SINGAPORE (Dec 18): Union Bank of the Philippines (UBP) is not the largest bank in the Philippines, but it is one of the country’s top universal banks that distinguishes itself through superior technology, unique branch sales and service culture and centralised backroom operations.

UBP consistently ranks among the top three listed banks in the country in terms of profitability and cost efficiency ratio despite its ranking in size.

Having been at the forefront of the country’s digital banking revolution as early as the late 1990s, UBP is quick to join the ongoing global trend of financial institutions making use of technology so that the banking group can be more efficient, serve its customers better and, ultimately, generate better returns for shareholders.

Fortuitously, the Asean Financial Innovation Network (Afin) was set up in May this year by the International Finance Corp, a unit of the World Bank Group, and the Monetary Authority of Singapore, to facilitate the broader adoption of financial technology (fintech) innovation and development and enhance economic integration within the ­Asean region.

And Justo Ortiz, chairman and CEO of UBP, intends to make good use of the services offered by Afin. “Since Afin has a bigger scope, it is putting this [initiative] together,” he says in an interview.

Afin launches sandbox Afin is a platform for financial institutions, fintech firms and regulators to address issues of connectivity, local compliance and cross-border compatibility. On Nov 16, it announced the introduction of an industry sandbox for financial institutions and fintechs firms. The announcement was made as part of the week-long Singapore FinTech Festival 2017 held last month. Afin’s main aims for the sandbox are to facilitate access by banks to a broader range of fintech solutions to match various opportunities and challenges.

The organisation will help in product development through efficient testing, design and integration tools for both banks and fintechs, and support the adoption and standardisation of application programming interfaces (APIs).

Afin also aims to support financial services innovation and inclusion in less-developed markets within the Asean region and to provide a platform for collaboration and innovation for Asean banks, microfinance institutions, non-banking financial institutions and regional fintechs.

In addition, the platform will facilitate development and experimentation of new digital financial products and services. These include functions such as customer onboarding, credit scoring, merchant payments and compliance solutions. By providing a structured method for integration and defining relevant standards where necessary to connect the back-end systems of banks and fintechs, Afin can help banks test solutions in a quick and seamless manner.

“Hopefully, over time, the fintechs that will be connected to Afin are curated so that when we want a specific engagement, we just choose from a specific vertical,” says Ortiz, who also spoke at the Singapore FinTech Festival.

These fintechs are likely to provide Know Your Clients screening processes, and payment, lending and investment services more efficiently to banks, he adds. “For instance, if we need a KYC platform for onboarding customers, we don’t need to look at 100 fintech options. Since Afin has a bigger scope, it will attract more fintechs, test them and work with them to see which have the best solutions. This gives us access to a broader number of fintechs that have been observed by a regulator.”

Afin will initially be run as a market experiment and as a neutral not-for-profit organisation with a mandate to support financial sector innovation and development. During initial-stage experimentation, Afin will operate a test platform and work towards supporting “live” production services after proof of concept. Users may be asked to help defray costs via subscription, usage charges, membership or other fees.

“The vision of Afin is to enable these smaller institutions that don’t have the budget or IT talent to prosper,” Ortiz says.

In the design and development and proof-of-concept phase, Afin is likely to restrict the initial number of active financial institutions to a few for each country so as to maintain a manageable scope of work. After the initial phase of development and proof of concept, the Afin steering committee and related stakeholders will consider options for Afin to become a sustainable enterprise and provide a live, cloud-based, production environment.

Benefits of digitalisation Ortiz expects the wider adoption of technology to enable customers to have easier access to banking services. In UBP’s home market of the Philippines, 70% of the population are unbanked, according to him. “Maybe another 15% are underbanked, only 15% are banked in the true sense of the word,” he adds.

The Philippines has more than 7,000 islands and 42,000 villages. “The biggest bank has 1,000 or so branches, and they are mostly in urban areas. So, we really need to digitalise,” Ortiz points out. In 2013, UBP acquired CitySavings Bank for PHP5.7 billion and this bank is now the banking group’s mass-market bank.

