Banks digitalization and vulnerability to risks

Efforts to digitalize Philippine banks were spurred when banks were compelled to find novel ways to provide financial services in the face of mobility restrictions during the coronavirus pandemic.

Today, the digital transformation of banks and consumers’ growing preference for digital payments and financial services has resulted in huge gains in terms of the Bangko Sentral ng Pilipinas’ (BSP) financial inclusion and digital payments transformation roadmap, observed BSP deputy governor Chuchi Fonacier.

“As technological innovations become mainstream in financial services, financial consumers can avail of accessible, affordable, and convenient digital financial services,” Fonacier said.

“To further cement this development, the BSP has implemented regulatory and supervisory frameworks covering digital banking, and open finance, among others,” she said.

The BSP is targeting to achieve 60-70 percent share of digital payments over total retail payments volume by 2028 and to onboard at least 70 percent of Filipino adults into the formal financial system in 2023.

BSP data indicates that the share of digital payments in terms of total volume of retail transactions in the country grew to 42.1 percent in 2022 from 30.3 percent in 2021.

Merchant payments, business transactions, salaries and wages as well as peer-to-peer remittances contributed to the increase in digital payments in the country.

Likewise, some 22 million Filipinos gained access to formal financial accounts between 2019-2021, bringing the country’s banked population to nearly 60 percent in 2021, or about an increase of 29 percent from 2019. Such increase was driven faster by digital payment growth, with 36 percent of Filipinos in possession of e-money accounts.

With rapid digitalization of the sector, banks and financial institutions are making adjustments in their business and operational models to keep apace with the so-called “new normal.”

Said Fonacier, “BSPFIs (universal and commercial banks, thrift banks, trust corporations, non-bank financial intermediaries) are increasingly migrating to the cloud to address capacity demands and scalability. We have also noted a growing interest in AI, the digital marketplace and open finance, among others.”

Of late, the BSP has launched an Open Finance PH Pilot partnership with the World Bank and the International Finance Corporation which is aimed at building financial profiles and credit histories for unbanked Filipinos.

The pilot is a voluntary pledge of financial institutions to co-develop an inter-connected ecosystem allowing consumers to gain more control over their finances and use of various types of financial products from different providers.

Fonacier points out that there are a lot of growth opportunities to intensify innovation in the delivery of financial services to capture or retain customer base and maintain competitiveness while enhancing revenue-generating capabilities.

“Nonetheless,” she said, “the BSP and players in the banking industry must continue to support digital expansion by making certain that technologies and systems remain robust, accessible, secure and resilient against cyber and IT-related risks.”

Meanwhile, according to Economist Intelligence Unit industry manager Swarup Gupta, further adoption of digital platforms can boost Philippine gross domestic product if done in a way that provides equitable access to internet access and digital services.

Said Gupta, “Digital transformation of enterprises and governance processes has the potential to substantially boost GDP and thus the rolling our of various initiatives by the Marcos Jr. administration in this area.”

One major positive factor, he said, is that the Philippines per current statistics, has some of the best internet speeds in the world, “a crucial factor when it comes to aiding the process of digital transformation.”

There is a downside to this, however. Digitalization also makes data vulnerable to theft and other illicit activities if not effectively monitored. “The BSP, late last year, launched a regulatory and supervisory solution to lighten the burden of regulatory compliance while automating the central bank’s supervisory role on cybersecurity,” informed Gupta.

This solution, he said, “catered to 150 supervised financial enterprises and will soon be expanded to 600.”

Despite having a young population and a relatively high internet penetration rate, the country faces various challenges to digitalization. Philippine banks have to persevere with services catering to a population remaining relatively underbanked aside from being economically underprivileged.

Data from the BSP shows that 34.3 million adults are unbanked, with farmers and agriculture workers being the least banked among all types of workers, 73 percent of whom are without accounts, the highest financial exclusion level seen in current times.

Also a high percentage of unbanked adults are private household workers (48 percent) and self-employed individuals (45 percent) while non-working adults without accounts stood at 52 percent or 15.6 million adults.

But Gupta believes the digitalization and open banking outlook in the country is rosy. “There are numerous opportunities in terms of financial innovation leading to more economic growth and the evolution of personalized products and services catering to specific needs set,” he said, adding that “risks include an increased prevalence of cybercrime and consequently the need for regulators to strike a balance between helping to foster innovation and protecting customers.”