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Are PHL banks ready to play with FIRe?

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By Christine J. S. Castañeda, Senior Researcher

ARTIFICIAL intelligence (AI), robotics, cloud computing, machine learning, and the Internet of Things (IoT) are among the things that make up Industry 4.0 — more commonly known as the Fourth Industrial Revolution (FIRe). As these technology breakthroughs are becoming more evident in business and day-to-day living, how prepared is the country’s financial system in harnessing its potential benefits and at the same time, mitigating its potential costs?

From its name, FIRe marked the fourth period of industrial innovations that started in the late 1700s and early 1800s with the shift from hand production to machines using water and steam power as well as machine tools. The second wave, which started around the mid-1800s, saw the use of electric power and the assembly line for mass production while the third — which is commonly attributed to have started in 1969 — made use of electronics and information technology in automating production.

The fourth phase, according to the definition by the Asian Development Bank (ADB), is characterized by the use of “smart applications (apps) that integrate virtual and physical production systems” such as AI, quantum computers, biotechnology, blockchain technology, three-dimensional printing, and new generation robotics.

FIRe, which is popularized by World Economic Forum founder Klaus Schwab, is “fundamentally different” in that “emerging technologies and broad-based innovation” are diffusing much wider and faster than in previous revolutions. Mr. Schwab stated in his book The Fourth Industrial Revolution that while it took the first three industrial revolutions many years to be fully experienced by majority of the world’s population, it took the internet only less than a decade to permeate across the globe.

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One of the first industries that will likely feel the impact of FIRe is the banking sector through its operations. Bank clients are seen to benefit in terms of ease and speed of transactions, better access through mobile or digital platforms, improved data, and enhanced cybersecurity measures, among others. At the same time, however, there are apprehensions on the adverse effects it would bring such as job displacements and layoffs with AI and robots replacing human employees.

TESTING THE WATERS
According to Ramon L. Jocson, chief operating officer at the Bank of the Philippine Islands (BPI), the next generation technologies will change the way its customers transact with them.

“We will be able to multiply our technological capabilities, producing cost-efficient processes for the bank, while making interactions with our customers smarter (we talk to them through multiple touchpoints in communication channels that they consume most), personalized (acquisition tools are customizable to customer profiles and cross-sell product offers that fit client sub-segments and behaviors), and always relevant (banking is readily available at any point when the client needs it via any device and even in touch points outside of the bank),” he said.

The Bangko Sentral ng Pilipinas (BSP) has noted that quite a few of the local BSP-supervised financial institutions (BSFIs) “have been testing the waters” with regard to their status in FIRe adoption.

“In general, the financial system’s players are taking a conservative and deliberate approach while assessing the pros and cons of these technologies,” the BSP said.

“While the level of immersion differs from BSFI to BSFI, previous tech buzzwords such as robotics, artificial intelligence and internet of things are now becoming the norm, particularly for complex bank’s IT (information technology) plans,” the central bank added.

“These banks are cognizant of the huge benefits that can be derived from these technologies, hence, have been exploring potential use cases such as customer acquisition, digital Know-Your-Customer (KYC) and marketing, among others,” the BSP said.

For BPI’s Mr. Jocson, around 85% of the bank’s transactions are already being done electronically.

“Our digitalization road map is grounded on using more and more new technologies that will streamline our processes, and allow us to quickly build on current IT capabilities that will provide the best customer experience for our clients at any point of contact,” Mr. Jocson said, citing among examples the implementation of mobile-first technologies, employing authentication and fraud detection global standards, the use of biometrics, big data and location-detection technologies and the expansion of its chatbot facility to engage with customers.

Mr. Jocson likewise noted their engagement with risk management service provider Tongdun International in creating a credit scoring model that will allow more small and medium enterprises access to financing.

“Through Tongdun International, we’re able to employ the ‘intelligent integrity network’ concept which integrates artificial intelligence and cross-industry defence that makes efficient and intelligent risk management solutions possible,” he said.

“Moving forward, we will be able to serve more clients faster while managing our risks better,” he added.

Mark Joseph A. Bantigue, vice-president and head of e-commerce at Security Bank Corp., said that the Bank is working on mobile banking capabilities to improve its accessibility to clients.

“This entails pushing to make the mobile app the primary interaction channel for simple and low-value banking transactions while driving complicated and high value interactions to the branch,” he said.

“This includes customer acquisition, servicing, transactions, and connections with other financial services,” he added.

