Philippines: Small Lenders Not Prepared for Shift to Digital

Oct 2018
Philippines, October, 19 2018 - Smaller Banks in the Philippines are not ready to adopt digital technology in offering financial services due to outdated internal systems, according to an industry report, with low willingness to invest for upgrades.

The third Inclusive Digital Finance Report by FINTQnologies Corp. showed roughly 80% of thrift, rural and cooperative banks as well as microfinance firms have “minimal capacity” for digital transformation.

Currently, 90% of these financial firms do not have an electronic banking platform.

FINTQ, a financial technology firm, conducted an online survey covering 76 institutions to measure their commitment, awareness, readiness and adaptability to latest innovations for digital banking. Firms were then scored using a 100-point scale, with a higher score signalling better preparedness to offer electronic services.

Only 14 of 76 lenders are deemed “highly ready” to upgrade, with the average score at 37.

“The findings underscore the prevailing observation that digital transformation remains to be a low priority for many small- and mid-sized financial institutions,” the report read.

The survey showed that lenders are taking a “wait-and-see” stance in terms of how these technologies can bring direct, immediate and substantial benefits in broadening their customer base and bottom line.

Around 81% of the respondents said they are planning to migrate to a new core banking system. However, only 30% of bank presidents and chief executive officers have taken steps to prepare road maps for digitization.

A bigger share at 77% said they have not even looked at the budget needed to make the transformation.

More than half the banks said they are not planning to migrate to a new core banking system as they insist to keep their legacy system. This is one of the largest barriers for shifting to digital platforms, FINTQ said.

“A lot of financial institutions don’t know where to start,” Angelito M. Villanueva, FINTQ managing director, said during the report’s launch yesterday at the Bangko Sentral ng Pilipinas (BSP) headquarters in Manila.

“The biggest barrier to their adoption is their willingness to invest in digital technologies.”

Only officials from thrift banks said they had “substantial” awareness about going digital, but readiness stood “limited” with an average score of 55.68. On the other hand, microfinance firms and rural banks scored the lowest, which FINTQ said could “potentially derail” progress towards greater financial inclusion.

Industry representatives said there is a broad push to go digital. However, Chamber of Thrift Banks trustee Rommel S. Latinazo said “constraints on resources” stand in the way towards the migration.

“We are at different phases in terms of development. Probably, those thrift banks which are part of a bigger conglomerate or a unibanking group will tend to have more resources available for digitization,” Mr. Latinazo said during the press briefing when sought for comment.

Armando B. Bonifacio, president of the Rural Bankers Association of the Philippines, noted they are exploring shared services to help reduce costs on going digital, which is a big burden especially for lenders with small operations. He added that connectivity issues also stand in the way as most lenders are in the countryside.

Only 22.6% of adult Filipinos owned formal accounts as of 2017, leaving around 52.8 million still unbanked, according to the BSP’s latest Financial Inclusion Survey published in July.

If ever these small lenders do adopt e-banking solutions, they would prioritize digitizing basic needs services like bills payment, mobile and online banking, and digital marketing rather than for more sophisticated functions like artificial intelligence, credit scoring and cryptocurrency mining.

Should they go digital, banks are largely motivated by the need to remain competitive rather than to keep up with BSP regulations. In particular, thrift banks are enticed to migrate to e-banking in order to join the National Retail Payment System and allow interbank fund transfers.

The BSP targets to raise the share of digital payments to 20% of total transactions by 2020 from a measly 1% recorded in 2013 through its National Retail Payment System project. A study from the Asian Development Bank showed that a digitally-driven inclusion strategy could boost Philippine gross domestic product by 2-3%.

FINTQ is the financial technology arm of Voyager Innovations, Inc., PLDT, Inc.’s digital innovations unit. Hastings Holdings, Inc., a unit of PLDT Beneficial Trust Fund subsidiary MediaQuest Holdings, Inc., has a stake in BusinessWorld through the Philippine Star Group, which it controls.

Source : BusinessWorld

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