January 17, 2025 l Manila Times
IN my previous article, I described the top business risks in 2025. This time I will present the best three opportunities in the banking sector.
Risks and opportunities are two sides of the same coin. If you only have one face of the coin, it is worthless. Together, the two faces could create value.
This value can be realized by carefully evaluating the risks, understanding them, and seizing the opportunities they can lead to. A strategy carefully crafted from this evaluation could result in significant financial rewards, but a misstep could just as easily end up in ruin.
What are these opportunities?
According to a study by Michael Abbott of Accenture, “The past 25 years of digitization transformed the banking industry, making banking easier and cheaper. Customers, by and large, welcomed the changes. Yet, while most banks’ mobile apps enjoy good ratings and feedback, they have become less differentiated than ever. More than 40 percent of consumers find it hard to distinguish between financial service brands, and 58 percent acquired at least one financial service product from a new provider in the past 12 months.”
I remember working at Globe Telecom 20 years ago when GCash was introduced. It was hard to imagine then what GCash would be able to deliver today. At that time, it was just a transfer service that was established to compete with Smart Padala.
Today, GCash offers banking, insurance, and an array of investment products that includes crypto. You could even apply for a loan through your phone and get approval in minutes. The lines have blurred, and it is difficult to distinguish what you could transact with a fintech and a regular bank.
According to the study, though, “the fundamentals of banking will remain the same. The bedrock of the industry is and will be trust and security, and customers will want to be heard and understood.”
The solution and opportunities are in artificial intelligence (AI). The rapid rise, as well as the rapidly declining costs of AI, coupled with the digital-first demands of both boomers and, most specially, the succeeding generations, will drive a new wave of digital transformation. The objectives will be different, though.
In the past, we implemented these projects mostly to drive efficiencies and economic gains. The new projects will provide opportunities to gain insights of our clients’ needs and preferences to provide them with bespoke, value-added solutions. This could be a significant breakthrough, as more and more non-banks, like private equity firms, mortgage lenders and fintech companies, are quickly taking over the financial service business.
The second opportunity comes from rising regulatory demands, particularly in anti-money laundering (AML), cybersecurity and sustainability that affect overall system compliance requirements of traditional banks. Although well-intentioned and necessary, stricter regulations on banks led to the growth of competing non-banks in the country and the region.
The Bangko Sentral ng Pilipinas (BSP) has also set the framework for open finance which aims to transform the financial services sector to empower people and promote inclusivity. This extends the ideas of data sharing and interoperability to a wider range of financial products and services, including savings, pensions, insurance, mortgages, and other personal finance matters.
Once completely implemented, this would change the banking landscape and would open doors to more aggressive competitors, and possibly more nimble ones. More than ever, it will be important for banks to understand the value drivers of their profits.
Some banks have started creating new growth opportunities for themselves by lifting from the pages of non-bank playbooks. Some are even partnering with them. We have also seen a growing trend of sustainable lending which are still under the control of banks.
Scale matters
The third opportunity is driven by the fact that scale really matters in banking. Large banks have stronger brands and make it easier to attract clients. Scale also allows these banks to have access to more diversified funding sources, including “free” money in retail checking accounts.
Large banks enjoy lower interest rates when they issue bonds. Economies of scale play a key role in their operating models, as the bigger banks could spread the costs of their operating systems to a wider customer base.
In 2024 we saw the merger of Robinsons Bank and Bank of the Philippine Islands (BPI). This is not the first merger between two major financial institutions in the Philippines. In the 1990s, the BSP encouraged the creation of more banks to promote competition.
After the crippling Asian financial crisis, however, the BSP decided it would be better to have stronger, bigger, and more stable banks. During this time, the mergers became more common — Far East Bank and BPI, Banco de Oro and PCI Bank, and the Philippine National Bank with Allied Bank.
I am certain there will be more mergers in the future since scale really matters. I also believe Philippine banks will meet the growing tide of risks by embracing new opportunities.
***His opinions are his own do not necessarily reflect the opinion of FINEX. Photo is from Pinterest.