In this first part of the Digital Reinvention Dialogue series, Lito Villanueva, executive vice president and chief innovation and inclusion officer of RCBC, discusses the bank’s journey in establishing its own digital bank and the need for digital transformation, especially amid the COVID-19 pandemic.
Rizal Commercial Banking Corporation (RCBC) is one of the largest universal banks in the Philippines. Majority-owned by the conglomerate Yuchengco Group of Companies (YGC), RCBC has been operating since 1960. Yet, despite its long history, the bank is keen to take on a new journey, to try its hand in the digital arena with the establishment of its own challenger bank.
At the helm of this effort is RCBC executive vice president and chief innovation and inclusion officer Lito Villanueva. In this interview, he details where the bank is at in its digital banking journey and how the COVID-19 pandemic has emphasised the need to fast-track going digital.
Opportunity and vision driving digital reinvention
Foo Boon Ping (FBP): I want to start the interview with a personal profile. Tell us about your own experience and what you bring to the role of leading the digital reinvention at your bank.
Lito Villanueva (LV): I've gone through a lot of organisations geared towards inclusive digital finance. I've been with a government bank before, Land Bank [of the Philippines], doing remittances or money transfers. I’ve been with the International Finance Corporation (IFC) World Bank, as well as with Visa and a telco. I was also with Voyager Innovations, PayMaya and FinTech Alliance.
I've gone through a wide array of interfaces with various markets. When I was with Visa, I was handling about 36 markets at the time and looking into various implementations when it comes to mobile money. That gave me the opportunity to look into the essential elements needed to come up with innovative digital solutions that would best fit the Philippine market.
I moved to RCBC, one of the biggest banks in the country. Although traditional in mindset and ways of doing business, the management of RCBC – or the entirety of the YGC – were cognisant of the reality that digital is the way forward.
When I was interviewed by YGC Chairperson Helen Yuchengco Dee, it was very clear in her mind that the way forward is digital. That was a very striking moment for me. The sincerity and clarity of the objective and vision as regards having honest to goodness digital transformation was the prime element that moved me in making the decision. Now, I've been with the company for less than a year.
We've made major strides and accomplishments, especially during the crisis or the lockdown amid COVID-19. In the first couple of months that I've been with RCBC, I think we were the only bank in the Philippines that actually constituted a digital committee inside the bank. In traditional banking operations, you have to go through a lot of committees, task forces to even come up with one product or service before you could implement or execute it.
Digital transformation is not just about technology. It’s not just about adopting the latest innovations or what's new in the market, but it's really about people, mindset and culture. We have seen that the management, the owners are dead set in pushing for digital. Now, the investments made into digital are bearing fruit, as we've seen exponential growth in consumer adoption of digital transactions.
The lockdown really restricted Filipinos’ mobility. As they are not allowed to get out of their homes, everybody was forced to go digital in their transactions. For example, we’ve had three-digit exponential growth in adoption across all of RCBC’s digital channels. This exponential growth will be sustained even post-lockdown or during the new normal, because we are seeing it's increasing on a daily basis. After all, going digital is habit forming. Once you've tried it or gotten used to it, you won't go back to your old, traditional ways of doing things.
FBP: In the Philippines, we see digital banking gaining steam. RCBC has DiskarTech, a digital banking app, but there's also the entry of digital-only banks. Tonik, for one, claims to be the first digital-only bank in Southeast Asia through their rural banking licence.
Digital banking is transforming the financial services landscape in Asia with neobanks and big tech challenging the traditional banks. In your opinion, where do you think the future is headed for banks like yourself? What is the one key opportunity and challenge that your bank faces in this age of digital innovation and disruption?
LV: I would say that we have the best of both worlds. RCBC, as a traditional bank, is now trying to be a challenger bank in a sense that moving towards digital would now be a new order. It would be very difficult for any giant, for example, to manoeuvre quickly. But of course, over time, it will be able to navigate the right course for that particular player.
