The digital evolution of the banking industry

The high cost of building bank branches, coupled with the scarcity and ever increasing salaries of skilled banking professionals, are factors that discourage banks from expanding in far flung areas of the country. As a result, banks have concentrated their branch networks in central business districts and areas where corporate offices and mid- to high-net-worth customers are located. This has made banking inaccessible to millions of Filipinos as well as scores of micro, small- and medium-sized enterprises (MSMEs) in the countryside.

The advent of digital technology can now make banking services available to all, regardless of where they are. In other words, a souvenir vendor operating in the town of Carmen, Bohol can now have access to the same banking services as a BGC-based conglomerate would. Not only can the vendor use a bank for simple needs like making cash deposits, withdrawals, and applying for business loans, the vendor can now make arrangements for more complex transactions like direct payments of payroll, sales pick-ups, employee loans, automatic contributions to SSS, PhilHealth, and Pag-Ibig, financial advisory and even wealth management. All it takes is for the vendor to have a smartphone.

Digitalization democratizes banking services and this brings forth tremendous opportunities for banks. After all, more than 90% of businesses in the country fall under the MSME category and, collectively, they employ 70% of the work force. Many of these MSMEs are located deep in the countryside. Tapping these MSMEs through a digital platform could easily double a bank’s client base. Even better, it can be done at a lower cost than serving them through brick and mortar branches. It is a win-win situation

What’s exciting is that the top tier banks in the country are on a mad scramble to migrate to a digital system. Hence, it is only a matter of time before everyone can enjoy banking services.

An old friend of mine, Owen Cammayo, along with Bank of the Philippine Islands (BPI) President Cezar Consing, recently briefed my colleagues at the Bulong Pulungan media group on BPI’s transition to the digital sphere. While I was not able to attend the event, I thought it would be interesting to learn how the banking industry is evolving. BPI experience is representative of what most progressive banks are going through. Owen was kind enough to provide me with data and answered my questions on BPI’s digital journey.

BPI has always been a maverick in the banking industry. From a bank that operated using pencils and ledgers back in the 19^th and early 20^th century, it was the first to migrate to computerized mainframe banking in the 1960s. This was followed by the introduction of Automated Teller Machines (ATM) in the ’80s, a wave that ushered-in the epoch of self-service banking. These days, with the deep penetration of cellular technology and smartphones, a new era has began. They call it the “experience era” because anyone can experience an entire range of banking services, anytime, anywhere.

“As the world becomes increasingly digitalized, embarking on this (digital) journey is a critical step to maintaining the competitive advantage of our franchise and growing our business,” stated Mr. Consing. As it stands, the current mainframe system used by BPI is four decades old and is no longer compatible with new technologies. The old system, in effect, is holding back the growth of the bank. Not just BPI but all banks must evolve to remain relevant.

BPI’s digital journey started three years ago, said Mr. Consing. It started with the basics — building a state-of-the-art cyber-security operations center, an endeavor that came with a price tag of P11.6 billion. This was accompanied by the digitalization of the bank’s core systems to make data processing faster. All these resulted in a 13.8% improvement in processing speed.

Last April, the bank undertook a deposits systems upgrade to increase capacity. The upgrade allowed the bank to process three times more transactions than the old mainframe system could. This will enable the bank to entertain the needs of hundreds of thousands of new clients.

Phase Two of the digital journey is more complex. It involves the synchronization and co-operation of the entire digital environment; partnering with other digital platforms (e.g. Lazada and G-Cash); reshaping the way the public pays for goods and services (the use of digital wallets); deepening the penetration of digital banking in the countryside; digitizing the end-to-end processes of the bank, among others. All these will take several years to complete.

When done, BPI will be a fully digital bank accessible to all. Digitization will allow them to be less dependent on its traditional clients of conglomerates, big businesses, and high-net-worth individuals. It can now entertain more MSMEs and individuals with relatively low average daily balances. In fact, the drive towards attracting more MSMEs has already began. “Our goal,” says Mr. Consing, “is to see our SME loans, consumer loans, and micro-finance loans account for a larger percentage of our loan book.”

The era of BPI being the bank of the elite is coming to an end. If Mr. Consing has his way, BPI will be the bank of the republic, just as it was envisioned by its founders back in 1851.

The digitalization of BPI does not mean it will stop opening new branches. The branch expansion will continue, albeit not as aggressively as before. New branches will focus on unserved markets. This is where BPI’s micro-finance subsidiary, Direct BanKo, comes in. BanKo make access to financial products and services more convenient, especially for those in the countryside. To make banking less intimidating for the country-folk, BanKo has deployed loan officers called BankoMares and BankoPares to coach first-time banking clients on how to utilize banking services. It is also their way of strengthening the relationship between client and bank.

It has also made loan applications simpler. Instead of having to deal with a long list of documentary requirements, Direct BanKo only requires simple documents that most micro-entrepreneurs can easily obtain, such as a barangay permit. The entire process is designed to be less intimidating.

Having brick-and-mortar branches operate alongside the digital platform is a strategy called “High-Tech, High-Touch.” High tech because the bank wants everyone to shift most of the everyday transactions to the mobile app. High touch because the bank still needs personal engagement. The branches will be the venue for high quality conversations, be it for financial advice or how to use more sophisticated products offered by the bank.

BanKo seeks to ease-in the unbanked into the practice of banking. They will have 300 offices operating across the archipelago by the end of the year. Mr. Consing envisions the BanKo clients of today to be BPI’s digital clients of tomorrow.

Being a maverick has kept BPI at the top of its game for almost two centuries. With its digital revolution, they can assure that the country’s first bank will have a place in tomorrow’s world.

Lets hope other banks migrate to digital platforms as smoothly and as strategically as BPI is. The more that succeed in their digital transitions, the stronger the banking industry will be.

Andrew J. Masigan is an economist.