Even so, digitization of bank processes may not be enough as the country’s banks would have to prepare to integrate with non-banking institutions for it to be deemed ready for FIRe, according to Michael P. Araneta, head of Asia/Pacific advisory and consulting at IDC Financial Insights.

“They are obviously far from this, especially because they are trying to still complete some of their digital banking projects, which are still, essentially way prior to the Fourth Industrial Revolution,” Mr. Araneta said.

He added: “If FIRe were to be seen in financial services, it would have to come from the banks’ ability to truly understand, engage and interact with the customer as a human individual — not just a customer with a customer information file (which exists as a unique customer identifier in a bank’s core system), but as a human being with… financial habits and preferences, emotional manifestations that go with finances, and can physically/biologically engage with the bank accordingly.”

Mr. Araneta explained that Philippine banks still work on manual processes that require effort from their clients to go to the bank branch for certain processes that could have been done digitally such as the filing of forms and expressing explicit consent.

“Unless those unnecessary processes are reduced, Philippine banks will still lag in the journey to FIRe,” he said.

This is more so for rural banks, which are in early phases of digitization process.

“If rural banks would not adapt to the changing business environment, their viability and sustainability as financial institutions may be in danger. This is because customers’ demand for technology-aided banking services will never be met by traditional rural banking approaches,” the BSP said.

“As such, rural banks need to ramp up their efforts to integrate IT-enabled projects and solutions in their business strategies to cope with the competition and address market needs,” it added.

Notwithstanding the technological advances brought by FIRe, BPI’s Mr. Jocson said that digital banking would not supplant branch banking: “In the context of the Philippines, we are years away from that,” he said.

“Digital banking and branch banking will exist side by side, with different purposes for the customer. This will give clients a choice and greater control in making banking transactions faster, more accessible, and safer,” the BPI official said.

Security Bank’s Mr. Bantigue shared a similar view, saying that Security Bank would focus on growing all their channels to create an “omnichannel” network as most of their customers would probably go for “multi-channels” suited to their lifestyles and needs.

“In the medium term, we do not see digital banking totally replacing branch banking. However, we do recognize the fact that digital will emerge as a major channel for the customers most especially the younger segment,” Mr. Bantigue said.

SETTING UP RELIABLE DATA INFRASTRUCTURE
In addressing the risks and challenges relative to the adoption of FIRe technologies, the central bank said that the banking industry has started to implement enhancements to their IT risk management in accordance with BSP rules and regulations.

For IDC Financial’s Mr. Araneta, Philippine banks would have a lot of work to do when it comes to building up reliable IT infrastructures.

“[The] [b]anks’ IT infrastructure in general fail to meet higher standards of reliability (no errors), availability (no downtime), and security (no breaches),” Mr. Araneta said.

“Philippine banks have underinvested in IT security compared to other banks in other markets — and are therefore not equipped to deal with requirements detection of IT security gaps (weak review of IT environment to assess especially the presence of advanced persistent threats). [They] might have focused on prevention and response, which is good, but not on the necessary steps of detection, mitigation of cyber threats,” he explained.

BPI, according to Mr. Jocson, is working on the continuous improvement like upgrading their technology and strengthening their firewalls against cyber attacks.

FUTURE-PROOFING THE WORKFORCE
While FIRe is seen to improve the efficiency of banking operations, much of the concern lay on its impact on bank employees, particularly on the security of their jobs.

“The normal fear in anticipation of this technology is that people will lose jobs… because there is a notion that everyone will be replaced by machines,” said Jesus Exequiel I. Nidea, national president of the National Union of Bank Employees (NUBE).

Alan A. Tanjusay, spokesperson of the Associated Labor Unions-Trade Union Congress of the Philippines (ALU-TUCP) said that FIRe is causing anxiety among the sector’s rank-and-file, managerial and supervisory employees.

“In our observation, the anxiety, though guarded, manifest in many forms but the general sentiment revolves around security of tenure, wages and benefits, social protection insurance, and individual capacity to adapt new ways of doing things,” Mr. Tanjusay said.

Jobs most affected in the sector, Mr. Tanjusay said, are front desk services such as tellers and verifiers. Jobs in marketing, billing, new accounts, and customer relations are going to be affected as well.

“We can’t really say up to what extent banking processes can be digitized, but it will be challenged by data breaches holding back customers to automate. Also, there are customers who wanted empathy in the bank’s quality service that machines are unable to provide,” Mr. Tanjusay said.

For Mr. Tanjusay and the rest of ALU-TUCP, FIRe is both a challenge and an opportunity: “A challenge, because we do not know the extent of the animal. An opportunity because we are capable of change and able to adapt to a certain extent.”

