Building successful digital banks in the Philippines

INTERVIEW: PHILIPPINE DIGITAL FINANCE Building successful digital banks in the Philippines

Get it right on the first try or fade under a bad reputation, warns Jumio Asia VP Frederic Ho.

The Philippines’ banking and finance industry has fully immersed itself in the digital race, a run fueled by the local regulator Bangko Sentral ng Pilipinas (BSP) recently handing out digital-only bank licenses. Even earlier, the financial regulator outlined an ambitious target that aims for banks to have 50% of their transactions done via electronic media by as early as 2023.

With six new digital bank players to soon make their debut in the country, the digital battle is at its most intense. Even the most trusted banks face having to start over from scratch in building up their digital channels.

“Building a digital channel is akin to creating a whole new brand. When we needed a particular service where business was conducted face-to-face, our heart leads us to a particular financial institution because of the trust we have in the brand,” Frederic Ho, Vice President of Jumio Asia, told Asian Banking & Finance in an exclusive interview. “Creating the equivalent branding capacity is important for the digital channel.

“Just one other point, I cannot emphasise more in terms of getting this right at the go. The moment a brand is launched digitally, the quality of the user experience at that moment will mark how the market receives the product over a longer period of time,” Ho said.

What is the current state of Philippine banks’ digital transformation initiatives?

An important factor in the Philippines’ digital economy is the mobile revolution. In 2020, the Philippines achieved up to 70% smartphone penetration. So the reach given by the digital channels has now, via a mobile device, overcome some of the problems and restrictions in the Philippines’ business landscapes. For example, the geographic nature of the Philippines itself—with the population spread over a large area—and the accessibility to a bank branch outside the city areas may not be that convenient.

These factors have been recognised by the regulators like Banko Sentral ng Pilipinas (BSP). The government is creating programs, legal frameworks, and initiatives to encourage the digitisation of banking services. It has led to a great level of activity in 2019-2020.

The traditional banks, themselves, are upgrading the market. We have this app that was launched just over a year ago by RCBC Bank. There’s Komo from EastWest Bank. Of course, there are the new licensed digital banks that have entered the market under the purview of BSP inviting digital-only banks like Tonik or Uno Bank. So we see that there is a lot of excitement to participate in this big growth area of digital banking in the Philippines.

What are the things that banks and traditional lenders are getting wrong when it comes to digitising their services?

I think that a lot of the planning and decisions for traditional micro-financing, lending businesses are trying to dominate the digital channel in a way that the culture and user experience is not the same as what we are used to in the past.

Of course, everyone speaks of speed, convenience, and all these have got to be efficient and transparent to the applicant, simply for the fact that there are so many choices today. The task then is to have them perform something simple, and also to cover as wide an identity document available in the market as possible. In the Philippines, for example, there are many official documents. The ability to process these, approve them in a quick simple way, has become an important part of designing the user experience, which ultimately leads to the success factors behind lending, remittance as they design their customer acquisition strategies.

Getting the whole design and the user experience correct will be critical in terms of how that product and that brand can secure their objectives, be it market share, brand status, user reviews, or maybe having a long-term strategy about where the product will scale to deliver that

Building a digital channel is akin to creating a whole new brand – Frederic Ho, Vice President of Jumio Asia

Creating the equivalent branding capacity as traditional channels is important for digital channels

scope of services.

What must financial institutions consider to ensure a successful rollout of their digital financial services?

Amongst the areas that I have mentioned is from a technology perspective: what can be done to provide the convenience and the ease of a user who expressed interest and wanted to open an account? I also briefly mentioned in terms of the market coverage, that if we provide the service to identify an individual then we must support the widest set of identity documents. So that will give the business that breadth of coverage.

Behind these considerations, ultimately, are many others, including security. In particular, how the technology can be robust enough to prevent impersonations over the internet. Because you can have a few cases where such incidents happen and it could damage the trust in the brand.

Unfortunately, when an applicant books over the internet, it may be easier for someone to try to fake an identity when they apply for an account. A fraudulent bank account has got commercial value in the deep web and dark web markets in a way that could be rented out to money launderers for a profit.

These technologies and security areas are to enforce some level of control such that individuals will trust that this brand, this bank, has put in necessary security functions. So they trust that a digital channel is a safe place to conduct my financial services, be it to deposit money or to remit money or even to take a loan.

There are also other considerations around data privacy. I would want to know of course, that when I perform a particular service—having a picture of my face as well as my identity documents—the products which I have expressed interest in, there must be some level of protection of this information that is not exposed to parties which have not provided consent. These are areas where you want to check on the service providers handling this API data. What international standards do they comply with? For example, do they subject themselves to be audited under ISO standards, in particular, one of them will be like ISO 7001 specifying how private API data should be handled; other standards like the payment card industry, PCIDSS.

All these somehow combine into what a bank or a fintech company would evaluate and then build the user experience into the service ultimately to acquire the client and subsequently to maintain this over the lifecycle of their business relationship with the company itself.

