Digitalization for greater financial inclusion

Digitalization is defined as the use of digital technology to change business models and provide new revenue-producing opportunities. It embraces technology’s capabilities to optimize customer journeys and uses data to enable better business decisions.

Digitalization also presents an opportunity for many countries around the world to facilitate greater financial inclusion. Everyone benefits from being a part of the mainstream financial ecosystem and economy. As customers gain access to more financial services, they are better positioned to grow financially – empowering themselves and the communities they belong to. As more people gain access to the financial system and begin to build wealth and access credit, greater financial inclusion serves as a catalyst for investment and spending, which in turn enables economies to flourish.

The Philippines is well on the way to achieving greater financial inclusion through the continued growth and development of digital payment innovations. The 2022-2028 National Strategy for Financial Inclusion launched by the Bangko Sentral ng Pilipinas (BSP) places digitalization as an important initiative in broadening access to essential financial products and services. In terms of legislation, House Bill 8992 – also known as the Promotion of Digital Payments Act – is currently pending review. The bill seeks to widen access to digital payment systems to reach Filipinos who have otherwise been excluded from the formal financial system.

COVID-19 also had a hand in the country’s rapid push toward digitalization. Social distancing guidelines and movement restrictions prompted businesses and customers to change their behavior, to shift to digital payments and allow wider access to financial products. Many government units also sent financial relief payments through digital channels. According to data from the BSP, over 4 million Basic Deposit Accounts (BDA) were opened since the start of the lockdowns.

With a maturing millennial demographic (born 1981-1996) alongside high rates of mobile subscriptions, internet usage, social media penetration and smartphone adoption, the opportunities are present for digitalization to create a more inclusive economy for more Filipinos.

The digital divide

Digital financial inclusion can be transformational, especially for unserved and underserved members of the population who transact mainly in cash due to the lack of effective access to formal financial services. According to the latest BSP Financial Inclusion Survey, the number of unbanked Filipinos stood at 51.2 million – accounting for 71 percent of the total adult population.

Financial exclusion affects a wide range of people. While there is no “one size fits all” solution for the problems of financially excluded people around the world, affordable and accessible digital financial services can go a long way.

In a recent TransUnion global study on consumer attitudes towards credit, findings showed that consumers across the globe understand both the benefits and risks of credit and want to maintain control of their finances. In the Philippines, most unserved (51 percent) and underserved (52 percent) consumers surveyed expected their credit needs to increase in the next three to five years. In relation to this, both unserved (39 percent) and underserved (51 percent) consumers plan to apply for credit within the year. Finding ways to meet the needs of this large population of consumers while prudently managing risk represents a significant growth opportunity for lenders.

With the right technologies and business strategies, banks and other financial institutions across the country can help bridge the digital divide to promote greater financial inclusion. By reducing barriers to entry with lower-cost digital services, digital financial inclusion offers the promise of reaching new markets that conventional solutions are unable to service. As customers gain familiarity and trust with digital platforms, the data utilized and generated by such platforms enable access to services such as savings, credit and insurance tailored to customer needs.

A tech-driven economy

Digital financial services also enable economic empowerment by allowing customers to transact in small amounts. This helps increase economic participation by helping individuals with uneven income manage their expenses. BSP data showed that in the first seven months of 2021, the value of transactions made through local e-wallets increased by more than 180 percent.

Greater economic participation through digital financial services propels the country further in terms of transitioning towards a technology-driven economy. According to research conducted by economic consultancy firm AlphaBeta, if a technology-driven economy is fully leveraged by 2030, the Philippines can raise up to P5 trillion in economic value. The majority of the total estimated digital opportunity can be generated by technology-led businesses such as e-commerce and mobile retail applications. These platforms facilitate digital transactions, reduce labor requirements, promote inventory efficiencies and cut retail costs, offering productivity gains ranging from six to 15 percent.

Digitalization for the future

Digital solutions streamline processes. For lenders, effective digitalization can help create a positive consumer experience that potentially brings more consumers into the formal financial system. Additional local findings from the TransUnion global study on consumer attitudes towards credit showed that smooth digital processes can significantly reduce credit application abandonment rates – helping more people become financially included.

However, with the presence of bad actors and the emergence of more sophisticated methods of fraud and other forms of cybercrime, banks and other financial institutions must be vigilant in ensuring security. Everyone stands to benefit from being confident in the integrity of digital financial services. Bad experiences can undermine trust, but robust security and an informed consumer base form the blueprint for trust and loyalty.

As a global information and insights company, TransUnion Philippines is committed to helping build trust between businesses and consumers. With high smartphone usage rates in the country, solutions such as our updated CreditVision Link Universal Score leverage traditional and alternative credit data to enhance risk decisions and understand consumer trajectory, while digital onboarding technologies increase acquisitions while safeguarding against fraud.

Although much has been done to drive broader financial inclusion, there is still much work to be done. While digitalization is an important component in fostering inclusive growth and financial resilience, efforts must be cohesive. Financial institutions must work together with the new government to help increase awareness, promote digital literacy and advance the development of needed infrastructure to ensure greater access to digital finance.

With these measures in place, not only can more Filipinos become credit visible, but more families stand to enjoy an improved quality of life across the nation.

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Pia Arellano has over 25 years of experience in banking, payment solutions, telecommunications and remittance services. She has been instrumental in establishing TransUnion as a risk management and data solutions and insights partner of banks and financial institutions in the Philippines.