The Philippines: Covid-19 helps a digital revolution
Many Filipinos switched to digital channels during lockdown. Bankers think customers are unlikely to return to branches now that they have had a taste of what it is like to go cashless. That would be good for banks – and for financial inclusion.
Filipinos are breaking the habits of a lifetime when it comes to banking, thanks to coronavirus.
“In the Philippines, a lot of the customer interactions historically were done physically, typically in branches,” says Eduardo ‘Edu’ Olbes, chief financial officer at Security Bank in Manila.
But that stopped very quickly in March, following the first cases of coronavirus in the Philippines and the imposition of a restrictive lockdown. There has been a surge in take-up of digital banking services that should improve financial inclusion and equality in the Philippines in the long run.
The picture varied around the country, but in certain parts of the capital region, three quarters of bank branches were closed, while restrictions on transport, strict social distancing requirements and a night-time curfew meant that people were barely allowed out to visit them anyway.
“While the regulator called out banks as being critical necessities, the reality is the physical infrastructure of the banks was hamstrung,” Olbes says. “Clients really had no choice, and many opted to swing to digital channels.”
To get an idea of how consumer habits changed with the lockdown, consider the two main transaction systems used in the Philippines for electronic fund transfers – Instapay and PesoNet. Instapay is used for digital payments with a relatively small value, settled in real time, while PesoNet is for larger transactions, not in real time but usually completed within a day.
Covid-19 became the greatest disruptor. It really forced the people to shift to digital
Data provided by the Philippines government shows that use of PesoNet surged 325% in terms of transaction volume between April and May, while InstaPay jumped 57%. And bankers expect the numbers to stick.
“We’re projecting PesoNet will grow about 200% from 2020 to 2021 because of Covid,” says Henry Aguda, chief technology and operations officer at UnionBank.
“InstaPay we expect to grow at least 500% by the end of this year,” he adds.
Aguda expects the use of cheques to decline this year. UnionBank has opened new accounts for 200,000 customers digitally, without them having to visit a branch; in the same time frame only 2,000 to 3,000 customers have opened accounts in a branch.
At Bank of the Philippine Islands, it’s a similar story. Before the lockdown, 70% of clients’ transactions were conducted in branches and 30% online, says Noel Santiago, chief digital officer.
“This has drastically shifted to 90% of all transactions being done digitally,” Santiago says. The number of registered active users for digital services at BPI has doubled through the pandemic: more than half of the bank’s 8 million clients are signed up and using digital platforms.
Lito Villanueva, who heads digital enterprise and innovation for RCBC, says his bank has seen exponential growth in consumer adoption of digital channels, as high as 2,000%. Everything – from the use of ATMs to disbursement of government subsidies and the use of couriers to send shareholder dividends by cheque – has changed, moving to digital channels and away from personal interactions.
“We have been saying in the industry that fintech was the main culprit for disrupting traditional banks,” Villanueva says. “That paved the way for the digitalization of the banking and finance industry. But Covid-19 became the greatest disruptor. It really forced the people to shift to digital.”
The situation has become so extreme that once-onerous targets are being reset. Bangko Sentral ng Pilipinas (BSP) governor Benjamin Diokno wants 50% of all financial transactions, by volume and value, to be in digital form. That seemed an ambitious target at first: in 2018, only 10% by volume and 20% by value were digital. It was originally a target for the end of his term, in 2023, but Covid-19 means it may be achieved as early as this year.
“I’ve been a strong advocate of digitalization,” Diokno says. “I made myself very clear that I wanted to shift from a cash-heavy to a cash-light society. The ultimate goal is to be a cashless society, but that’s not going to happen during my term.”
Perhaps not. But it’s going to be a lot closer than anyone would have imagined before the pandemic.
One interesting detail for believers in digital banking: even as restrictions and quarantine requirements are being lifted slowly, people have not returned to branches.
“It’s been said that it only takes 21 days to form a habit,” says Santiago. “And it’s been well over 100 days since we’ve been on some measure of community quarantine.”
Santiago, like all his peers, believes that people have become accustomed to the convenience afforded by digital banking and won’t look back, even when they have the opportunity to return to the branches.
And even when there is a vaccine, Villanueva adds, “I think the numbers in digital adoption will remain high beyond Covid-19 and lockdown. People have experienced how convenient, easy and seamless digital is.”
Aguda at UnionBank says that the attitude of the government and central bank will also ensure that people stay on a digital track. Retailers and corporations are increasingly requiring contactless payment “and the government is actively discouraging cash”.
It’s been said that it only takes 21 days to form a habit... and it’s been well over 100 days since we’ve been on some measure of community quarantine
As this gradually finds its way into legislation, it becomes self-fulfilling. Aguda says the tax authority is encouraging – though not yet requiring – digital payment, and there is a bill in the Senate on digital transformation.
