Digitalization of Rural Banks in the Philippines Crucial to Economy

Rural banks in the Philippines must speed up their digitalization this 2022. The economy has woken up from its pandemic slumber and growth opportunities abound. Those who are quick to infuse technology in their businesses will reap most of the economic rewards. Most of all, the digitalized rural banks will better fulfill their mission to drive economic growth in the regions.

Rosy Economic Outlook

The Covid-19 pandemic dealt a crippling blow to our economy in 2020. At that time, our Gross Domestic Product (GDP) decreased by 9.5% as movement restrictions were in place. The next year, GDP recovered slightly by 5.6% as people coped up with ‘the new normal. Government restrictions were then relaxed as vaccines became available.

Fortunately, COVID-19 cases finally came into recession after a huge spike in January 2022. Our economic managers thus came up with a forecast: GDP will increase by 7% to 9% this year. It will likely be at par, or even beat the pre-pandemic levels. The 8.3% GDP growth this first quarter confirms this positive outlook.

The 6% to 7% GDP growth forecast may indeed become achievable in the next two years if things will continue to do well. Therefore, the digitalization of rural banks in the Philippines must be swiftly carried out. This will allow the economy to absorb the maximum benefits from this sector.

Agriculture and Rural Banks in the Philippines

Rural banks in the Philippines did not suffer as much compared to other firms. The reason lies in their major dependence on the agriculture sector, which improved even in the midst of the pandemic. In fact, rural banks’ cumulative net income grew by 33.5% to P3.2 million by September 2021 compared with the same period in 2020.

The ‘heroes of the countryside’ proved to be resilient during the worst of the pandemic. However, can they meet the expected demand for financial services with better days seemingly ahead?

Digitalization Challenge for Rural Banks in the Philippines

The government has lifted most of its restrictions related to the pandemic. This encouraged firms that were on self preservation mode to quickly transition, grow and expand. Even in the farthest municipalities, the scale of economic activities are back to pre-pandemic levels.

Domestic consumption went up, and tourism has opened to both locals and foreigners. Also, billions of pesos are in fresh circulation thanks to the recent national elections. As a result, financial support services are currently in high demand as entrepreneurs seize the available opportunities left and right.

Rural banks in the Philippines are thus under pressure to rapidly increase operational capacities. They need to step up since regional entrepreneurs rely on them for capital. Their clients cannot maximize the opportunities at hand without financial help.

But how can rural banks overcome this challenge? The answer is digital transformation. It can help them become more intelligent, agile, and sustainable in this changing digital economy.

The Digital Effect

New technologies allow microlenders to expand their portfolio, widen their reach, and process higher volumes of transactions. Moreover, investing in digital technology allows small banks and microfinance firms to boost efficiencies, offer more services, and grow revenues.

One example is ASA Philippines Foundation, a microfinance Non-government Organization. In 2016, ASA interconnected its 1,150 branches across the country using a cloud-based system. The benefits reaped from this move allowed ASA to expand to the farthest places.

ASA also diversified its product offerings by four times, resulting to a 57% increase in loan portfolio. The best of it all, ASA increased their net income by 150%.

The NGO gained access to real-time financial data care of the new automated system. ASA officers recall that it takes a month before they can figures on portfolio performance, profitability, and related information. Now, ASA can readily take action and craft strategies in view of real-time data.

As a result, ASA has expanded to 1,683 branches across the country. They have almost two million borrowers now and their loan portfolio is at P29.39 billion.

ASA’s digitalization success is worth should be replicated by rural banks in the Philippines since they belong to the same microfinance industry.

Online Payment: An Introduction to Digitalization

There are some good things that came out of the COVID-19 pandemic. For one, it encouraged use of online payment channels. Filipinos who insist on over-the-counter payments were forced to experience the ease and benefits of digital transactions. Who will go back to paying cash after tasting the convenience of paying anytime online? Who will miss the tiresome commutes and long queues to physically deliver cash to the cashier?

Consumers and business owners alike got to devote more time to their livelihoods, thanks to the convenience offered by online payment channels. Also, the organizations that utilized cashless payments gained key advantages. First, they can now process thousands of transactions without having to add personnel or physical facilities. Second, the cashiers’ workloads became lighter as more customers resort to using G-Cash, PayMaya, online banks and other e-facilities. Third, personnel can actually be reassigned and given other roles if their customers’ dependence on cashiers have been significantly reduced.