The Philippines recently awarded its digital bank licences to three entities, one of which is OFBank. How will the entrance of digital banks change the banking sector of the Philippines?

It is very interesting that prior to the announcement of the new entrants, even before 2020, digital onboarding has already proceeded in the market itself.

For instance, UnionBank in the Philippines has already launched digital onboarding services in 2020. There were announcements by the bank that when they rolled out a digital channel, they saw that very quickly, within four months of their digital business launching, the number of new accounts opened has exceeded the entire branch network of UnionBank. That gave a lot of encouragement to the industry. The market was ready to accept that a digital way of building a relationship with the bank was viable. Following that, CIMB Bank in the Philippines also rolled out its digital services, and in just over two years, they have signed up more than 4 million accounts.

So when you kind of consider how you would want to reach such objectives through a traditional branch network, and the momentum the new entrants have come into the market, you can say that the Philippines market already has a certain level of experience. The users are now comparing, they are going to be more selective than before. The sensitivity to ease of opening an account, to user experience, to inconveniences becomes more criticised.

What is your outlook for digital banks in the country?

I think what we see now, of course, is a legal framework that encourages digitalisation. Regulators are inviting big tech to participate in the Philippine market. In the payment space, the likes of GrabPay, for example, are already making huge waves in terms of the payment experience. In terms of infrastructure, in real-time remittances, the InstaPay and PesoNet really create the kind of framework for the greater promotion of the digitisation of financial transactions.

There are always discussions about building the super app, where, for example, the likes of RCBC has always highlighted that its app is a one-stop-shop where you can have access to a whole range of different services that you may need for your personal requirements.

Ultimately, the goal is to have a huge digital market base where you can build a one-stop-shop, where financial services across different requirements can be offered via that single app, that single brand. From that perspective,

The goal is to have a huge digital market base where you can build a one-stopshop via a single app

BSP calls for financial inclusion serving the underbanked or underserved markets

I see so much activity in the Philippine market in the coming year. Even with all the activities now, only a small percentage of the Philippine population of around 100 million is fully on-board digitally or has a digital bank account. The scope under which the BSP calls for financial inclusion—serving the underbanked or underserved markets—represents a huge area that is still being highly competed in by the current players in the market today.

We are always talking about what traditional banks should do to keep up with the new digital entrants. What about digital banks? What must they consider, especially those entering the Philippines, to succeed and reach profitability?

The first issue, which was highlighted earlier, was the issue of geography. Once you have things on a mobile app, we have to overcome problems related to distance and accessibility to a bank branch, where they can then enrol themselves to have a bank account.

The other factor would be the banks themselves like not having the cost of maintaining a physical bank branch to be built across the whole country just to capture as much of the market share as possible. Now they want to do so via a digital channel. It represents a huge cost reduction in terms of acquiring new customers. So, when you can reduce your customer acquisition costs, then a lot more can be done in terms of benefits that can be returned to the client.

Ultimately, the participation in financial services—the endpoint of which is everyone having a bank account—is a big factor in terms of the market growth potential, where you have every person of age own a bank account.

The Philippine market is even more attractive now because the whole market’s addressable size has just multiplied. After all, now with technology, you have overcome certain challenges in the past that you could not really address.

So I would say that these are probably the key areas of benefits of going digital.

How can banks in the Philippines—traditional, digital, and virtual—help increase the accessibility of their services, especially for the unbanked?

The mobile revolution itself was the big gateway. The smartphone has become even more powerful today and can perform the kind of transactions over the required network bandwidth, and this is the needed infrastructure to grow the Philippines’ digital economy. To the financial technology sector, and to the banks, having that level of stability and accessibility means that they will continue to focus on that channel.

Also, because of the current situations with COVID, having no face-to-face engagements is just hard. There is the question of how far this trend would persist. We are not quite sure, but what the outcome would be is that the formal experiences of banks’ business will become digital, regardless of what happens in the future. Because businesses are now really used to the lower cost of customer acquisition, a lot of focus would be delivering better products, better services digitally. There will be a lot of partnerships to redefine the services that they will offer so that they can compare and compete with their peers in the industry.

To build out the different user experiences beyond just onboarding, I just want to highlight one other area. Beyond just the onboarding itself and complying with the right regulations, we are also looking at how to maintain financial stability: to continue to ensure that as digital activity achieves higher growth, the necessary risks are still managed, such as in terms of fraud or fraudulent channels. The question of how this will be managed will give rise to a lot of interest in transactions that monitor these types of activities. For example, we have a bank account, and if there are strange transactions or money movements, there must be some ability to then detect and report these to BSP. So, there is another layer that provides a continued set of protection in the services, where you have an automated way of applying the rules around how this suspicious activity is reported and monitored, as well as how it is pulled out so that they can be easily reported back to the regulator.

The mobile revolution was the big gateway for Philippine digital economy

The participation in financial services is a big factor for market growth potential, where you have every person of age owning a bank account