What is happening right now is that RCBC is creating its own digital bank with a rural bank licence. Because in the Philippines, our regulator – the Bangko Sentral ng Pilipinas (BSP) – has yet to implement specific digital banking regulation. We are one of the first, if not the first, regulator in Southeast Asia that has come up with regulations targeting digital banking without having to pull it together and call it as a digital bank code or regulation. All of those regulations pertaining to eKYC, agent banking – practically, you have more than 10 regulations talking about digital banking. This is already the framework of going into the digital banking landscape.
We are the first Philippine universal bank that is now venturing into a digital bank. You have seen CIMB and ING operating in the Philippines, but these two entities are owned regionally. ING is a global player and CIMB is a regional player. Tonik is owned by a Singapore-based company. The digital bank that RCBC is pushing – which we already applied formally to our BSP – will be the country's first digital bank owned as a subsidiary by a Philippine-based or Philippine-owned universal bank.
How do we now place RCBC as a traditional bank vis-à-vis that of a challenger bank like what we are now creating? I think there will definitely be no competition, no conflict at all, because both would be complementing each other. RCBC is more targeting the mass affluent, while the digital bank that we are now creating is more targeting the mass base, the unbanked or underserved Filipinos that constitute majority of the population.
There are about 58 million adult Filipinos that do not even have a bank account until now. Imagine that magnitude of opportunity in terms of addressable market is so huge for any player in the Philippines to take advantage of. Looking at the CASA (current account, savings account) base across Philippine banks, more than 80% of their average daily balance (ADB) is way below $1000. Of course, in the definition of the basic deposit account of BSP, it is actually only limited or capped at about $1,000 for the mass market, the unbanked or underserved.
This is where we will be playing. The target is so clear, the vision is so well-defined in the approaches or objectives of how we intend to roll it out and scale along the way. There are two major metrics that we want to really emphasise here: acquisition and usage. Acquisition is quite a very straightforward initiative, but usage is a different story altogether. What is critical is how the market traction and consumer adoption of all these digital transactions and channels are measured.
FBP: You have developed a formula for it, you call it the 4Ps + 3Vs = PDC.
LV: The four Ps would be people, process, product and platform; the triple Vs – volume, value and velocity. These would now result in PDC: profit optimisation, data generation and cost minimisation. At the end of the day, the value of going into digital would really mean having to achieve these three.
FBP: RCBC’s 2019 results are quite spectacular. Your profit grew 25% on the back of a 35% increase in revenue, although, your cost-to-income ratio – and for Filipino banks in general – tends to be on the higher side, almost 60% coming down from 70+ per cent. There is enormous opportunity there to bring cost down and improve margins and profitability.
LV: That's true. We are very lucky that we have a very able and digital-savvy presidency in the person of Eugene Acevedo, who is a seasoned banker as well as an advocate of digital financial inclusion. He has rallied all people in RCBC to make a difference and push the envelope in delivering and sustaining the momentum. On top of our 2019 results, we’ve also seen spectacular performance in Q1 of 2020. Net income increased 77%. If you were to compare that with other players, I think we're one of the frontrunners when it comes to having profitability on Q1.
FBP: That market for the underserved is quite a huge one – overall, a hundred million population with about 70% of them underserved. The deposit market is worth $140 billion, the consumer loan market is about $100 billion. What is your key strategy to succeed and the key priority pillars that support the strategy? What is your vision for your bank in its journey of "reinvention"?
LV: The digital banking offer that we will launch is DiskarTech. This is practically the country's first inclusion super app. This will address not only financial but also social, livelihood and even health and wellness. We will offer a whole slew of financial services in the app as well as other features that will encourage the user to maximise its use.
I think this is also the first mobile app in the Philippines that is in Taglish (Tagalog-English). It’s a conversational language that will address a potential barrier amongst majority of Filipinos that find English intimidating. We made sure that how the app communicates would be conversational, easy and pain-free for anyone, especially in far-flung areas or markets that are unbanked or underserved.
There are many perceived barriers in opening a bank account in the Philippines. They say the branches are too far or that the bank branches are air-conditioned and they may not be allowed to enter if they are wearing slippers or sando (sleeveless shirt). For some farmers or other folks in remote areas, it would take so much money and effort to even go to the nearest branch or financial touchpoint for their transaction. In this particular case, DiskarTech resolves the access issue. The language issue and the issue concerning variety of services have also been resolved.
