Digital divides. In the banking world, it partitions lenders, branding them as either leaders or laggards. Whether fair or not, financial institutions are perceived to fall into one camp or the other.
Among the stragglers are the big-hitting Japanese trio of Mizuho Bank, MUFG Bank and Sumitomo Mitsui Banking Corporation, according to a report from London-based Autonomous Research published in September 2017. On the positive side of the ledger is Singapore’s DBS Bank, which views digital disruption as a boon and a blessing, rather than a threat to its bottom line.
But is there a limit to digital’s upside? Can it work genuine miracles and transform the small into the large, the minnow into the shark? Could, say, a worthy but marginal lender with previously limited ambitions beyond its home market really transform itself into a national or regional leader by going flat out on technology?
Edwin Bautista certainly thinks so. Union Bank of the Philippines, the lender he joined in 1997 and which elevated him to chief executive in January this year, has seriously outsized digital ambitions. An hour spent with him is a useful reminder of how fast our world is changing. But it also leaves one struggling to discern where the bank’s attainable goals stop and its more grandiose dreams begin.
Bautista is waiting in the boardroom for Asiamoney. It’s a typical July day in Manila, sweltering and damp, the sky framed by dark storm-clouds rolling across the city. But once Bautista, cheery and engaging with a round face and expressive eyes, shakes hands and immediately launches into an impassioned description of his bank’s digital-led expansion plans, the gloom immediately lifts.
“By the close of the decade, we will have 50 million customers,” he says firmly, within a minute of sitting down.
Sorry – 15 or 50?
“Fifty,” he replies. “Five-zero. By 2020.”
How many customers does the bank have now?
“Six or seven” million.
How will he convince the remaining 43 or 44 million to come on board over the next 18 months?
“It’s a secret,” he replies. “No, I will tell you. The only way you can do it is to look at the country’s financial demographics. There are 100 million people, and just 30% of Filipinos have a bank account. That leaves 70 million people unbanked.”
And you’re going to bank all of them?
“Yes. It’s a moonshot. We’re going after scale.”
It’s certainly an attention-grabber. But it’s hard to know if Bautista is genuinely serious about hitting a figure that exceeds the actual number of people in work, which the Philippine Statistics Authority put at 44 million in January.
After all, the bank he runs is a medium-sized player at best.
UnionBank is the ninth-largest domestic lender by assets, according to data from the central bank. Using the same metric, Bank of the Philippine Islands is three times larger, while market leader BDO Unibank is nearly five times its size.
UnionBank’s stock market capitalization at the end of August was P92.3 billion ($1.7 billion), against P405 billion at BPI and P539 billion at BDO.
To put that in perspective, DBS, winner of the Asiamoney award for best digital bank in Singapore, has a market capitalization in the region of $45 billion.
Sure, UnionBank has always been good at certain products, notably cash management, where it’s regularly cited as a local leader and innovator. But this is a financial institution that reported a 16% year-on-year decline in net profit in 2017, and which has taken a half-century to crawl to its current mid-table position (it celebrated its 50th birthday in August).
Yet here is the chief executive, not long into his new job, confidently stating his intention to expand his customer base seven-fold, transforming UnionBank into a top-tier domestic lender, literally within a matter of months.
Longer term, he wants it to become not just the most sophisticated lender in the Philippines, but one of the most advanced, anywhere in Asia.
This is no sudden flight of fancy. UnionBank has been investing heavily in digital for years. In his previous role as chief operating officer, Bautista was instrumental in fleshing out the bank’s plan to open, over the next several years, dozens of new digital-led branches. The first of these opened its doors in November 2017.
His chairman, Justo Ortiz, a man equally opinionated on all matters digital, is president of the Blockchain Association of the Philippines.
Bautista talks a good game on digital, but it’s worth examining in greater detail and seeing if all or any of the ideas can fly.
An obvious one as a starter: is UnionBank the best digital bank in the Philippines? The answer to this question is a firm ‘yes’. Local analysts say so. Rival CEOs reluctantly agree, as do foreign bankers working in Manila. It was awarded the best domestic digital bank award this year by Asiamoney, with Euromoney handing it the gong for Asia’s best bank transformation story.
