THE continued adoption of digitalization and open finance in the Philippine banking industry is expected to transform the delivery of financial services, enhance lenders’ revenue-generation capabilities and boost economic growth.

Digitalization in the sector was accelerated when banks were forced to find new ways of delivering financial services to the public amid the mobility restrictions imposed at the height of the coronavirus pandemic, Bangko Sentral ng Pilipinas (BSP) Deputy Governor Chuchi G. Fonacier said.

“The increased digital transformation of BSP Supervised Financial Institutions (BSFIs) and the financial consumers’ growing preference for digital payments and financial services brought about tremendous gains in terms of BSP’s advocacy on financial inclusion and digital payments transformation roadmap,” she said in a Viber message.   

One of the central bank’s priorities is to ensure the delivery of payment solutions aligned with consumers’ needs, she said, and digitalization has enabled increased efficiency, stability and confidence in online payments.   

“As technological innovations become mainstream in financial services, financial consumers can avail of accessible, affordable and convenient digital financial services,” Ms. Fonacier said. “To further cement this positive development, the BSP implemented regulatory and supervisory frameworks covering digital banking, open finance and regulatory sandbox, among others.”

The BSP wants 50% of retail payments done digitally and to onboard 70% of adult Filipinos into the formal financial system by the end of this year.   

Latest data from the central bank showed the share of digital payments in the total volume of retail transactions in the country rose to 42.1% in 2022 from 30.3% in 2021. 

Merchant payments, peer-to-peer remittances and business transactions of salaries and wages were the key contributors to the increase in digital payments.

Meanwhile, about 22 million Filipinos gained access to formal financial accounts between 2019 and 2021, bringing the country’s banked population to about 56% of adults in 2021, up from just 29% in 2019.   

The increase was driven by faster growth in digital payments, the central bank earlier said, as 36% of all Filipinos had e-money accounts in 2021, up from the 8% share in 2019.

However, the Philippine central bank is also aware of the risks associated with digitalization, Ms. Fonacier said, including cyberattacks.

“Thus, the BSP employed various regulatory and supervisory responses to manage such risks,” she said, adding that they issued BSP Circular No. 1140 to mandate institutions to adopt fraud management systems to address increased cybercrime incidents.

The circular issued in March 2022 amended risk management regulations to help strengthen cybersecurity and minimize losses from online fraud and illicit activities.

The BSP has also issued several memoranda on application programming interface (API) security, security of retail electronic payments and financial services, and e-mail security to address emerging threats that affect BSFIs, Ms. Fonacier said.   

Amid the rapid digitalization of the sector, banks and financial institutions are tweaking their business and operational models to keep up with “new normal,” she said.

“BSFIs are increasingly migrating to the cloud to address capacity demands and scalability. We’ve also noted growing interest in the areas of artificial intelligence (AI), including generative AI such as ChatGPT, digital marketplace and open finance, among others,” she said.   

The BSP launched the Open Finance PH Pilot in partnership with the World Bank and the International Finance Corp. The initiative aims to build financial profiles and credit histories for unbanked Filipinos.

The pilot is a voluntary pledge of financial institutions to co-develop an interconnected ecosystem that would allow consumers to take more control over their financial data and to use various financial products and services from different providers.

“Moving forward, we still see a lot of growth opportunities to deepen digital innovation and transformation in financial services delivery, to capture or retain customer base and maintain competitiveness while enhancing revenue-generation capabilities,” Ms. Fonacier said.

“Nonetheless, the BSP and the industry players must continue to support the digital expansion by making sure that technologies and systems remain safe, robust, accessible and resilient against cyber and IT related risks,” she added.   

Using Threat Intelligence technology will help financial institutions strengthen cybersecurity, Siang Tiong Yeo, general manager for Southeast Asia at Kaspersky, said in an e-mail.

He added this technology can help allow internal cybersecurity departments to focus on objectives with higher priorities.   

“Also, having a Managed Detection and Response solution that allows a cybersecurity team to employ the help of external experts to detect and stop complex attacks on company infrastructure at an early stage would be a great defensive measure,” he said.

Mr. Yeo added that financial data sharing and open banking initiatives are not new concepts, with Singapore being among the early adopters in Southeast Asia.   

“In a study in 2022, 85% of professionals in Singapore agree that open finance is giving consumers access to a greater range of financial services,” he said.

“Additionally, 76% agreed that open finance has the potential to bring about fairer and more equal financial services, while 90% agreed that open finance is already having a positive impact on the industry and making it more collaborative.”

However, data and third-party security should be fully covered in any data-sharing business model, especially in the financial industry.   

“As there are potential opportunities for growth in the industry for both players and consumers with the adoption of open banking, our experts at Kaspersky are predicting that this may lead to more opportunities for cyberattacks,” Mr. Yeo said.

He said open banking is vulnerable to risks such as financial fraud and identity theft.

“We also predict that the continued adoption of open banking systems will result in API abuses shifting from an infrequent to the most frequent attack vector, resulting in data breaches for enterprise web applications,” he said.   

Thus, Kaspersky said banks should adopt a unified cybersecurity approach with process-based security implementation, employee and user/consumer awareness and education, and technologies created specifically for the industry.

The further adoption of digital platforms can boost the Philippines’ gross domestic product (GDP) if done in a manner that provides equitable access to the internet access and digital services, Swarup Gupta, industry manager at the Economist Intelligence Unit, said in an e-mail.

“Digital transformation of enterprises and governance processes has the potential to substantially boost GDP, and this is why the Marcos administration has rolled out several initiatives in this area,” Mr. Gupta said.

“A major positive is the fact that, according to recent statistics, the Philippines has some of the best internet speeds in the world, which is a crucial factor when it comes to aiding the process of digital transformation,” he said.   

However, digitalization also makes data vulnerable to theft and other illicit activities if not monitored effectively.   

“Late last year, the BSP launched a regulatory and supervisory solution in order to lighten the burden of regulatory compliance while automating the central bank’s supervisory role on cybersecurity,” Mr. Gupta said.   

“This solution catered to 150 supervised financial enterprises as of end 2022 and will soon be expanded to 600,” he said.   

Despite having a young population and a relatively high internet penetration rate, the Philippines faces multiple challenges to digitalization, Mr. Gupta said.   

“Philippine banks have to launch and persevere with services which can cater to a population which remains relatively underbanked apart from being less fortunate economically,” he said.   

Based on the central bank data, 34.3 million adults remained unbanked in the country. Farmers and agriculture workers were the least banked among all types of workers, with 73% having no accounts, the highest financial exclusion level seen in 2021.

Other segments that had a high percentage of unbanked adults were workers for private households (48%) and self-employed individuals (45%). Non-working adults without accounts stood at 52%, equivalent to 15.6 million adults. 

Still, the outlook for digitalization and open banking in the Philippines remains bright, Mr. Gupta said.   

“The opportunities are numerous in terms of a spurt in financial innovation, leading to higher economic growth, and the evolution of personalized products and services to cater to specific need sets,” he said.

“Risks include an increasing prevalence of cybercrime and the consequent need for regulators to strike a balance between helping to foster innovation and protecting customers,” he added. — Keisha B. Ta-asan