The idea behind our strategy is really on how we can offer variety. In the Philippines, we want a variety of choices because for us, as Filipinos, freedom of choice empowers us.
Criticality of technology and its impact
FBP: One advantage a digital bank has is its agility in responding to customer needs, whether it's onboarding or in the development and rolling out of products. One question on technology, What are your views about a cloud and open architecture-based PaaS core banking infrastructure platform that support APIs and microservices? Would open banking be one of the features of your bank?
LV: Since day one, I have been an advocate of open banking, open architecture and cloud. DiskarTech will be 100% on cloud. Our core banking is on cloud. For RCBC to adopt cloud banking, we had to separate the digital bank from the legacy bank. With the legacy bank being so huge, you can’t simply say, ‘Okay, shift to the cloud in 30 or 60 days’ – it will take some time. The quickest way to transition to a digital bank is to separate an entity that will now venture into pure cloud, pure digital and advocate open banking as well as open architecture.
How I define open banking is similar to Bluetooth. It's a matter of how any player in the industry will be able to connect with you seamlessly and quickly – any fintech player, vendor or platform provider. You could expose your APIs and voila, it could easily connect with you without the pain of having a long, tedious integration and a costly way of doing business. The main thrust of digital banking is how you could advocate and push forward all of these principles pertaining to open banking, cloud computing and all the other facets of having a democratised way of doing financial services.
FBP: That includes partnering with fintechs, third parties for that product or platform.
LV: Precisely. At the end of the day, collaboration is key in making everybody successful. No entity will be able to solve or address the major issues or concerns on financial exclusion. There is a surplus of platforms and fintech players operating today. It is a matter of how you could identify and make use of those players that provide value to your proposition.
FBP: We discussed DiskarTech, which going forward might be a subsidiary, a standalone digital bank. Are there other key initiatives that you're working on?
LV: We are putting so much premium on how we can migrate at least 50% of branch-based, over-the-counter transactions to digital. Even post-lockdown, we know that Filipinos will still not go out of their homes or have limited mobility because of the fear of the virus. We are very much afraid of a potential second wave or third wave of coronavirus. We've seen that majority of those branches that have been closed never really produced anything at all because of the restrictions, so I don't think banks will even bother to put in their plans on how to further expand their branch network. We've seen that more than 50% of the branch network of most banks have been closed during the lockdown. That's why it really makes so much sense for us – or for any bank, for that matter – to really shift the branch-based OTC transactions to digital.
FBP: COVID has, in a way, accelerated this whole channel migration. Going back to the question on initiatives, are there technology-specific initiatives, for example, in terms of rolling out of AI, machine learning, the much-vaunted blockchain or other technologies?
LV: RCBC has been into robotic process automation (RPA) already. Since last year, we are using AI. We have a dedicated group focusing on data analytics.
Blockchain I think is not yet a priority for us because the primary items that we need to address would be on how to first cater or serve our clients, what would be the most essential for them in terms of adoption. What we need is to ensure that there is traction in their adoption to what we have. We've seen that even during lockdown.
We've seen blockchain, heard about its many facets and how it's being implemented, but we have not really seen a success story of scale, of a specific use case and how it actually scaled. We have not seen that during this lockdown working for the market, for the people.
The primary thinking of the public right now is how to get cash quickly, transact quickly, buy goods, and how not to be hungry. It would be very difficult to explain to them the intricacies and complexities of blockchain.
For example, we've seen exponential growth in cardless ATM withdrawals, how can an unbanked or underserved individual receive cash from RCBC through ATM cardless withdrawal or get the cash from any remittance partner nationwide? That is as simple as saying, ‘Okay, you can get your cash by simply going to the ATM without the plastic or just present your reference number to any remittance partners that we have.’ As easy as that, then they get their cash.
We also have other challenges in some parts of the country in terms of telco infrastructure, but the good thing in the Philippines is that we now have very robust connectivity. Data services have dramatically improved in the country. We've seen that even in our ATM Go, for example, our mobile handheld ATM device that allows any customer to transact with any ATM issued by any bank. We now cover 89% or 72 out of 81 provinces in the Philippines. Those provinces transact using that device, which requires connectivity. That's why, now more than ever, the Philippines is ready for the digital revolution. We've seen the enormous acceptance and adoption of the Filipinos during this crisis.