So, to a second question: why UnionBank? While historically well run, it’s never been a big player in its home market. Its larger rivals, including BDO and BPI as well as Metrobank and Security Bank, take online banking seriously enough. None of them are blind to the financial gains of using technology to reach and service tens of millions of unbanked or under-banked corporates or individual customers, many living in distant cities like Davao, or on one of the country’s 2,000 or so inhabited islands.
Was there a trigger for UnionBank that marked the moment when an unimposing medium-sized commercial lender was transformed into an institution convinced it could shoot for the stars? Bautista nods at the question.
“The whole reason we did this is because we were scared,” he says. “Three years ago, [the global consultancy] McKinsey came and told us: ‘If you don’t take digital seriously, you guys will perish, disappear’. And they were right – we faced being disrupted out of existence. So, we rolled our sleeves up. Now we look back two years later, and say: ‘Hey, where is everyone?’” he adds.
“I thought we were all supposed to be scared of this digital stuff, so how come no one is keeping pace with us,” he wonders. “And yes, maybe we ran too fast at first. But that isn’t a bad thing. So, we ask ourselves, if we aren’t being disrupted, can we be the disruptor? And if so, it’s not just a matter of survival but of thinking – hey, maybe we can win this thing. That’s what’s driving us on now.”
Bautista was also clearly influenced about the benefits of investing in digital by his own employment history. Before joining UnionBank in 1997, he worked at Citi, heading the US lender’s Philippines global transactions services group. His boss at the time was Piyush Gupta, who was then working his way up to the position of chief executive, southeast Asia, Australia and New Zealand.
When Gupta left Citi in 2009 to join DBS as group chief executive, kicking off the Singapore lender’s digital revolution, Bautista took note.
“I read everything I could about their story,” he says. “They are the one bank we place on a pedestal, the one bank we put above all the others. Digital has allowed them to compete on the world stage. In fact, they are way ahead – the best digital bank in the world. So, OK, they can have the world. We’re not quite that ambitious.”
By delivering banking services digitally, on a national scale, we will cut our cost of operation, and make it cheaper to disburse capital to clients. Everyone wins- Edwin Bautista, UnionBank
This external chutzpah isn’t just for show, but during the course of our conversation, he verbally wanders between the extremes of what is possible, at least in the near term, and what is probably not. He begins simply, with the eminently achievable: “Our aim is to convert as many of our customers to digital as fast as we can.”
Then comes the more bullishly ambitious: “I want to be the first and the best digital bank in the Philippines. I’m happy to be a top-three” lender in terms of assets, net interest income, and return on equity. “But I have to be prepared to go beyond the top three [banks by size]. And if I have the chance to be number one, well that’s fine.”
Finally, he reveals: “People say to me: ‘Why not aim to be the best in the world’? They can have the best in the world. We’re happy being the best in Asia. Initially, we are happy being the best in the Philippines.”
The big league
Some markets are riper for digital disruption than others. Places, for example, that are cash driven and deeply unequal, where people and corporates in rural or poorer areas are often excluded from formal banking services, and where infrastructure is poor or non-existent, making it hard for lenders to justify maintaining a genuine national presence.
In other words, markets like the Philippines. Yet at the same time, it’s also surprisingly digitally inclusive. Smartphone penetration is tipped by Statista to top 50% for the first time in 2020. According to the Hamburg-based research firm, only five other countries are more engaged with social media. The Philippines has 70 million active Facebook users, against 130 million in Indonesia and 270 million in India.
UnionBank sees these dichotomies at work, and knows this is a once-in-a-lifetime opportunity to gain scale quickly. Its domestic rivals, for now at least, see emerging technologies as a threat to be contained, not an opportunity ready for exploitation.
Manila is fast becoming a hotbed of financial innovation, but change is being driven by the likes of UnionBank and fintech operators such as China’s Ant Financial and PayMaya, a division of local outfit Voyager Innovations.
