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Banks and digital disruption

“Banking is at the highest risk of disruption”.  This is what PLDT’s Lito Villanueva (the first and only Filipino included in the Top 100 Asian FinTech Leaders) said at the 4th FINEX SME Forum based on the Millenial Disruption Index (MDI).  The MDI was based on a 3-year US study of over 10,000 millenials (born between 1981 – 2000) of 73 companies in 15 industries, and the MDI results paint a clear picture of which brands are loved, which are meeting consumer needs and poised on the brink of disruption.  The index showed that in 5 years, 70% said the way we access our money or pay our bills will be totally different and 30% believed they won’t need a bank at all.  Half said banks offer the same product, no difference at all.

Will financial institutions go the way of the Compact Disks (CD)?  Apple’s iTunes service disrupted the business of selling music through CDs.  Today, iTunes itself is being disrupted by music streaming services such as Spotify, Pandora or Sound Cloud which allow subscribers access to millions of titles online which may be downloaded.  In this age of digital disruption, will Banks in their current form: its processes and the business model face a similar fate?

In this digital age, the expectations of a Bank client have likewise been transformed.  Consumers have begun to expect the same digital experience offered by Google, Facebook, Amazon and Apple from their Bank.  They now want their financial service experience to be convenient: quick, mobile, customizable, personalized and always accessible at a competitive price. What can we expect? Francis Oliva of PLDT said, in the Philippines, mobile users are estimated at 120Million, which is more than the population of 100Million, with social media users representing more than half.

In a discussion with PNB’s Marketing Executive Martin Reyes, he said, today, there is an explosion of entrepreneurial and tech savvy companies that have begun to disrupt the financial industry’s processes and transactions. These companies apply new technologies to innovate on current traditional banking products and services. Fintechs generally transform services by putting themselves between the Bank and its customer. Some examples of the products they provide:  digital wallets, mobile payment solutions, mobile banking, mobile trading, peer-to-peer lending, equity crowd funding, etc.   In more extreme cases, Fintechs replace humans with robot advisors as in personal wealth management services or provide direct customer distribution services as in the case of selling insurance plans without the help of an agent.

Disruptive technologies put pressure on the margins of traditional financial institutions.  The upsurge of mobile telephones and the internet challenges the need for expensive brick and mortar offices.  Cheaper hardware, better and faster computing, affordable cloud storage and robust data access all come together to bring down the cost of providing financial services.  DIGITAL is really revolutionary, there are 10x more innovators entering the market at 1/10th the cost and with their apps having 100x the power.  This allows Fintechs the leverage to develop new offerings faster as well as providing alternatives to how money is traditionally handled by banks customers.

Banks vis-à-vis Fintech companies.  Fintech companies are organized to be cost-efficient, agile and focused on satisfying a specific client’s need.  In the Philippines, most Fintech companies target the remittance and payments industry. Since they operate quickly and evolve efficiently, regulatory bodies often end up playing catch-up.  Their ability to quickly create a good digital customer experience gives them the distinct advantage.  These companies however do not have a big customer base.  Because they are new, Fintechs may lack scale and oftentimes the client’s trust.  In some markets, they would need to partner with a traditional financial institution in order to avail of licenses to operate in a regulated environment such as remittances or to connect with the various ATM and payment networks.

Banks on the other hand may have entrenched and difficult to change processes whose infrastructures are closely regulated by government bodies.  This results in a culture that is conservative and risk averse.  These institutions are also zealous in protecting their customer information.   This current mindset makes it slow and difficult for them to act and innovate on a promising new idea or technology.  Banks however, do possess some distinct advantages.  They enjoy relationships with their client base thereby earning the trust of a wide customer segment.  They possess their client’s profile and through their transactions with the Bank their usage and behavioral patterns as well.   Plus they already have a very good customer service organization. They have the expertise and the necessary Government licenses to operate in various financial markets.

How can Banks stay Relevant in the digital age? To stay relevant, Banks must reinvent themselves.  First, it has to have a clear digital vision of where to go and what it wants to be, to guide its strategy and actions.  A digital mindset at all levels, with a more open, collaborative and innovative culture.   It has to review, simplify and digitize its processes in order to rapidly deliver new digital banking services.  Banks need to accept that it cannot develop all the necessary applications demanded by its customers.  It needs to collaborate with technology companies: to incubate new technologies as well as gain access to talent and new ideas

Customers now demand better, convenient and cheaper products that can only be provided through digital and mobile services. Let’s learn from Nokia when the CEO said “we didn’t do anything wrong.” Digital disruption in the financial industry is here. We better act on it now, before it is too late!

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Ms. Flor G. Tarriela is Chairman of PNB and a FINEX Trustee. She was formerly Undersecretary of Finance.  First Filipina Vice President of Citibank.  A passionate gardener and avid environmentalist. ‘Florencia Tarriela (2)’; pnbchairman@pnb.com.ph