AI in Philippine banking: Embracing innovation amid challenges

By Abigail Marie P. Yraola, Deputy Research Head

AS THE COUNTRY embraces the digital revolution, the use of artificial intelligence (AI) in its banking operations shows significant advancements for the country.

AI, particularly generative AI (GenAI), redefines the operational and strategic landscapes of the banking sector and thus, has become a crucial factor in transformative change, Ernst & Young said in a report titled “How artificial intelligence is reshaping the financial services industry.”

The report highlighted that utilizing AI is driving a significant transformation in financial services by fostering innovation and streamlining operations.

Additionally, with its broad applications, AI enhances customer service, improves risk management, and reshapes capital markets.

The banking sector is adapting to a landscape sculpted by the six major trends: emerging technologies, ecosystem models, sustainability, digital assets, talent acquisition, and regulatory adjustments, Ernst & Young said in their report noting that these factors are driving the industry to move beyond traditional boundaries, impacting not only consumer banking but also transforming investment, corporate banking, and capital markets.

“By integrating AI technologies, banks are setting new benchmarks for operational efficiency, client engagement and sustainable growth,” it said.

The Bangko Sentral ng Pilipinas (BSP) recognizes that AI is continually evolving.

“AI has been identified as one of the crucial components of the fourth industrial revolution,” the BSP said in an e-mail.

The central bank added that AI can bridge the gap in financial inclusion through innovative solutions.

However, it also pointed out barriers that hinder financial inclusion which include (a) a lack of documentation required to open an account, (b) low awareness of the digital products and services available in the market, and (c) the high costs associated with the infrastructure needed for digitalization.

ADOPTING AI IN BANKING OPERATIONS
Currently, the central bank is guided by the definition provided by the Organisation for Economic Co-operation and Development (OECD), which describes an AI system as a “machine-based system that, for explicit or implicit objectives, infers how to generate outputs based on the input it receives.

These outputs, it said, can influence physical or virtual environments. Different AI systems vary in their levels of autonomy and adaptability after deployment.

This definition, the BSP said, aligns with the central bank’s goal of promoting the responsible use of technology to assist in inference and output generation that enhances decision-making processes.

“There has been a notable increase in the adoption and integration of AI solutions within the financial sector, particularly in enhancing decision-making, automating processes, and personalizing services,” BSP said.

It also added that recent advancements in technology have had a significant impact across various industries, particularly in BSP-supervised financial institutions (BSFIs) but noted that BSFIs can choose not to adopt AI if their existing processes are working efficiently.

The central bank further explained that when considering the adoption of AI systems, BSFIs should ensure that these technologies are integrated into their overall business plans, highlighting that it should align with its digital transformation goals.

“As with any emerging technology, there are benefits and risks associated in adopting AI,” the central bank said, acknowledging that there is “no one-size-fits-all approach for AI systems.”

However, it suggested that financial institutions can establish a policy statement outlining their approach towards AI adoption which could help prime the organization on its use.

Fintech Alliance.PH Founding Chairman and Rizal Commercial Banking Corp. Executive Vice-President and Chief Innovation and Inclusion Officer Angelito “Lito” M. Villanueva said that AI has played a crucial role in democratizing financial access, allowing for more efficient, secure, and personalized banking experiences.

He cautioned that alongside these advances, AI also brings complex challenges that demand careful attention to regulation and ethical boundaries before widespread adoption.

He further explained that AI is crucial for automating processes, enhancing predictive analytics, and enabling targeted decision-making, which helps banks accomplish data-driven tasks more efficiently and accurately.

“Central banks can leverage AI for regulatory compliance and fraud detection. In commercial banking, AI can personalize customer interactions, credit risk analysis, and cybersecurity measures,” Mr. Villanueva said in an e-mail interview.

He added that as AI evolves, concerns about job displacement, especially within low-skilled sectors, are growing. Under Philippine labor law, employers are permitted to terminate employees if labor-saving technologies, such as AI, lead to redundancies, provided that legal standards are followed.

“This presents a need for the government to focus not only on AI regulations but also on creating alternative job opportunities for displaced workers,” he said.

CONSIDERATIONS AND IMPLEMENTATION
When considering the adoption of AI or any emerging technology, financial institutions should start by evaluating their risk appetite.

“Depending on the risk-reward analysis, BSFIs could integrate AI into their systems with proper controls,” the BSP said.

The central bank expects that risk management measures for consumer protection, cybersecurity, and anti-money laundering/combating the financing of terrorism (AML/CFT) are established whenever an AI system is implemented.

