The digital challenge from a Philippine banking perspective

It is almost a cliché by now when banks cite Know-Your-Customer (KYC) processes and controls as the biggest risk management challenge when going digital but it might be even more so in the case of the Philippines.

In our survey of more than 20 financial services institutions (FSIs) operating in ASEAN on the risk, compliance, and change management challenges they face in their digital journey, they mentioned KYC processes and controls, customer experience, cybersecurity, regulations, FinTech, internal organisational resistance, and emerging vendor risks as the top concerns.

Resolving some of these challenges would go some way towards enabling digital banking, which presently, the Philippines has one of the lowest digital banking adoption rates in the region.

This is also important to allow Philippine banks to compete against global banks who are looking to capture the market in this space, given the increasing demand from the consumers to try new digital banking products and solutions that meet their needs.

Addressing the KYC and customer experience digital challenge
In our report on "Managing change and risk in the age of digital transformation; digital journey of ASEAN FIs," KYC processes and controls are seen as hampering the move to "digital-only" for critical processes such as account opening, loan applications, or investment advisory.

Currently, ASEAN FIs are continuing to rely on employee-assisted onboarding or some level of physical intervention to verify a customer’s identity. Proven solutions are available to automate this process, but their adoption remains limited. For example, electronic signatures, although accepted by most regulators, are not considered to be sufficiently user-friendly or convenient for the customer.

Likewise, a few ASEAN banks have trialed mobile data capture to verify the customer by taking a photo of the signature, an ID card, or the customer themselves, but concerns about security outweigh the added convenience. After all, the signed original still has to be delivered by mail, which fundamentally reduces the benefits of a straight-through process.

Banks in the Philippines meanwhile are taking active steps to address the above issues in a bid to improve the online banking experience for their customers. For example, Metrobank¹ has been narrowing loan processing time and approval turnaround within the application period, which has helped their digital banking growth.

China Bank Savings (CBS) recently partnered with Lendr². Lendr is the country's first 24/7 digital loans marketplace. With the partnership, clients of CBS can now complete their loan application process online, track their loan application status, and monitor their monthly loan repayments, balance, and amortisations.

Cybersecurity is also a key concern amongst the Philippine banks, who see potential risks involved due to a lack of security measures such as two-factor authentication and transaction signing to secure transactions.

To address this, the local banks have put in place several measures, to protect the banking system and its consumers from risks associated with electronic-banking operations. Banks have migrated from the use of magnetic stripe technology to the use of globally recognised EMV. For internet banking, clients would receive the transaction password via email or SMS message.

The regulatory challenge with regards to FinTech
Given how FinTech now plays a key role in more banks' digital journey, in the Philippines however, the FinTech landscape is still at infancy stage.

While regulators are not prohibiting banks from working with FinTechs and other start-ups, they are just uncomfortable with a digital-only strategy because of KYC issues.

Dealing with emerging vendors also requires FSIs to rethink many aspects of the traditional FI-vendor relationship. These include: procurement, third-party risk management, regulatory reviews and audits for outsourcing services, data privacy and security, business continuity, and integration with legacy systems.

Most Philippine banks are still not prepared to deal with FinTechs in terms of organisational mindset and policies, which makes it difficult to incorporate them into their existing systems and structures. Most banks also do not have a clear set of evaluation criteria to help them assess the suitability of a FinTech vendor that comes into the picture.

From a regulatory standpoint, the responsibility to do appropriate due diligence checks on prospective vendors lies with the banks.

The Bangko Sentral ng Pilipinas (BSP) has put in place a regulatory environment that properly guides banks on how to deal with risks and ensure consumer protection as they pursue technological advancement. Banks are rated for its IT Risk management, thereby encouraging banks to adhere to high standards of IT security as they enhance their services with the use of modern technology.

Given the regulatory requirement, banks prefer to work with the larger, more established vendors, limiting the playing space for FinTech start-ups, though they may have the right technology to help banks advance their digital strategy.

Global players cashing in on the digital growth potential, local players to follow closely
What all this means is an opportunity for global banks to establish their foothold to try and gain first mover's advantage in the digital consumer market using their existing technological capabilities without having to partner with a FinTech to develop one.

For example, Citi Direct³ was the first to establish digital presence in the Philippines in 2000. It started the banking alerts wherein clients received SMS and email alerts on banking and credit card transactions in 2009.

Another innovation is a Citibank Ph mobile app compatible with most mobile phones as well as the eAdvice in 2012. During the year, the bank also launched the Citi Philippines Facebook account.

That said, the major domestic banks have the advantage of in-country expertise and home-grown familiarity with their existing customer base, and are expected to give the global players stiff competition.

All in all, though challenges still need to be addressed, Philippine consumers are using more of the internet and mobile platforms for their financial transactions.

We foresee that this will in turn drive more innovation and competitive product offerings in the digital space by both the global and local players alike, giving Philippine consumers more choices.

The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organisation or its member firms.

¹https://www.mb.com.ph/metrobank-pushes-expansion-of-retail-banking-operation/#Wd8v3eSLwtRqspu1.99
²https://www.philstar.com/business/2016/04/09/1571142/chinabank-taps-pldt-unit-for-digital-auto-loan
³https://www.philstar.com:8080/banking/2015/09/29/1504947/citibank-targets-more-clients-using-digital-banking-services