Digitization of rural banking services is key to ensuring financial inclusion

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Banking in rural areas remains a big problem in most parts of the world. With the number of unbanked people remaining high, rural banking is key to ensuring financial inclusion, especially in today’s increasingly digitalized societies.

These banks help promote and develop the rural economy and provide essential financial services to rural communities unserved or underserved by commercial banks. The community segment it caters to is primarily comprised of those in the retail sector and people who are unbanked or unreached by banking services or similar financial institutions.

In fact, statistics show that the population of the Nordic countries, Australia and Canada have zero percent unbanked population, the figure is still high in Asia and Africa. In Southeast Asia, Vietnam and the Philippines have a very high share of unbanked populations.

According to Banko Sentral ng Pilipinas (BSP), which is also the central bank of the Philippines, in its 2019 financial inclusion survey, there are approximately 51.2 million unbanked Filipinos, or 71% of the entire the adult population.

The numbers have improved slightly since the start of the pandemic, but the unbanked population still remains high and a concern in the country. Rural banking is one way to solve this problem, but it also faces growing challenges.

Speaking at a forum organized by the Bankers Institute of the Philippines (BAIPHIL) and co-presented by SAP SE, Estrellita Ong, Director of BAIPHIL and Chief Internal Auditor of BDO Unibank, said rural banks are currently facing many challenges.

“Rural banking is one of the most vulnerable segments to economic shutdowns caused by calamities and the pandemic. It also requires more personal, inclusive and far-reaching approaches. And while competition is fierce, regulatory compliance is a must. That’s why rural banks need more than good people and enough capital. This requires an upgraded and robust IT infrastructure to keep pace with the changing technology landscape,” Ong commented.

An innovative rural bank

rural bank

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To address the challenges of rural banking, Nitin Vohra, director of the S/4HANA Center of Excellence for SAP Asia-Pacific and Japan, highlighted how technology and business innovation are changing the banking game.

Vohra pointed out that traditional universal banking operates on a full-service model. They offer customers different accounts and labeled products and services, such as mortgages and credit cards. However, this model contains multiple vendors that offer lower price, less friction, and better customer experience in the value chain. And with legacy software, it’s impossible to compete with these vendors.

“Banks should streamline their product offerings and focus on areas that provide competitive advantage. Another option is to become a service provider for other banks or fintech companies to eliminate the need for others to engage in heavily regulated industries and activities, easily shouldering the burden of compliance Nitin explained.

Banks can also function as aggregators of financial services and products. In this way, Nitin said, banks do not have to bear the costs of manufacturing products and services to be compliant. It also offers its customers access to a wide range of products.

“On the other hand, they need to adopt a vertically integrated yet open platform to leverage their execution capabilities and expand their ability to deliver higher levels of customer satisfaction. It also allows banks to capture network effects and capitalize on their existing competitive advantage,” he added.

Become a smart bank

For SAP, rural banking can be transparent if banks transform their businesses and become smart, sustainable enterprises that consistently apply advanced technologies and best practices within agile, integrated business processes.

For example, SAP provides applications and technologies integrated into a digital platform. Its current offerings include RISE with SAP, a business transformation-as-a-service (BTaaS) solution that helps ensure transformation readiness and access to simpler support models by consolidating solutions and services businesses need in a single package.

“RISE with SAP provides cloud delivery capabilities that enable smart banking. It mitigates risk, reduces costs and accelerates time to value. It is built on the SAP reference architecture built with industry best practices over the past five decades. It’s predictable and lowers total cost of ownership to help banks operate today and become the smart banks of tomorrow,” Nitin said.

At the same time, to boost the rural banking sector, BSP will also increase its minimum capitalization of small banks. BSP said that the increased minimum capitalization requirement is part of the objectives of the program to strengthen rural banks in the country. The program was created to help rural banks improve their operations, capacity and competitiveness.

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