“Beyond the habit, it is going to be the law that pushes us more towards digital,” Aguda says.
Banks have had to adapt their systems for new demand.
“We’ve actually had to reprioritize investments to improve the capacity and functionality of our digital channels, both for retail and wholesale, precisely to address this need,” says Olbes at Security Bank.
The bank has repurposed its contact centres, both voice and non-voice, to make sure there are more channels to deal with the bank beyond branches.
“Before, it was just one of many things we were doing; in this environment it has taken on a different level of urgency,” says Olbes.
Still, not everything will automatically turn digital.
“We believe that there are aspects of banking where the client will greatly benefit from branch services,” says Santiago at BPI.
The hope is that with the long-term migration of simple transactions such as fund transfers, balance checking and bill payments to digital channels, the branches will be used for more tailored services.
“It will free up the capacity of our branches to engage in higher-value conversations,” Santiago says. “These would be matters where the advice of our highly experienced branch staff can be put to better use, such as investments and estate planning.”
Digital adoption tends to be good for the bottom line. Aguda at UnionBank says that revenues earned from digital customers are 11 times higher than for non-digital customers. UnionBank has made dramatic gains in current and savings accounts, or CASA, through digital accounts, much of it moving from the three biggest banks in the country.
“We are in the sweet spot,” Aguda says. “We would have wanted it to happen in a different way but, tragic as Covid is, it has a knock-on effect.”
BSP governor Diokno is a great believer in digital banking as a driver of inclusivity and social equality, and his interest here long predates his time at the central bank: he was working on the reduction of rural poverty way back during his time with the Corazon Aquino administration in the 1980s.
Bankers hope he’s right. “The pandemic gave many of our less digitally-inclined clientele the impetus to finally sign up,” says Santiago at BPI.
“Having that infrastructure and system also allowed us to develop more digital products and services that respond to the pressing need of giving access to cash for more people, especially for the unbanked sector,” he says.
Santiago says that nearly 75% of Filipino adults do not have access to mainstream financial services.
“These are mostly individuals from marginalized sectors or are in locations that do not have easy access to bank branches or ATMs,” he adds.
The pandemic gave many of our less digitally-inclined clientele the impetus to finally sign up
BPI launched a new product, BPI-to-cash, where a client can use a BPI online account to digitally transfer money to a partner remittance centre with branches in remote areas of the country; the recipient just needs an active mobile number and a valid ID to redeem the money. UnionBank has a similar service, integrated with 11,000 remittance companies around the country. Aguda notes that the relevant central bank approval came through within a matter of weeks of the Covid-19 pandemic starting, indicating a genuine fast track for any digital initiative that aids financial inclusion.
In late July, UnionBank launched an app allowing consumers to buy retail treasury bonds without having to open a bank account. The app, bonds.ph, uses blockchain technology and involves a partnership between UnionBank and Philippines Digital Assets Exchange, a cryptocurrency exchange. Again, Aguda says approval with the central bank took just two weeks.
“The government wants to raise money, and at the same time to develop financial inclusion,” he says. “It was very receptive to us launching this app.”
RCBC recently launched an inclusion app – a ‘super app’, it insists – called DiskarTech, which offers various services in a sachet format from deposit-taking to card-less ATM withdrawals and other transactions. The diskar bit of the word translates roughly as grit, or personal resilience.
“The Philippines is a resilient nation,” Villanueva says. “We are visited by 20 typhoons a year. We sit on the ring of fire. Natural calamities? You name it, we have it.”
The idea is, in this resilient nation, to “address the pain points of underserved Filipinos,” which, by his calculation, equates to a target market of about 58 million adults. The app has had 9,000 downloads a day. “We surprised ourselves. We only started on July 1.”
Coronavirus aside, Diokno points to the development of a new national ID card, “20 years in the making”, which he believes will help with financial inclusion in the same way that Aadhaar is intended to do in India.
“Just like in India, this will satisfy the KYC [know your customer] requirements of the banks, will allow people to open an account, and I am very positive that it will accomplish both financial inclusion and digitalization,” Diokno says.
Another step was the approval and launch of a state-owned digital bank for overseas foreign workers, called Overseas Filipino Bank, as a subsidiary of a government bank called Land Bank of the Philippines. OFB will focus on financial and investment services for overseas Filipinos – a large and very important constituency whose remittance flows have protected the country time and again from external shocks.
Such remittances from overseas workers, which are an essential element of the Philippine economy, are clearly going to fall this year, because so many of the sectors that employ them, particularly cruise ships, have been hit by the pandemic.
Diokno says he expects a 5% drop from last year’s $30.1 billion of remittances. It would probably be a lot more were it not for the fact that many overseas Filipinos are healthcare professionals.
