The Taiwan Academy of Banking and Finance (TABF) hosted the 2018 general meeting of the Asia Pacific Banking Association of Banking Institutes (APABI) in Taipei. Delegates from across Asia came to the Taiwanese capital to learn about Taiwan and exchange ideas for best practices in the financial services industry. At that meeting, the member countries agreed to a create a new website for information sharing, to be maintained by TABF. At the end of that meeting, APABI members decided that the next one would be held in the Philippines. After all, who could resist that country's sandy beaches and translucent waters?

The 2020 APABI meeting was held last month on the picturesque island of Panglao. As luck would have it, the novel coronavirus which has spread like wildfire globally since January had not affected the Philippines heavily at that point. Still, several member countries were forced to cancel, making the meeting smaller than usual. The participation of Taiwan itself hung in the balance until the last minute, as the Philippines restricted travel from Taiwan for apparently political reasons. (The next day, it also signaled the end of a longstanding defense alliance with the US). It was only on February 14 that the Philippines government relented and Taiwan was able to finally confirm its participation.

Once on the ground, the host country showed a strong spirit of hospitality and assisted the APABI delegation at every turn. Over the course of two days, the nine member institutions in attendance shared their development experiences, challenges, and predictions regarding this year’s theme of digital transformation. The different training institutes have widely varying backgrounds, histories, and institutional contexts. In Nepal, for instance, modern banking itself only has a 40-year history, while in neighboring India, the Indian Institute for Banking and Finance has been established for a century. TABF was able to co-organize FinTech Taipei last year, with the presence of President Tsai Ying-wen, while BAPHIL of the Philippines has a much more lightweight model, run by volunteers with full-time banking jobs.

The theme of the 2020 APABI meeting was “digital transformation,” emphasizing how technology will occupy an ever-growing role in the banking sector in the coming years, perhaps even surpassing credit in importance. This transformation will not occur in a vacuum. Rather, it will impact every aspect of banks' operations, necessitating a comprehensive overhaul of risk management, corporate culture, and business planning.

Giles Cuthbert from the Chartered Banker Institute, a UK accreditation organization with global reach, noted at the meeting, “You can’t simply put technology in a box, and separate it out from all other aspects of management.”

A New Center of Gravity

Finance is of course far from the only industry experiencing a digital transformation. For software companies like Microsoft, it means switching services to cloud-based platforms. For industries like manufacturing which deal with physical products, the Internet of Things is allowing for the creation of a “digital twin” to precisely model operating conditions. Probably no sector has been as deeply impacted as marketing, which has switched from a mass audience to finely-targeted orientation.

The primary differentiating characteristic of finance is that it is the business of risk management. In the past, the nexus of risk was credit. Financial practitioners would be trained in topics like law and economics, and would wear suits while working in hierarchically-organized, centralized organizations.  Information transmission and disclosure were constant challenges, whether or not bankers realized it at the time, and many links in the process required some degree of trust, necessitating a conservative approach to all areas of business.

Hans Sicat, Country Manager of ING Bank and keynote speaker at the APABI conference, noted how digitalization is driving ING to adopt an ecosystem approach to banking, turning the bank into an anchor rather than a driver. ING itself is creating a series of apps to manage digital letters of credit and personal finances, besides just mobile banking. Disruption will not be a one-time event, but rather a constant process. In response, banks will need to modify their previous vertically-oriented approach into one more suited for the tech sector. Delegates at the meeting mentioned a culture clash between the older traditionalists and younger generation with a hacker mentality.

The coronavirus situation also reminds us that ecosystems, like many things in nature, can be not only beautiful but also highly dangerous. Digitalization is creating a variety of new technologically-driven risks that couldn’t have been imagined before. Banks will exchange personal data with social media, health care, and even emerging sectors like E-sports and online gaming. Risk management will need to be strengthened, particularly to ensure data security and fight money laundering.  The rise of anti-money laundering as a primary component of compliance is largely a result of banks’ growing ability to monitor monetary flows. Because of their increased capacity, banks are now being given more responsibility.

This shift will not be absolute: algorithms will never be able to control the entire customer experience from top to bottom. The banking industry however needs to prepare itself for lighter weight operating models. Training institutes may eventually need to take a broader view towards their roles, and increase their collaboration with organizations outside of the financial sector. For its part, TABF already trains NGO staff as part of its financial inclusion efforts.

Neighborhood Stores as Financial Institutions

During the trip, the TABF delegation got the chance to learn more about the Philippines and its banking sector. Despite being a developing country, the Philippines is capable of providing high-end services. Taiwanese banking executives stationed in Manila noted that legal talent is abundant there. For historical reasons, the Philippines has a legal system closer to the West than some of its neighbors. Having been a U.S. colony at one point, it boasts a large number of fluent English speakers. Underdeveloped infrastructure, however, remains a significant hurdle for the manufacturing sector.

Financial inclusion remains a major focus in a country where 77% of citizens lack a formal financial account, according to data from the BSP, the Philippines' central bank. There are several reasons for this relatively low figure. One is simply the geography of the country. With about 2,000 inhabited islands and 55 million rural residents, many Filipinos do not live close to a bank branch. The 2017 Findex survey by the World Bank found that 41% of unbanked Filipino cited the lack of a nearby branch as a reason for not having a bank account, compared to 22% of unbanked adults worldwide.

Lack of documentation also hinders financial inclusion in the Philippines. Along these lines, the central bank is working to coordinate the release of national ID cards this April. The economy has long relied on various types of underground lenders. Corner supermarkets known as sari-sari stores, for instance, frequently sell and buy on credit.

Experts see the Philippines as one of the countries that could benefit the most from digital financial inclusion. The Asian Development Bank estimates that bringing the unbanked population into the formal financial system could increase the GDP of the Philippines 9-14%. Furthermore, international remittances were responsible for over 10% of its GDP in 2018, more than in any other country in East Asia.

In the face of these difficulties and also opportunities, the Philippines is taking a number of measures. The central bank is encouraging financial institutions to take a risk-based approach to compliance, enabling streamlined e-KYC for low-risk customers. Lito Villanueva, Chief Innovation and Inclusion Officer at Rizal Bank, spoke of a “sachet banking” model in which low-cost touchpoints like sari-sari stores would serve as “last-mile” agents to disburse or accept cash for customers without accounts. The “sachet economy” refers to the practice, especially for customers with little savings, of purchasing products in small, reusable bags in order to smooth out consumption over time.

Hank Huang, President of TABF, noted that financial inclusion is one of the three core value propositions of fintech – the other two are higher-quality financial services and economic development. These factors will continue to drive innovation, even though the sector will undoubtedly look very different by the time of the next APABI meeting in 2022. Certainly the meeting itself will: APABI voted Mongolia as the location. The sparsely populated steppe landscape will make for a stark contrast to the last two gatherings on tropical islands.