Bautista knows he has a limited amount of time to usher his bank into the big leagues before his peers catch on and catch up. He knows the real value is to be found in the country’s towns and villages, where, he says, over the next few years, “the adoption of digital services will grow faster than in urban centres. Once a business owner sees the benefit of using their cell phone to make a transaction, rather than driving an hour in a Jeep just to pay a creditor, mobile banking will catch on fast.”
Hauling millions of citizens into the digital age will benefit everyone. This is a country bereft of good infrastructure, where poorer regions are dominated by “informal operators who lend at rates of 80% to 100% or more,” he says. “We charge corporates 5% interest, so why can’t that 100% rate be brought down to 40%, 30%, 20%? By delivering banking services digitally, on a national scale, we will cut our cost of operation, and make it cheaper to disburse capital to clients. Everyone wins.”
So how close is the lender to becoming a digital giant in its own right and using those new-found powers to leapfrog its rivals? The honest answer is not very.
We are putting all our bets on blockchain. It’s going to revolutionize cash management in the Philippines- Edwin Bautista
Bautista’s bank is a national digital star in the making that justifies its recent haul of awards. The chief executive also talks a good game. During the course of a one-hour chat, he uses the word ‘transformation’ 14 times, ‘blockchain’ is aired on 18 occasions and ‘digital’ enters the discourse 32 times.
But while, say, DBS – to pick a prime template for success – has taken a forensic approach to gauging the impact of technology on its bottom line by actively comparing the relative ROEs of digital and traditional customers, Bautista indicates he does not know what it will mean for the bank if it succeeds in converting more traditional customers into digital ones.
“When we look at our digital customers, they typically have five times more deposits, make five times as many transactions, and generate roughly five times the personal profitability” of a traditional customer, he observes. “But the question we need to ask is: are they profitable [to us] because they are digital? And if we are able to convert the rest of our customers to digital, will this five-fold factor remain in place, or will it revert to the mean? We just don’t know the answer to that. All we know is we have to go ahead [using] blind faith. There’s no downside, only upside.”
It’s a curious blend of open questions and wishful thinking. But there’s something important going on here, too. Bautista felt compelled to blaze a digital trail after meeting – and being terrified into action by – the delegation from McKinsey.
Deloitte, another professional services firm, is helping “transform our organization, making us more fintech-oriented and more agile,” he adds.
The “blind faith” he mentions isn’t so very far from the truth. Before the advent of the digital age, the process of creating, building and adding scale was a reliably predictable process. A typical bank grew steadily, bulking up when necessary by, say, buying a rival and/or entering a new market. Investors valued a financial institution by measuring, among other factors, risk, expected growth and the cost of capital.
Digital hasn’t changed the substance of the industry: banks will always need to do the basics well, taking in deposits and disbursing loans. But it has changed how all lenders plan for the future. Some are managing the transition by slowing it down: bolting on services as new technologies emerge and are embraced by customers.
Others, gripped by the promise of spoils for the victor, radically alter their mind-set. But because there is plenty of (expensive) advice on offer yet no guarantee of success, they’re forced to make up their strategy as they go along. They can either stand still and face obliteration or plough ahead and hope for the best outcome – and UnionBank very much slips into the latter category.
While Bautista is happy to extemporize about UnionBank’s future as a digital champion, it isn’t always clear if he knows where the finishing line is, or whether he’s headed in the right direction. He is prone to admirable but wild statements of intent, with his ambitious customer-acquisition goal and his aim of being the best digital bank not just in the fifth-largest Asean economy, but in the entire Asia Pacific.
He dismisses banks’ long-standing fixation with holding more assets on their books than their peers as a “battle of the past”, adding: “To be big in terms of customer reach – that’s the new battlefield. What’s going to happen over the next five years is that who wins will depend on who gets the most new customers.” The truth is, both factors matter, and always will.
Meanwhile, there is a clear and constant need to compare the local bank he now runs with the regional giant overseen by his old boss.
“A key component that will power us forward is our API [application programme interface] platform,” he says. “DBS has about 400 APIs. They claim to have the most APIs of any bank in Asia, but my chief technology officer tells me that we are neck-and-neck with them.”