Regardless of the pace of circumstances, he said that bank employees can adapt by organizing themselves as a union not only for security in jobs, benefits and tenure, but also in learning new skills through sharing and capacity building.

“By organizing themselves as a union and collectively bargain is one sure way of leveraging FIRe thus addressing a part of the anxiety,” he said.

“The other part, which is the most important one, demands individual willingness to evolve and acquire new skills. The more willing you are to adapt new learning the more the chances for the individual to be likely employed.”

For NUBE’s Mr. Nidea, it is a matter of managing the changes associated with FIRe.

“We have to make sure that our members are actually aware of these changes and then come up with the provisions controlled in our CBA (collective bargaining agreement) to ensure that the union is being notified by the bank of whatever changes they will make in terms of processes… and then making sure with a certain provision [that would ensure] the continuity of the employment of its people by training and recruiting,” he said.

“For those who cannot adapt… there are banks who have actually implemented the early retirement program (ERP) precisely because they found out that there are so many people who no longer adapt to the new systems,” he added.

IDC Financial’s Mr. Araneta said that while they acknowledge the anxieties surrounding the “robotic process automation” (RPA), its adoption can actually be beneficial in terms of boosting employee productivity, efficiency, and morale. For instance, he illustrated that with the adoption of the RPA, the turnaround time to complete a process can be reduced by fifty- to ninety-percent.

“Employees can be freed up from mundane tasks, allowing them to focus on critical initiatives such as non-repetitive complex transactions, improving customer engagement, or engaging in business development. From the perspective of giving more enriching and rewarding jobs to people, the improvement of morale is an advantage of RPA,” Mr. Araneta said.

He added: “RPA can also be seen as a preemptive action considering the future workforce, as there seems to be little to no inclination from younger talent to do mundane, repetitive tasks that can be easily executed with the help of technology.”

In addition, RPA can lead to quicker deployments, faster outcomes, and easier rollbacks according to Mr. Araneta: “At peak times, an institution can increase its army of bots, say, from 10 to 100. The rollback is also as easy and quick as deployment,” he said.

Another benefit, he said, is that institutions such as banks can handle varying workloads 24/7.

“[A] humorous frequently segue is that bots do not complain about working on weekends or holidays. This flexibility not only increases turnaround time and speed to market but also improves cross-sell, upsell opportunities and overall market competitiveness for FSIs (financial services institutions), as they instead assign more sales-driven activities to human employees,” he said.

The BSP is of the same view, even as they are on “constant surveillance mode” of the market environment to ensure that regulatory and supervisory frameworks can mitigate the risks brought about by FIRe while at the same time, taking advantage of its benefits.

“With respect to labor force, it will inevitably result in gradual shifts of manual work allocation. Those activities that are repetitive and linear will require less human staffing though it is not to be construed as demand for manual labor will lessen,” the BSP said.

This was also the view of the Asian Development Bank (ADB) based on its flagship report Asian Development Outlook 2018 themed “How Technology Affects Jobs” wherein it noted these new technologies only automate routine tasks that form part of certain jobs, such as soldering components onto a circuit board repeatedly on an assembly line or counting cash in banks.

Likewise, the unpublished results of the Philippine TalentMap Initiative study provided by SFI Group of Companies also point out to the banking sector’s low competencies in areas needed for high-skilled jobs. A joint project of the Department of Labor and Employment, SFI, and Tested Talent, the areas which the study considered the sector’s workforce having “low skills” were creative problem solving, innovation, problem sensitivity, decision making, and planning and organizing.

STAYING AHEAD OF THE CURVE
Regulatory authorities are not exempted in the disruptive effects of FIRe with the BSP noting it to be an “ongoing challenge.”

This would mean that the BSP must develop its personnel for them to craft appropriate regulations which would balance the convenience brought by innovation with security and client protection.

“In much the same way technology is changing the financial services industry, the BSP is also adopting FIRe in enhancing the way we regulate and supervise BSFIs. This is through the use of RegTech/SupTech (regulatory and supervisory technology) solutions aimed at enabling the BSP to have a more intensive, risk-focused and forward-looking supervision while easing BSFIs’ regulatory compliance burdens,” the BSP said.

The BSP said that they are in the final stages of rolling out two RegTech solutions — an application programming interface that would facilitate regulatory reporting by BSFIs and a chatbot where financial consumers can easily lodge complaints via social media and other digital channels,” it added.

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