Digital banking a strategy for financial inclusion in Philippines

13, Mar. 2020

By Darlene Basingan

MANILA, NNA – For decades, encouraging Filipinos to open a bank account has been a tough challenge despite a national call to promote financial inclusion throughout the country.

But the growth of digital banking might be the big helping hand the country needs to get the majority of adult population to have a bank account finally, say industry players.

Already, Filipinos are heavy users of mobile phones and internet which should make it convenient for them to adopt digital banking.

As pointed out by Vijay Manoharan, CEO of the CIMB Bank Philippines Inc., there is already a growing demand for digital banking, supported by widespread use of mobile devices, internet and social media as well as increasing e-commerce transactions.

As digital banking makes it easy for anyone to open an account, it could help the government achieve its target of getting 70 percent of Filipino adults to own a bank account, Manoharan told NNA in an interview.

Photo by Austin Distel on Unsplash
Photo by Austin Distel on Unsplash

Only 34.5 percent of them have a formal account with a financial institution, according to 2017 World Bank data. The central bank, Bangko Sentral ng Pilipinas (BSP), has targeted 70 percent of the adult population to have formal bank accounts by 2023.

Compared to its Southeast Asian neighbors, Philippines is currently only at the roll-out phase of digital banking, said Manhoran. But he believes bank customers will eventually shift to digital transactions over the next three years.

It also helps that all-digital banks in the Philippines such as CIMB Bank PH and Dutch giant ING Bank are offering interest rates higher than traditional banks. Another attraction of online banking is its fewer application requirements for opening an an account using a mobile app.

ING Bank, which began offering retail banking in November 2018, has had one million app installations up to January 2020, according to its website.

CIMB, which began operations in January last year, has garnered two million customers by February 2020.

The new-comer will be Singapore-based Tonik Financial Pte. Ltd, which will launch its digital bank in the Philippines in the third quarter of the year.

Neall Mercado, 43, a TV station technical support and operations assistant manager, opened an account with an all-digital bank in January this year, as he was "really tired" of the perpetually long queue at traditional banks.

In fact, Mercado already closed his savings account in one of them because of that, he told NNA, adding that he was happy to earn better interest during the first three months of this year.

Also pleased with the higher interest is Arcangel Noche, a quality assurance analyst, who opened a digital savings account nine months ago. She said the added bonus is the convenience of opening one.

For a long time, opening a bank account in the Philippines is a tedious process because of the many requirements. The banks need proof of billing with two valid IDs, among other things. Getting a valid ID alone could take one to several weeks.

To address the issue, the government enacted the Philippine Identification System Act or PhilSys last year to provide a single “valid proof of identity” for Philippine residents.

Central bank BSP said it will benefit unbanked Filipinos as they would need the only the National ID under PhilSys as proof of identity for getting financial products and services.

Ruben Carlo Asuncion, chief economist at the UnionBank of the Philippines, believes the national ID system would be a game-changer in the government’s efforts to achieve financial inclusion for the population.

“Digital banking is like a bridge. It will link the financially marginalized persons to formal financial systems. However, the central bank's initiatives, particularly, the National ID program will hasten the growth of digital banking and thus help achieve its financial inclusion target,” he told NNA in an email.

BSP aims to produce 116 million pieces of PhilSys ID cards within the next three years. It will start mass production and issuing them by July this year.

While shifting people’s mindset to transact digitally still poses a big challenge, they will eventually change, said Asuncion.

“Digital banking will fly very soon...government initiatives will have to go ahead and work with private sector eventually,” Asuncion added.

Emphasizing the importance of financial literacy, Nicholas Mapa, a senior economist at the Manila office of ING Bank, said the government needs to educate consumers, who mostly prefer cash transactions, about the benefits of having a bank account, be it traditional or digital.

He explained that most salaried workers in the Philippines maintain at least one transaction account for payment deposits from their employers.

Most of them would withdraw money in cash and then use it at establishments, which mostly accept cash only, he told NNA in an email.

Low financial literacy in the Philippines is a problem the government has long been trying to address. A World Bank study found that only 2 percent of Filipino adults surveyed were able to answer seven financial literacy questions correctly.

To further encourage people to open accounts, Mapa said the Philippines could follow the example of China and other countries where electronic payments like QR code are used to entice citizens to go cashless.

“The key, however, is to encourage vendors to shift to alternative payment channels. And once they do it, Filipino consumers will have no choice but to transact through them,” Mapa explained.

In fact, both Mercado and Noche opened their digital accounts only after discovering about the service from a digital payment remittance app.

Meanwhile, BSP has set in place initiatives to encourage e-payments such as the use of QR codes. The bank has targeted 50 percent of transactions to be carried out digitally by 2023.

Even brick and mortar banks have also jumped onto the bandwagon to offer digital services.

It seems inescapable especially with internet penetration rate hitting 67 percent and a staggering 173.2 million mobile connections were made in the country in January 2020, according to a report by Hootsuite and We Are Social, a marketing and advertising firm.