The Philippines financial sector has also seen new entrants. One is East-West Banking Corporation, the 11th-largest bank in the Philippines by assets, which in May announced it would launch a digital bank called Komo in the third quarter. It touts Komo as the first all-digital bank to be launched by a domestic universal banking group (Malaysia’s CIMB group having done so as a foreign lender at the end of 2018).
Bankers are impressed with the attitude of the central bank in enabling digital innovation. “BSP has risen to the occasion,” Aguda says. “This is Bangko Sentral’s ambition: to move digital.”
Villanueva, impressed by the support RCBC got from regulators in developing new digital products, calls the Philippines “one of the luckiest countries in the world among developing nations, because the regulator has been the prime mover in pushing the industry to digital transformation. You don’t find that sort of dynamic and proactive regulator in other markets.”
This is Bangko Sentral’s ambition: to move digital
But there is more that can be done, particularly with the most basic infrastructure.
“There’s a lot we can do to improve the quality and availability of internet connectivity around the country,” says Santiago.
IT consulting firm Accenture says internet penetration in the Philippines is expected to rise from 59.2% in 2017 to 73% in 2022 – and Covid may drive that figure higher.
“This would go a long way in enabling more Filipinos to have access to digital banking services,” adds Santiago.
It would also help if the tax office didn’t have such a dependence on paper-based receipts for commercial returns. Bankers say work is under way on digital receipts, which would help.
While speed of approvals is impressive, it needs to be accompanied by a robust infrastructure around cyber security.
“We see the need to update our Cybercrime Law, considering the changing business landscape and the need to build trust in the digital tools that banks, businesses and government agencies use or plan to use,” says Santiago.
This is also what Aguda wants to see. “The next thing we can ask for from the BSP is cyber-security,” he says. But he believes this work is under way, with new standards appearing and stronger enforcement.
“Our regulators are doing exactly what they should be doing.”
DBS weighs up digital upstarts
The latest digital entrant to the Philippines is Tonik, which was formed in September 2018 when it began conversations with the central bank about receiving a bank licence in a sandbox arrangement.
It secured approval in December 2019, becoming the first digital bank in southeast Asia to receive a bank licence, and should launch commercially by the fourth quarter of this year. It secured $21 million of Series A funding (a level of investment in a startup that follows initial seed capital), $6 million of Series B (or the second round of funding for a business through investment, including private equity and venture capital), and now has enough cash to fund operating and IT expenditure and to meet capital adequacy requirements to get started.
How attractive are opportunities for a bank like Tonik?
“There are around $140 billion of retail deposits in the Philippines, with more than half of these clients keen to switch them to a digital contender given the right proposition,” says Greg Krasnov, the founder and CEO. Similarly on the asset side, there are about $10 billion of unsecured consumer loans in the Philippines today, but Krasnov believes this figure should grow to between $40 billion and $50 billion over the next few years, based on per-capita comparisons to similar markets.
“There’s massive under-banking and financial exclusion in the Philippines,” Krasnov says.
The central bank said in the 2017 Financial Inclusion Survey that only 22.6% of adult Filipinos had bank accounts, while the 2019 BSP Consumer Expectation Survey found that 36.6% of households had savings.
“Only 30% of the Filipinos hold bank accounts, and only 4% of the ones that borrow do so from the banks. We are here to solve for these consumer needs,” says Krasnov.
He doubts the ability of the established players to meet these consumer needs, trapped in older models.
“The traditional banks in the Philippines seem to be unable to innovate sufficiently to address the needs of the mass-market deposit or loan customers,” he says. “They operate with very low deposit rates, weak digital propositions, and no capabilities in the high-volume, high-automation, unsecured consumer finance space.”
This, he says, is quite at odds with the modern reality of the Philippines, where the average consumer is 24 years old, completely digitally native and spends an average four hours a day on Facebook (the Philippines is the global leader in Facebook use). “The needs of these consumers need to be solved through digital proposition,” Krasnov says.
In Krasnov’s opinion, Covid-19 certainly had an impact, but only really as part of a longer-term upward curve. The volume of digital transactions went up 3.5 times in e-wallets, he says. “However, it still has a long way to go. On such high and critical products as bill payments or peer-to-peer domestic remittances, pre-Covid digital penetration was well below 10%.”
Benjamin Diokno, governor of Bangko Sentral ng Pilipinas, the central bank, reiterates that the pandemic has resulted in big advances.
“There has been a quantum jump in the use of digital payments,” Diokno says: “There has been a dramatic increase in the opening of bank accounts in electronic form.”
Like the more traditional bankers, Krasnov believes that those who made the switch during Covid will stay digital.
“We are observing the sustainability of the switch to digital post-Covid in the markets that are coming out of the pandemic, which leads us to believe that, indeed, post-Covid in the Philippines, the digital penetration in financial services will continue to grow more rapidly than before.”