Rural banks in the Philippines, therefore, can start with digital payments before deciding to go full-blast with their digital transformation.

Resistance to Tech Softened

Before COVID-19, it was hard to sell the concept of online payment channels to customers who distrust technology. They were content with paying cash, so they can’t be bothered with creating online accounts and learning different apps.

The volume of digital transactions, however, grew steadily in recent years despite the resistance of traditional customers. What brought its steep rise to popularity, unexpectedly, was due to the pandemic.

The use of digital channels gained much traction when the government’s restrictions on physical movement peaked. People can’t go out, but transactions can be made online. People who missed shopping in malls found refuge in e-shopping. Those who want to avoid the crowds opted for online-based delivery setups— for food, groceries, clothes, basically anything. Businesses quickly saw the increase in ecommerce transactions and made it easier for customers to avail their products and services online.

Taking all of these to account, it is no wonder that consumers payments accounted for 78% of the 4.6 billion monthly payments made in the first half of 2020. People are now more open to digital transactions, and rural banks in the Philippines must take advantage. The digitization of its processes will bring immense benefits to both the business and client’s side, as exemplified in the previous story of ASA Philippines.

Narrowing Down the Digital Divide

There is however one problem. Digital payments may not be as accessible for low-income consumers. The same holds true for micro and small business, especially those in the provinces.

The Bangko Sentral ng Pilipinas (BSP) discussed the smartphone ownership and internet access gap in its 2019 Financial Inclusion Survey. Their report said 4 out of 10 adults in rural areas do not have access to a smartphone nor the Internet. Their data for adults under the socio-economic class E was similar.

Furthermore, their 2019 FIS showed that 52% of Filipino adults own a smartphone. However, only one in ten use them for financial transaction. The reasons cited? Lack of trust and awareness, weak signal or slow internet, and preference for bank and ATM transactions.

Rural banks deal mostly with farmers, fisherfolks, cooperatives, and various cottage industries that belong to the most marginalized sectors. Therefore, their clients may not have access to smartphones or the internet. The situation, however, varies from area to area, so a one-size-fits-all digitalization solution should not be expected for all rural banks.

What should be kept in mind is that people love technology. It is embraced as soon as it becomes available in the community. The digitization strategy of rural banks in the Philippines thus should not call for an abrupt transition. Rather, it should outline a series of steps that should be taken as access to technology improves.

Government's 2023 Vision: A 'Banked' Population

The 2019 BSP study also mentioned that 51.2 million adult Filipinos do not have bank accounts. This means that around 71% do not have access to legitimate financial services that help improve lives.

The BSP however noticed a 53% surge in bank account ownership by the second quarter of 2021. From 20.9 million adults, those who own bank accounts rose to 41 million. This is a promising development but overall, there still exists a large financial inclusion gap in the Philippines. The BSP thus launched the National Strategy for Financial Inclusion (NSFI) 2022 to 2028 to address the issue.

The NSFI is a six-year plan which pushes for inclusive growth and financial resilience for Filipinos. Achieving these goals requires increasing transaction account ownership from 29% to 90% by 2028. Moreover, the plan identified four strategic objectives or major areas of intervention:

Promote inclusive digital finance
Strengthen financial education and consumer protection
Enhance access to risk protection and social security nets
Enhance agriculture and MSME financing ecosystem

Strengthening Program for Rural Banks in the Philippines

The BSP also established the Rural Bank Strengthening Program (RBSP) to improve the operation, capabilities, and competitiveness of rural banks in the Philippines. The three-year structured program was developed by the Interagency Working Group of the RBSPT (IAWG-RBSP).

The RBSP has four key elements:

Strengthened capital base
Holistic menu of five (5) time-bound tracks,
Incentives and capacity building intervention, and
Review and enhancements of existing regulations.

Kickstart Your Digital Transformation Journey

Hurey is a cloud-based HR and payroll app that can be scaled easily to meet the needs of any business— including rural banks. It can automate repetitive HR and payroll tasks, so your staff can focus on supporting your rural bank’s digital transformation.

Hurey has partnered with GCash to offer a more convenient salary disbursement and encourage cashless transactions and online payments. Moreover, Hurey can be easily integrated with the Xero accounting software to improve your financial institution’s accounting, tax, and compliance process.

Hurey has also inherited Microsoft Azure’s security assessments to ensure secure exchange of financial information between your rural bank branches. Moreover, its database is geo-replicated to guarantee the safety and easy recovery of your and your clients’ data during disasters.