For years, people have been talking about digital transformation (DX) across all sectors that by now, the public expects that institutions have come fully digital. However, based on FINTQ’s Inclusive Digital Finance Report titled “Are Philippine Financial Institutions Ready for DX? A Baseline Study,” this is not the case.

In the online survey conducted from Aug. 23 to Sept. 25 this year by FINTQ, the financial technology arm of Voyager Innovations, it was found out that not only do some financial institutions (FI) are unsuccessful in their DX attempt but also a majority of the banks have not even started yet “even as innovation-friendly regulations are set in place, and even as customers are already highly engaged in digital space.”

The third edition of the report aims to examine the readiness of FIs in undertaking digital transformation using an index FINTQ created called CARA: Commitment, Awareness, Readiness, and Adaptability. It is conceptualized to aid in the assessment of FIs digital readiness.

The survey reveals that a whopping 80 percent of FI respondents show “limited” or “minimal” capacity to digitalize their systems and processes. A number of them are still stuck in their legacy systems, which in the first place, is extremely susceptible to cyber attacks.

“To expand access to financial services throughout the country, we need to focus on enabling banks and financial institutions that require massive modernization of their legacy systems,” said Lito Villanueva, managing director of FINTQ.

The survey sent questionnaires to 76 chief executives and/or presidents of the member FIs of the Chamber of Thrift Banks (CTB), Rural Bankers Association of the Philippines (RBAP), and Microfinance Council of the Philippines (MCPI). The FIs that responded to the survey are from 16 out of the 18 regions in the country.

The research shows that when assessed against the CARA quotient, the average FI at this points shows minimal capacity for DX. About 80 percent scored 61 and below out of the perfect 100 score.

The results of the survey send a strong signal on the urgency to examine the pace of digital transformation across FIs in the country. According to the Bangko Sentral ng Pilipinas (BSP), 77 percent Filipino adults are unbanked and bank branches are “physically non-existent” in 35 percent of local government units across the archipelago.

While consumers in urban areas have been utilizing mobile banking, a significant number of FIs are not ready to serve the growing number of digital natives in the country. The report points to the “lack of framework from which institutions could assess their progress.”

Legacy systems

“They are more than willing to disrupt their business models — by modernizing their profitable legacy infrastructure, for instance — knowing fully well that technologies require regular iterations and that the returns could take some time,” the report said.

The report shows that there is a willingness on the FI’s part but “what is missing is the massive digital transformation of the whole financial industry.”

However, the report also quoted the findings of US-based Brooking Institution in the study titled “The 2017 Brookings Financial and Digital Inclusions Project” which finds that the Philippines leads the rest of Asia in expanding financial inclusion. It stated as the main reason is the country having a strong enabling environment.

“There is a national strategy for financial inclusion, a regular conduct of the survey, clear national targets, and a dedicated body looking at financial inclusion,” the report said.

In spite of all this, total DX remained elusive.

Using the CARA Index, the report grouped the respondents into three archetypes and scored from 0 to 100: Path Breakers (score 61 and above), Pack Followers (between 41 and 60), and Digital Laggards (score below 41).

Path Breakers consist mainly of thrift banks (42 percent) followed far behind by rural banks (10 percent).

A measly 14 of the 76 respondents are “highly ready for DX.” Their scores range from 61 to 100. “Of these financial institutions, four have extensive readiness to go digital, which means they score 81 and above out of a perfect 100. Two thrift banks, one cooperative, and one rural bank show a high level of readiness to go digital,” the report said.

Cybersecurity

The report was able to help identify the perceived challenges of banks and bank executives brought by technology. “Only 12 percent say their legacy system poses a challenge. Less than half see data privacy, cybersecurity, and internet connection as a concern. The findings underscore the prevailing observation that digital transformation remains to be a low priority for many small- and mid-sized financial institutions.”

The future is not bleak. The report said that “DX readiness is not a function of bank size or customer base, indicating the leadership, mindset, and political will may be far more critical factors in pushing digital transformation. Even financial institutions with fewer branch operations and smaller base of deposit customers have shown an extensive or substantial capacity to go digital.

With all these challenges as the backdrop, FINTQ, BSP, CTB, RBAP, and MCPI launched the “Road to 20 by 2020” campaign in the hopes of preparing the industry for their own digital disruption through the Digital Transformation Accelerator Program (DTAP). It targets to integrate 20 percent of FIs to PESONet and InstaPay “leapfrog digital financial transactions to 20 percent from 1 percent; reduce unbanked LGUs to 20 percent from 35 percent; and ultimately, bring 20 million unbanked and underserved Filipinos to a formal financial system — all by the end of 2020.”

DTAP, under the Road to 20 by 2020 campaign, seeks to assist and enable financial institutions with both the solution and the strategy or change management they would need, which includes a roadmap to leapfrog and truly go digital.

FINTQ, along with its private institution partners in the program, is holding a series of implementation workshops across different sectors of the financial industry–geared mostly towards rural, thrift banks, cooperatives, and microfinance institutions.

“What sets the Road to 20 by 2020 campaign from all the digital transformation initiatives is that this is geared towards financial institutions — providers of financial services at the grassroots. Realizing inclusive digital finance is not just about the consumers but also preparing the institutions that provide those financial services,” Villanueva said.

Image from Pixabay