos spend around 3.8 hours per day (26.7 per week) connected to the internet. This means there is huge potential for banks to connect with their customers via this channel. “Do not brand your online banking platform as "mobile banking apps." Brand them as productivity tools so you can engage more customers,” he added.

But whilst much has been said about the need for banks to embrace digital and mobile banking, some Filipino consumers, especially those in the country-side, are still very much reliant on physical branch banking.

Eric Valenzuela, Jr., vice president of Country Builders Bank, said that as a rural bank, they are not pursuing any mobile-related initiatives. “For our provincial branches, our customer base still prefers having the physical interaction. We have established branches in municipalities where there were no commercial banks initially. And now that commercial banks have penetrated those municipalities, people still remember what bank was there first. So there is that kind of brand recognition,” he said, adding that internet connectivity and low smartphone penetration are also some of the reasons behind their clients’ dependence on branch banking.

“I’m a firm believer that you have to merge the digital and physical strategy. If you would like to manage everything, don’t settle with just digital,” added Expedito Garcia Jr., SVP, head of transaction banking and customer engagement at Philippine Bank of Communications.

How about digital KYC?
EY’s Liew also sat on a panel with Mary Joyce Sasan, chief compliance officer of Unionbank; Christian Lauron, lead partner for financial services at EY; Rajiv Madane, director, products & strategy at Fiserv; and Burak Alper, senior consultant, Experian Global Consultancy Practice to discuss the banks’ dilemma of balancing regulatory controls with operational efficiency and good customer experience when it comes to implementing KYC and AML prevention processes.

In January 2017, the Philippine Anti-Money Laundering Council and the country’s regulator Bangko Sentral ng Pilipinas have allowed banks to use information and communication technology to complete their KYC processes. “The innovation of the regulatory framework now gives us more opportunities and challenges to plan how we onboard our clients,” said Sasan.

Asian Banking and Finance editor Tim Charlton moderated the panel discussion and he noted that banks used to not be worried over fintechs as most regulators still require banks to get their client’s wet signature and comply with a plethora of KYC processes. But with this recent development, it will be easier for an internet-only bank, for example, to set up a self-service kiosk at a shopping mall and have people open bank accounts there. So how will this change the competitive landscape?

Given the uneven playing field for banks and fintechs, Sasan noted that regulators are aware that fintechs are here to stay and that they pose challenges to banks. “The regulators recognised that they also have to speed up updating the regulatory framework in order for banks to compete with fintechs,” she added.

According to Lauron, banks are collecting data points at the back end to comply with regulatory changes. “But if you have a situation where channels are very different, you have to disrupt the process before you apply compliance filters,” he said.

“You're dealing with polarising sentiments: On the customer front, you have concerns about incorrect rejection. On the compliance side, you have concerns of incorrect acceptance. Managing this will require efficient techniques and preemptive analytics and modelling,” Lauron added.

Meanwhile, Alper from Experian noted that whilst the recent regulatory development is very much welcome, segmentation is important. “The question for banks is, ‘which segments are you going to do e-KYC for?; What are the risk profiles of these segments? How are you going to use the technology?; How is this going to impact your strategy?’ You are opening up yourself to risks if you do not do your KYC properly. The key is streamlining the process,” he added.

“As you embrace digital KYC, you need to change the process in terms of how customers are onboarded. You have to re-engineer old processes to embrace digital. Process becomes very important. You have to make sure that systems follow process,” said Madane of Fiserv.

Innovations in banking
Madane also discussed about the different innovations such as voice banking services. “We want to make banking so convenient you just talk,” he said. He also talked about how banks can make the user experience at the branch easier with palm authentication, instead of having to go through a manual process.

Madane added that one trend arising in Asia is the rise of the digical model, which is the coexistence of digital and physical strategies. “A lot of banks have the physical branch and a lot of banks are trying to move into the digital space, but digical is where the market in Asia is heading. We are having a lot of conversations with banks to look at the digical model,” he added.

Meanwhile, Sujatha Venkatramanan, head of consulting, APAC, Global Consulting Practice at Experian, shared some examples of what digital banks are doing across the globe.

“Digital banking has actually been in place for a little over two decades now so it’s not entirely new. And in these two decades, the myriad of organisations working in this space have evolved in different directions. So when you say digital banking, it doesn’t quite mean the same things to everybody. One thing that these players have in common is they are looking at providing a seamless and consistent customer experience across channels,” she added.