UBP has also grown its business through agency banking, which is approved by the banking regulator in the Philippines, Bangko Sentral Ng Pilipinas (BSP). “Agency banking allows a bank to do some transactions, such as payments and loan origination, through an agent,” Ortiz explains. UBP has partnered with a remittance company, which has a total of more than 2,300 counters. By contrast, UBP’s CitySavings Bank has just 100 counters. “We interfaced with them and helped them. We did an API with them so that they can originate a loan at their counter and pass it on to us to process and when it’s approved, they disburse the loan. Loan approvals take one or two hours,” says Ortiz.

The agency network uses an O2O, or online to offline, model. “The application is online, with KYC and fulfilment done offline,” Ortiz says. The loan is disbursed through ATMs. “Usually, people go to the ATM to get the cash,” he notes.

Half of UBP’s earnings comes from its mass-market business, according to Ortiz. “It’s a very good business for us. It was near zero four years ago. We think there’s good potential, not to mention the social impact it will have.”

Digitalisation will allow UBP to have an even wider reach. The Philippines has a large population spread over a wide geography. “The most important benefit [from digitalisation] will be our ability to generate more revenue, especially from retail customers,” Ortiz says.

The digital transformation exercise also improves operational efficiency. UBP is looking to lower its cost-to-income ratio from 52% currently to as low as 40%.

As Ortiz sees it, digitalisation will lower the cost of small accounts. “If you can bring the operating expense ratio down to 5%, you can reduce interest rates by 45% and then you can expand the market. More people would qualify and you can imagine the economic and social value it will have on the dignity of people and their income. I think, to a large extent, that’s the value of fintech and these digital solutions,” he says. “We’ve drawn up the whole enterprise architecture and mapped out 900 processes, and we’re going through them one by one. Our legacy system is out the window and we are starting from scratch.”

Digital bank Besides physical branches, UBP also has a “standalone” digital bank called EON Digital Me (EON Bank), which has its own distinct branding. EON Bank has signed up some 80,000 customers, picked up industry awards and punched above its weight.

EON Bank enables UBP to own the full array of financial services: branch banking through the main banking group, some financial services through agency banking, and full banking services through a digital bank. “For a digital solution to occur, you need enabling and regulatory infrastructure. This needs to be open and tiered. In a pure digital solution, you need to have API with a national ID database like India has, but most countries, including us, don’t have that,” Ortiz says.

India has the Aadhar system, in which a 12-digit identification number is issued by the government to individuals in the form of a card. Aadhar enables the population to open bank accounts digitally.

“We need technical infrastructure that is interoperable, accessible and verifiable through APIs. We need a merchant infrastructure like in China. Then, we need financial literacy and consumer protection infrastructure,” Ortiz says.

As he tells it, the Philippines still has some way to go to reach some of the milestones achieved by ­China and India. In the meantime, UBP is making use of APIs to connect its customers and other services. “We have one of the most extensive and advanced API libraries compared with the other banks. We have 268 APIs,” Ortiz says.

UBP was incorporated in August 1968 and acquired its universal banking licence in July 1992. As at end-FY2016, it had an asset size of PHP524 billion ($14 billion). The banking group operates 313 branches and 262 on-site and 59 off-site ATMs in the Philippines. The bank’s shares are listed on the Philippine Stock Exchange. It is 49.69% held by Aboitiz Equity Ventures, the holding company of the Aboitiz Group of Companies. For the nine months to Sept 30, the bank announced a net income of PHP6.39 billion, down 21% y-o-y.

Ortiz says he plans to be back in Singapore for the 2018 FinTech Festival. “This year, the festival was very fruitful. The big fintech event was the Afin initiative, which was announced in front of Queen Máxima [of the Netherlands]. This is the first time I saw a queen.” The queen had attended the festival in her role as the UN Secretary-General’s Special Advocate for Inclusive Finance for Development.

Union Bank of the Philippines taps regional fintech network

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