FBP: I'm going to use your quote, ‘digital bank is habit forming’ – it's transforming how your customers behave and transact. What is the impact that this reinvention brings on RCBC’s internal organisation as well as your financial performance and statement in terms of key ratios? Where do you see the largest impact, is it on your current income which, going forward, will change dramatically?
LV: Digital banking has had so much impact in the internal organisation of RCBC, even on the culture, the mindset. Employee morale is now record high, because they have seen RCBC at the forefront of this dramatic change in providing digital services right at the very core of this crisis.
In the first five weeks of lockdown, RCBC got at least six BSP approvals, one of which was given to us in a matter of six hours. We got one Monetary Board authority as well, which granted RCBC the authority to receive government funds so we can assist with the social amelioration programme for 18 million beneficiaries affected by the lockdown.
Published articles from various media entities have also provided so much impetus and morale boost on employees. We have a Facebook group among RCBC employees and you could see a lot of comments from them saying that RCBC is now the frontrunner in digitalisation efforts in the country during crisis. I got several comments even from colleagues from other players in the industry, saying that RCBC is shining brightest right now in the industry for being at the forefront during the crisis.
In terms of financials, we registered three-digit exponential numbers for Q1 2020. Everything, even our key metrics for digital banking, is in northward trajectory in revenues, volume and value as far as transactions are concerned.
Even our revenues for first quarter for the digital bank, my group was also on the green side. It's directly proportional to the height of exponential growth in transaction value, in transaction volume. We have actually achieved our first semester (Q1-Q2) supposed targets as early as Q1, because the volume pouring in doubled, tripled during the crisis.
Managing risk and failure – the lesson learned
FBP: Transforming, reinventing organisations is a high-risk initiative or venture. What are some of the risks and failures from your experience that you can talk about and what to look out for?
LV: In terms of risk, you have to invest heavily in cybersecurity. The more you become digital and leverage technology, the higher risk you have of facing potential cyber hacks or cyber attempts. I think that is also a huge investment on the part of whoever will be venturing into digitalisation. You don't want to be just one step ahead of the hackers, you have to be more sophisticated when it comes to having all of those platforms or solutions on how to prevent cyber fraud along the way.
The commodity we are offering the public is trust. Any digital offer is hinged on trust. As soon as there are attacks, fraudulent transactions or cyber attempts, the trust level of the consumers diminish. You don't want that issue or problem to arise, so you have to be always ahead of the game.
FBP: What are your personal aspirations for the new year? What personal advice do you have for people wanting to follow in your footsteps?
LV: You just have to be yourself. As long as you have that genuineness, sincerity of purpose and clarity of vision, you will be able to implement anything that you want – provided that you also have the support of the principals. No matter how good you are, no matter how sexy or how robust your platforms are, if you don't have the support of management or the principal and they don't believe in you, you're also doomed to fail.
Any digital initiative or any digital transformation has to start from the top. It would be very difficult for you to rock the boat at the bottom. You have to ensure that you capture the imagination, get the approval and the support from your principals. Share that vision and aspiration you intend to drive up and how you intend to deliver it. Of course, make sure that all of your actions are well-grounded. This is not the time for you to have lofty goals that would be impossible to even reach.
These are things that you need to understand in having to come up with measurable metrics and measurable targets that are really not impossible to undertake. What is also critical is how you could make your messaging simple, because you don't want to impress your customers. If you are to impress your customers, most often than not, they are overwhelmed to the point that they won't even use your product. Communication is key in having to offer a proposition that everyone understands.
The third critical element is, again, collaboration. It is not just about cooperating with any external entity outside your organisation. Collaboration is also about internal – how you deal with the internal politics within the organisation. There is always politics in any organisation that you may have, because the human being itself is political in nature. It's more on how you make use of your influence towards achieving a common goal in driving one, common objective for the common good. You have to champion it – not just by you as the prime mover, but also by others within your organisation who will advocate it.
One single person cannot do it alone. It has to be a concerted effort across departments, groups, across the men and women of any organisation towards achieving one common goal.
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