“At the minimum, financial institutions should adhere to the principle of “Do no harm” regarding the use of AI, whether internally or externally,” BSP said.

For Mr. Villanueva, phased and purpose-driven AI implementation should be given priority to areas that improve customer experience, risk management, and boost cybersecurity.

Customer-facing applications, such as AI chatbots and virtual assistants, should be deployed initially to streamline basic customer interactions and make banking more accessible.

“At RCBC, we’re focusing on how AI could improve the accuracy of customer risk profiles and improve cybersecurity protocols. Through Fintech Alliance.Ph, we work to advocate for AI policies that promote both innovation and customer protection, a balance that helps financial institutions adopt AI responsibly,” he said.

Mr. Villanueva highlighted that traditional AI, such as predictive analytics and machine learning, can reinforce the foundational framework of Philippine banks, while GenAI can enhance customer engagement efforts.

EMERGING CHALLENGES
A report by McKinsey & Co. titled “Scaling Gen AI in banking: Choosing the best operating model” highlighted that banks and other financial institutions rapidly use AI technology, and challenges are emerging.

It further explained that AI, specifically Gen AI is transforming the banking industry as financial institutions leverage this technology to enhance customer-facing chatbots, detect fraud, and accelerate time-consuming tasks such as code development, creating pitch book drafts, and summarizing regulatory reports.

They suggested that banks and financial institutions can adopt varying approaches to structuring their GenAI operating models, ranging from highly centralized to highly decentralized.

The BSP is cognizant of its crucial role in promoting an enabling regulatory environment that promotes innovation and risk resilient financial systems.

When an institution intends to adopt artificial intelligence (AI), it should conduct risk-based assessments before development. These assessments should focus on key risk areas, including consumer protection, cybersecurity, and anti-money laundering (AML) and counter-terrorism financing (CFT). Additionally, continuous monitoring is essential to validate the AI system’s outputs over time.

For Mr. Villanueva, institutions can maximize the value of AI by prioritizing transparency, ethical practices, and strong data governance policies.

The proactive measures taken by the BSP in developing regulatory frameworks for AI are essential for establishing these standards, he highlighted.

“We need that distinction between goal-oriented AI and ethically guided AI. AI’s capabilities for automation and problem-solving raise questions about maintaining a balance between efficiency and ethics,” Mr. Villanueva emphasized.

“We must ensure that human judgment remains central, especially as AI advances to more autonomous roles, how AI systems are designed and used ultimately defines their impact, whether good or bad.”

For John Paolo R. Rivera, senior research fellow at Philippine Institute for Development Studies, he said that AI can be used by banks to detect fraud in transactions and forecast financial risks.

“As an advantage, generative AI can create customer outreach campaigns or designs tailored financial advice scripts using natural language generation,” he said in a Viber message.

He further explained that traditional and GenAI are complementary technologies that financial institutions can utilize to enhance operations, boost customer satisfaction, and ensure regulatory compliance.

“Banks should focus on adopting hybrid solutions — using traditional AI for precision and security, while exploring generative AI for innovation and customization.”

RISKS AND BENEFITS
Mr. Villanueva listed that harnessing AI offers numerous life-changing benefits, including improved decision-making, cost reduction, and more personalized customer experiences.

“In fraud prevention, AI systems can monitor transactions in real time, which is critical in addressing the Philippines’ higher-than-global fraud rates. There is promise in reducing fraudulent transactions and boosting security.”

However, he also cautioned that integrating AI posts risks such as data privacy concerns, potential biases, and high implementation costs.

For example, he said that if not carefully monitored, AI systems can inadvertently introduce biases into decision-making processes.

The central bank emphasized that financial institutions should also develop a workforce training plan to prepare employees for the adoption of AI technologies.

“Similarly, with the rise of AI-powered cyber-attacks, institutions should continuously monitor and strengthen their cybersecurity defenses,” the central bank said.

Mr. Villanueva emphasized that they are focused on implementing ethical AI adoption by working with regulators to establish standards that protect consumer data and mitigate bias risks.

He noted that reports from McKinsey and Goldman Sachs predict that AI will impact millions of jobs in industries such as manufacturing and marketing.

“This shift will require flexible regulatory frameworks that protect consumers without stifling innovation,” Mr. Villanueva said.

Utilizing AI in banking operations, he said, is not just black or white. It has dual sides benefits and risks, wins and losses.

It is undoubtedly a powerful tool that can either help us create a more inclusive and prosperous future or exacerbate the existing class and digital divide.