DIGITIZE, DIGITIZE, DIGITIZE
‘Digitalization allows us to lower our operational costs. Now we are also leveraging the use of artificial intelligence to serve the traditionally underserved sectors because the technology now lowers the cost of servicing that sector.’
Even before the Covid-19 pandemic struck, the banking industry already had digitalization on top-of-mind discussion in board meetings. But the pandemic presented new circumstances that created an unstoppable trend that made digital banking more relevant than ever. UnionBank of the Philippines president Edwin R. Bautista said the pandemic disrupted the industry and that almost every bank, large and small, adopted digital technology and saw a spike in digital banking usage.
"We are taking the digital banking approach," Bautista said in an interview with Daily Tribune. "Digitalization allows us to lower our operational costs. Now we are also leveraging the use of artificial intelligence to serve the traditionally underserved sectors because the technology now lowers the cost of servicing that sector."
UnionBank's willingness to adopt digital tools and cutting-edge innovations, when needed, allowed it to expand its market reach. Its relentless pursuit to be at the forefront of digitalization, not only in the banking sector but in the Philippines, is extraordinary. The introduction of AI was a big leap for UnionBank. Bautista said, "Traditional banks will not touch the so-called unserved and underserved sectors because the cost of servicing them was too high. A big portion of the cost is the fact that it is very difficult to predict whether they will pay back or not. In the past, banks assessed credit by looking at financial statements, taxes, etc. It is more difficult for the underground economy because they have no written transaction documents."
The lack of these essential documents does not mean a person cannot pay, but rather, the banks try to avoid them because of the risks.
"AI helps us by putting together different information about that particular business or person, including the cash flows, sales, and other trends that are usually taken for granted by manual assessments. AI can give a prediction on the likelihood of whether they will pay you back or not, Bautista added.
Indeed, UnionBank is one of the very first banks to witness the storm of digitalization. Unfortunately, many popular banks are very slow to catch up and are new to the list of digitalization.
Low digital banking penetration
Although the Philippines is one of the fastest-growing economies in Southeast Asia, the country has the lowest digital banking penetration of any Asian market, according to a study by McKinsey& Company.
In a survey, McKinsey found that only 12 percent of Filipinos had tried Internet banking, compared with 28 percent in other developing countries of the region.
“In the Philippines, 35 percent of digital consumers (defined as consumers who make purchases online) own a smartphone, but only nine percent of Filipino consumers said they had used a smartphone to bank, compared with 26 percent in developing Asia,” the study said.
In addition, local banks allocate less than 10 percent of their revenues to IT, compared with nearly 15 percent among leading banks elsewhere in Asia–Pacific and digital channels account for just five to 15 percent of their income, well below the average of 25 percent for their peers in Asian emerging markets.
But change is coming, Bautista said.
'No more baby steps
"We have a problem if we continue taking baby steps because, by the time your development is ready, a new technology will emerge. You need to move faster and you need to take bolder actions if you want to ensure that you stay in the game," he added.
In order to be competitive, Bautista said technological advances such as blockchain and AI would need to be integrated into the banking system, adding these technologies will play a critical role in the evolution of the industry.
The need to modernize the banking industry's backbone, including its core banking systems, deposits and credits, will remain the most important services of a bank, he added.
Bautista said that harnessing the powers of AIs, machine learning and blockchain would deliver a seamless customer experience on the front end by solving the growing intolerance of clients for glitchy apps or systems.
“We don’t really know where the banking sector or technology is going to go because, to me, the AI that we see right now is not even stage one of its potential. Yet, we are already talking as if our lives will be destructed by the technology,” he said.
“You can just imagine if we reach stage two or three,” Bautista added.
According to Bautista, AI is going to disrupt our lives in all aspects. “We don’t know how big its impact will be, but we have to figure out how we can adapt,” he said.
All told, no matter how banks utilize digital technologies or even AI, the focus on technology and constant investments in IT infrastructure across the industry is paramount to avoid the risk of being disrupted and be prepared for any disruption.