Yet UnionBank has also taken some highly impressive and very real steps forward in recent years. It has become a trailblazer in artificial intelligence and robotic process automation, and joined forces with Microsoft Azure and New York-based ConsenSys to create a blockchain-based interbank switch that aims to incorporate rural lenders into the national clearing system.
“Most rural banks are small and seen as being of lower status,” he says. “They aren’t considered [real] commercial banks. We want to change that. We have between seven and 10 banks doing a pilot at the moment, and hope the service will be ready to launch” by the end of 2018.
He adds: “We are putting all our bets on blockchain. It’s going to revolutionize cash management in the Philippines.”
UnionBank was the first local lender to launch a so-called ‘selfie’ banking service that allows customers to open an account or secure a loan using facial recognition technology. And in November 2017, it opened its first Ark, a fully paperless branch described internally as a ‘third space’ where entrepreneurs can mingle with each another and bank staff.
As soon as the concept is mentioned, Bautista’s face lights up.
“Go and see it. It’s a great experience and very interesting.”
So Asiamoney goes.
At first glance, there’s nothing special about the Ark. Located on the ground floor of the Insular Life building at the junction of Ayala Avenue and Paseo de Roxas in Makati City, the immediate impression is one of functional sterility. With its wall-mounted screens, on-hand barista and bright, low-slung chairs, you could easily be in an airport lounge. That, indeed, was the intention: the furniture, the decor and even the staff’s clothes were designed by the team responsible for honing Singapore Airlines’ global image.
Ronaldo Batisan, head of customer experience, trots over and suggests a coffee. We order flat whites and wander over to a large tablet affixed to a wooden table in the centre of the room. One of the Ark’s ‘ambassadors’ (even though this is a bank, there are no traditional tellers), swipes the screen, showing how customers can take out a loan or open an account in under 15 minutes. Like DBS – again – the bank has invested heavily in cloud-based platforms. A couple of business owners loitering in the corner of the room drift over as we chat.
“They have pretty good events,” says one of them, adding that he is a digital customer with UnionBank. And the other? “I’m with BDO,” he replies, a little sheepishly. “They have branches where I need them.”
During our earlier meeting, Bautista spent a considerable amount of time lovingly embellishing the new brand’s symbolism.
“Two years ago, we decided not to open any more traditional branches, though we will relocate some if necessary. We will expand our Ark network, though. With its mixture of the physical and the digital, we are helping to transition people into a new world,” he says.
“The thinking,” he adds, “stems from Noah’s Ark – the moral story being that nobody is left behind. We know that everyone is at a different stage of digital adoption, and we want to accompany them all on their entire journey.”
How many Arks does UnionBank aim to open? Bautista insists that while there is “still only one, we will have 15 in place by the end of 2018”.
He adds: “My chairman sent me a note this morning saying he was underwhelmed with 15 and asking why we weren’t planning to open 200 this year. We have stumbled on a great concept, and there is no point in waiting for the market to catch up.”
It should be added that when Asiamoney went to press in September, there was still just the one Ark, and when the ambassadors were informed of Bautista’s goals, they looked puzzled.
“I haven’t heard of any new openings,” said one, looking doubtful.
There’s something impressive yet at the same time engagingly naïve about UnionBank’s digital journey into the unknown. This is not a lender of great scale or, historically, much substance. Its inability to post higher net income in 2017, a year that was good to pretty much all of its peers, is hardly the kind of marker likely to cow its larger rivals and make them fear for their future.
Yet its ambitions are not unrealistic. It is investing heavily in all the right things: pouring capital into research and development, rolling out new APIs, training up personnel and preparing to launch more paperless Arks, all while accumulating and forensically analyzing a mountain of customer data and putting it to work.
UnionBank may not be DBS, but it is streets ahead of its domestic peers in a market that is particularly ripe for digital disruption.
At first, Bautista’s firm belief that he can transform a middling lender from the Philippines into a national and even a regional champion, simply by embracing digital harder, faster and better than any of its peers, sounds a little outlandish. But you know what – he might just succeed.