Frederic Ho, Vice President, Jumio Asia

How can the Philippines' wannabe finance leaders build successful digital banks?

Banks, FIs must get it right or fade under a bad reputation, Jumio Asia VP said.

The Philippines' banking and finance industry has fully immersed itself in the digital race that has engulfed the rest of the region. Bangko Sentral ng Pilipinas (BSP), the local regulator, recently handed out digital-only bank licenses to three entities. Even earlier, the financial regulator outlined an ambitious target that aims for banks to have 50% of their transactions done via electronic mediums by 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 bank brands face having to start over from scratch in building up their digital channels.

“Building a digital channel is akin to creating a whole brand new brand. When we in the past need a particular service where business was conducted face-to-face, our heart brings us and leads us to a particular a 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 really important on the digital channel."

Getting it right on the first try is the most important aspect. “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.

Asian Banking & Finance spoke with Ho to learn more about the state of digital finance in the Philippines and his outlook for the digital development of the local banking industry.

What is the current state of Philippine banks’ digital transformation initiatives?
The country has already identified the digital economy to be a significant area of growth. A very important factor is the mobile revolution. In 2020, the Philippines is already achieving 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 actually be that convenient.

These factors have been recognised by the regulators like Banko Sentral ng Pilipinas. The government are creating programs, legal frameworks, initiatives to encourage the digitization 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. And of course, they're also 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's a lot of excitement to participate in this big growth area of digital banking in the Philippines.

What are banks, particularly traditional lenders in the Philippines, getting wrong when it comes to digitising their services? 
Building a digital channel it's akin to creating a whole brand new brand. When we in the past need a particular service where business was conducted face-to-face, our heart brings us and leads us to a particular financial institution because of the trust we have in the brand, the way the customer service is delivered to the customers, and as well as, of course, the products and services that is going behind it. Creating the equivalent branding capacity is really important on the digital channel. 

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. 

So 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. And just previewing services on App Store and Play Store, you could easily have more than 10 choices where you want to take your business to.

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 a very 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 very critical in terms of how that product and that brand can secure their own objectives, be it market share, be it brand status, user reviews, or maybe having a long-term strategy about where the product will scale to deliver that scope of services.

What must financial institutions consider to ensure a successful rollout of their digital financial services? 
There are many factors. And some of these may be outside the scope of what Jumio should comment on. Amongst the areas that I've mentioned really is from a technology perspective: what can be done to provide the convenience and the ease of a user who expressed interest and who wants 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.

There are many other considerations as well, including security. [In particular] security and 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 account 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 when they actually perform this, themselves believe that yes, this brand, this bank, have put in necessary security functions. So they trust that a digital channel is a safe place for me to conduct my financial services, be it to deposit my 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 my picture of my face as well as my identity documents—the products which I've 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 kinds combined together 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.

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, Union Bank 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 Union Bank. 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 their own 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 really becomes more criticized. 

What is your outlook for digital banks in the country?
I think what we see now, of course, is a legal framework that encourages digitalization. Regulators are inviting technologies, the big techs 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, real-time remittances, with InstaPay and PesoNet, really create the kind of framework for the greater promotion of the digitisation of financial transactions. 

So what is the outlook moving forward in the digital banking space? There are always discussions about building the super app, where [for example] the likes of RCBC has always highlighted that [their app] is a one-stop-shop where you can come to the app and 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, 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—represent a huge area that is still being highly competed in by the current players in the market today.

We’re always talking about what traditional banks should do to keep up with the new digital entrants. But what about digital banks? What must they consider, especially those entering the Philippines, in order 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 the accessibility to a bank branch, where they can then enroll 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 as 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 back 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 because now with technology, you have overcome certain challenges in the past that you couldn't 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 is able to perform the kind of transactions over the required network bandwidth, and this is the needed infrastructure to grow the Philippines' digital economy. To the fintech, and to the banks, having that level of stability and accessibility means that they will continue to focus on that channel. 

And also, because of the current situations with COVID, having no face-to-face engagements is just hard. And of course, there's 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'll 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's another layer that provides a continued layer 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 pulled out so that they can be easily reported back to the regulator. 

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