Financial inclusion in the age of digital disruption

SUITS THE C-SUITE By Christian G. Lauron and Ruben D. Simon, Jr.

Business World (11/13/2017 – p.S1/4)

A study conducted by the Bangko Sentral ng Pilipinas (BSP) showed that only two out of 10 households have bank accounts and, with an economy that has been growing 6% to 7% in recent years, this shows a disparity between consumption spending and actually saving for the future. Given this situation, confronting the challenge of inclusive growth requires a discussion on financial inclusion. If the flow of capital from financial institutions to important industries has contributed to the country’s economic growth, how then can those on the fringes of the society be included in this growth?

Some schools of thought consider the ‘brick and mortar’ approach to financial inclusion as passé. However, in a country dominated by cash transactions and with a number of technological glitches among big banks in recent months, physical access to financial institutions remains relevant. People still prefer face-to-face interaction with bank personnel — an interaction that creates a sense of assurance that their money is safe with the bank.

It is encouraging to see that the BSP, as regulator, has been putting enablers in place such as circulars on the establishment of other banking offices (OBOs), micro banking offices (MBOs) and the easing of bank branch rules in strategic locations in order to address physical accessibility. In fact, BSP data show that 1,052 cities and municipalities have a banking presence. Other financial service access points (such as microfinance entities, cooperatives, remittance agents, and pawnshops) have also significantly covered other areas that are unserved or underserved by banks.

Hindrances to access include geographical distance and documentary requirements for opening accounts and applying for loans. This is clearly illustrated in areas where there are banks and yet, borrowers prefer informal money lenders. Solutions do not simply lie in easing requirements (which is an important Know-Your-Customer control as espoused by the regulators), but in complementing physical presence with a virtual one. Traditional access points must not be completely replaced by technological solutions, but upgraded instead by technology.

Industries perceive emerging technological solutions as disruptive and, therefore, a threat to their existing businesses. This is particularly the case for technologies that ride on the platform of peer-to-peer (P2P) connectivity. What started with P2P file transfers are now full-blown P2P service business models that connect people to services directly, bypassing traditional platforms. This model has encroached on industries such as hospitality, transportation, media, retail consumer goods, and even lending.

In the area of financial inclusion especially in the countryside, technological platform solutions have been on the rise where crowd funding mechanisms have placed the farmers closer to retail investors. An industry that, for the longest time, has been seen as a high-risk market by the financial sector, has been made viable by technology. Rather than being seen as a threat, the banking industry (as well as the whole financial institution apparatus) must take this as a challenge. It is encouraging to see the increase in institutions using technological enablers in their operations, such as mobile and internet banking. It is just a matter of improving services, security and ensuring operability amidst system interruptions. The Internet of Things has been the buzzword for this fourth industrial revolution, and the banking and financial sectors need to take this into account.

While the use of online payment systems is growing, particularly among the younger demographic, majority still prefer cash transactions. This is primarily evident when dealing with micro, small, and medium enterprises (MSMEs), which comprise almost 90% of registered businesses in the Philippines as well as with overseas Filipinos workers and their dependents.

In 2016, total remittances hit a record $26.9 billion. Remitted through financial access points, what started as cash in their country of origin was converted to virtual “money” and then converted back to cash upon reaching the country of destination. Only a small portion of the virtual money, if any, is used for online transactions. There are key opportunities that can be gleaned from this situation. First, an ecosystem may be created where virtual cash is used for purchases, payments or remain in deposit accounts as savings. Second, more cash conversion access points such as ATMs or point-of-sale (PoS) terminals may be created. These solutions, while not entirely new, can create fee-based income opportunities.

About a decade ago, there were pioneering moves to integrate mobile banking platforms with microfinance operations in the country. Its main vision was to create an ecosystem at the barangay level where loan proceeds were disbursed via mobile wallet and could be spent using online payment systems of merchants. It envisioned a system where mobile money revolves around individuals in an entrepreneurship ecosystem where it does not need to be converted to cash — as converting mobile money to cash entails cost. While the business model has not yet materialized, the idea of a seamless, cashless ecosystem was beyond its years. At the time, apps and cloud computing were not as mainstream as they are today and short message system syntaxes were the way to operate — what one-click/tap access is for apps now were long lines of SMS commands sent to dedicated 4-digit numbers before.

Creating an ecosystem — where cash and online transactions intermingle — is an ideal environment for financial institutions. Financial service access points can be a rich source of data which can be used for decision making and strategy formulation. However, data alone will not amount to anything if it is not analyzed and presented well. Therefore, data analytics has emerged as one of the most, if not the most, important skills that an institution must develop. Advanced analytical models can be used to strategize and scale the presence of banks in certain locations (e.g., full-blown branch, MBO, OBO, or just ATM/PoS terminals). It can even be used to create predictive algorithms to assess credit viability among individuals or SMEs — which in turn can be used for risk-based pricing. The prospects for this latent tool are enormous and it has seen increased usage in various industries, most notably, in surge pricing among transport network vehicle services (TNVS).

The two-pronged strategy of physical accessibility and technological enablement can provide financial institutions with the tools to make banking more reachable to the unbanked/under-banked sector. However, it should also be noted that digital may not always be the best solution; in some cases, a refreshed, innovative, and pragmatic way of thinking can propound traditional solutions to new and emerging problems.

For example, in far-flung communities, the simple act of owning an ATM card (which is sometimes repurposed to double as an identification card) can be a source of fulfillment. Support mechanisms must be in place so that usage is ensured for that ATM card, such as appropriate infrastructure (accessible ATMs), deposit-taking mechanisms, and most importantly, financial education. Financial education, if implemented well, can empower individuals to accumulate useful lump sums — which can be used for personal development and education, business, and asset acquisition.

What sets apart doing business in the 21st century is that disruption is the new norm. Traditional business models are constantly being challenged. Innovation has been fast-paced and ideas can easily be converted into marketable products and services, with an unprecedented time-to-market. The key takeaway is not to go against the new wave, but ride it.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.

Christian G. Lauron is a Partner and Ruben D. Simon, Jr. is a Manager of SGV & Co.