By Karl Angelo N. Vidal
FOR much of history, banking was done in branch offices, but beginning in the late 20th Century, digitization began to creep in, allowing account holders ever more banking convenience without needing to leave their homes or offices. With tech revolutionizing banking, how will financial institutions keep their networks relevant?
The Fourth Industrial Revolution is associated with and popularized by World Economic Forum founder Klaus Schwab. He characterized this era as an array of new technologies “fusing the physical, digital and biological worlds” and impacting all industries and economies.
One of the sectors that was first engulfed by the revolution was the banking industry. New concepts like artificial intelligence, cloud computing, data science and Internet of Things helped lenders streamline operations and improve services.
Union Bank of the Philippines President and CEO Edwin R. Bautista said the bank’s digital transformation journey has made an impact across its businesses.
“In our mortgage business, most of the customers were referred to us by the developers,” Mr. Bautista told reporters following the bank’s annual stockholders’ meeting. “When the customer is referred to us, it would take 10-15 days before we approve the loan… Now, all it takes is 10 minutes for our sales people to enter the data. There’s an algorithm and credit scoring.”
After the Aboitiz-led bank introduced this system that trims significantly the approval time, Mr. Bautista added this immediately translated to profitability.
“We have to compete with other banks. When you talk to bank A and us at the same time, before you’re through, approved na kayo (your loan is already approved),” he said. “That one, we can achieve only because of the investments we made on the digital front.”
Angelito M. Villanueva, Rizal Commercial Banking Corp. (RCBC) chief digital innovations officer, said one of the lender’s imperatives is to revamp the way clients interact with them through data science.
“Everything we do starts with the customer. Personalization of services makes them feel special and unique,” Mr. Villanueva said. “This is where data science comes in. RCBC’s smart optimization and utilization of these data algorithms and insights will be key.”
Digital technology also allowed foreign banks to penetrate the Philipine market without a branch network.
Dutch financial firm ING Bank N.V. and Malaysian lender CIMB Bank both entered the retail banking industry as all-digital banks earlier this year, offering savings accounts with high interest rates and without maintaining balances.
These banks provide higher rates than most retail lenders as they are able to keep operating costs low because they do not need to maintain a branch network.
The emergence of online banking drove banks to see their branches as burden. In other parts of the world, banks started to trim the number of branches as more people are now inclined to bank using computers and smartphones.
“Bank branches are being closed in major Asia-Pacific markets — Thailand (and) Australia have seen the greatest number of closures so far into the year,” said Michael Araneta, head of advisory and research of IDC Financial Insights.
In a study conducted by data analytics firm Fair, Isaac and Co. (FICO) among 20 bank chief risk officers from across Asia Pacific, about 28% of the respondents said their organizations need to trim down their headcount by at least 5%, and another 28% believe they need significantly less staff, projecting reductions of at least half by 2030.
Despite the impulse to reduce branches amid the rise of technology and evolving business models, the Philippines remains an outlier.
“It is too early for banks to be closing branches in the Philippines because customer behavior has not really shifted to digital,” Mr. Araneta said.
“Many customers still prefer to transact via branches,” he added, noting that transaction levels in the branches are still high, as evidenced by long queues.
Dan McConaghy, FICO president in the Asia Pacific, said the bulk of the branch banking needs in the Philippines are in the rural areas, where internet connectivity that enables digital banking remains poor.
Based on The State of Mobile Network Experience report by mobile analytics firm OpenSignal, the Philippines had the 16th-slowest download speed among 87 economies surveyed and 11th-slowest in upload speed.
Poor internet infrastructure is extending the useful life of bricks-and-mortar branches, especially in far-flung areas.
“Even in (rural areas), there have been efforts to improve access to banking, through merger and consolidation of rural banks, micro-banking offices and agency banking,” Mr. McConaghy said.
In December 2017, the Bangko Sentral ng Pilipinas (BSP) allowed banks to set up branch-lite units. This kind of bank office is compact and less formal compared with the typical branch, allowing lenders to penetrate unbanked and underserved areas at reduced cost.
The central bank reported in February that 155 banks have established 1,751 branch-lite units as of end-June 2018. These branches are now operating in 738 local government units, of which 151 areas are being served by branch-lite units alone.
Apart from unreliable internet connection that hampers the rollout of digital banking, Mr. McConaghy said the barrier to Filipinos fully adopting digital banking is the “lack of a compelling digital user experience” encouraging them to stop going to the branches.
“Consumers expect their banks to be as easy to use as Uber, Netflix and Airbnb,” he said.
Mr. Araneta added many customers still prefer doing physical banking, as an online banking strategy has yet to establish standards of reliability and usability.
“The way that customers have to build and maintain relationships with their banks online makes it really difficult for customers, not easier,” he said.
“The future of branch banking… will really depend on the bank’s business model and the target market it intends to serve,” BSP Deputy Governor Chuchi G. Fonacier told BusinessWorld.
“[T]hose banks serving market segments where they feel that face-to-face contact is still very much valued by their clients would continue to make use of the bricks-and-mortar type or the physical branch.”
In UnionBank’s case, Mr. Bautista said the bank is not opening new branches, but instead focusing on refurbishing old branches to introduce digital banking to its customers.
“We’re using The ARK as a place where they get exposed to digital without going fully digital. One step ahead,” he said.
Called The ARK, UnionBank’s concept branches eliminate the so-called pain points in a branch such queues and paper forms. Instead, customers are entertained by “bank ambassadors” for sit-down transactions done via mobile tablets.
Mr. Bautista said UnionBank hopes to launch 40-50 refurbished branches this year, coming from the 16 The ARK branches as of this writing.
Meanwhile, Bank of the Philippine Islands (BPI) will continue to expand its branch network as poor internet service hampers the growth of digital banking.
“Knowing that the country has 7,100 islands wherein the coverage of communication is still lacking… is not conducive for digitalization,” BPI Chief Digital Officer Noel A. Santiago said in an interview.
“We’re putting up more branches even at the BPI side and even at our fully owned subsidiary, BanKo.”
The Ayala-led BPI Direct BanKo targets to open an additional 100 branches this year to a network of about 300. The thrift lender offers microfinance to small and medium enterprises.
Eventually, Mr. Santiago said the branches of BPI will evolve as offices where clients can consult officers on their concerns, while digital banking develops moving forward.
“What we’re seeing in the future is the branches will evolve into something like consultation or advisory (whenever clients) need a certain assurance,” he said.
Mr. Araneta concurred, saying the industry will see growth of new branch engagement models.
“Banks might go the route of having different categories of branches, varying branches in terms of size, intent (some might be more transactional than others that might be more advisory-led, some might be for origination), nature, staffing levels, and even look and feel,” he said.
As banks in the Philippines need to employ new technology to stay relevant, branches might take some time to become obsolete given the poor internet infrastructure and the weak value proposition digital banking currently presents.
“Digital is addition,” Mr. Villanueva said. “Having several touchpoints will always be there. Digital, in the Philippine context, may be hi-tech yet still hi-touch.”