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Philippine banks navigate digital transformation amid legacy challenges, identity verification gaps and regulatory pressures

Interviewed By Foo Boon Ping

The Finance Philippines 2024: Leading Practitioner Roundtable on Technology Modernisation for Digital Banking and Lending Innovation explored the critical role of foundational technologies, financial inclusion, identity verification systems, API-enabled collaboration, and balancing innovation with compliance, in shaping the future of finance in the Philippines.

As the Bangko Sentral ng Pilipinas (BSP) pushes for an inclusive, digitally-driven financial sector, Philippine banks are navigating the challenges of upgrading legacy systems, managing compliance costs, improving security, and fostering collaboration. At the Finance Philippines 2024: Leading Practitioner Roundtable on Technology Modernisation for Digital Banking and Lending Innovation, industry leaders discussed these challenges and opportunities, covering a range of critical themes: foundational technology, financial inclusion, digital identity, cybersecurity, and regulatory complexities.

Foundational technologies and the shift to API and microservices architectures

One of the major themes focused on the importance of foundational technologies in enabling banks to modernise their operations while maintaining stability.

Transitioning from legacy systems to cloud-enabled microservices

The shift from legacy systems to modern, cloud-native, and application programming interface (API)-driven architectures was seen as essential for Philippine banks to remain competitive. Participants stressed that while these architectures enable greater flexibility, scalability, and faster service deployment, integrating them with older legacy systems remains a significant challenge. Several banks are adopting phased approaches, incrementally replacing legacy infrastructure with microservices-based systems to ensure operational stability. This transition allows banks to integrate new features and scale services more easily.

API ecosystem for enhanced collaboration

Open banking through APIs was highlighted as a transformative approach that fosters partnerships between banks, fintechs, and other financial service providers. This API-based ecosystem enables seamless integrations with external partners, allowing banks to offer more innovative products and services. However, participants agreed that there are still challenges in standardising API protocols across different institutions, which can slow down the pace of digital transformation.

Digital identity systems and the challenge of identity verification

Another major theme that emerged was the critical role of digital identity systems in enabling efficient know your customer (KYC) processes, improving financial inclusion, and mitigating fraud.

National digital identity system: A work in progress

The implementation of the Philippines’ national digital identity system was discussed as a key enabler for improving KYC and onboarding processes. However, participants noted that the system is still in its early stages, with challenges such as data quality and multiple identities posing significant risks. The issue of identity fraud was particularly concerning, as some banks reported cases of individuals with numerous identities, complicating the verification process. Liveness checks, quick response (QR)-code-based identity systems, and artificial intelligence (AI)-driven fraud detection were proposed as potential solutions to strengthen digital identity verification.

The role of digital identity in expanding financial services

Despite its challenges, participants acknowledged that a robust digital identity system could significantly broaden access to financial services, particularly for unbanked populations. Seamless integration between national identity databases and banking systems is viewed as essential for enabling smoother customer onboarding and increasing trust in digital services. The successful deployment of such systems would also facilitate more accurate credit assessments for SMEs and individuals, reducing the reliance on collateral-based lending.

Financial inclusion through lending innovation and alternative credit scoring

Financial inclusion was a recurring theme, with discussions focusing on how banks can leverage digital tools, data analytics, and partnerships to provide more accessible lending solutions.

Credit Risk Database (CRD) and risk-based lending

The BSP’s Credit Risk Database (CRD) was a focal point of the discussion, with participants acknowledging its role in transforming micro, small and medium sized enterprise (MSME) lending. The CRD enables risk-based lending by utilising both financial and non-financial data, allowing banks to assess creditworthiness without relying solely on collateral. This approach reduces borrowing costs for SMEs, making credit more accessible. However, participants emphasised that full integration of the CRD with existing banking systems, including APIs and digital identity platforms, remains a challenge.

Collaboration with fintechs, rural banks and credit co-operatives to reach underserved markets

The role of fintech partnerships in expanding credit access was widely discussed. Fintechs are helping banks leverage alternative data for credit scoring, allowing them to offer loans to individuals and businesses who would typically be excluded by traditional banking models. These partnerships enable banks to reach underserved populations, particularly in rural areas where access to financial services remains limited. Participants shared examples of successful fintech collaborations that have helped reduce the barriers to accessing credit for low-income individuals and SMEs. At the same time, rural banks and credit co-operatives are also ulitising informal social networks and alternative data to better serve individuals and small businesses in the rural communities.

Cybersecurity and fraud mitigation in the digital age

As banks embrace digital transformation, the growing risk of cyberattacks and fraud was a central concern. Participants discussed the need for enhanced security measures, particularly as more services move online.

AI-driven fraud detection and cybersecurity measures

With the increasing digitisation of banking services, cyber threats are on the rise. Participants emphasised the importance of integrating AI-driven fraud detection systems into digital platforms to safeguard sensitive customer information. These systems can help identify and prevent fraudulent activities in real-time, providing a more secure banking environment. Security-by-design approaches, where cybersecurity measures are embedded into every phase of the digital transformation process, were highlighted as critical to mitigating these risks.

Addressing identity fraud and multiple identities

The challenge of identity fraud was raised in relation to the digital identity system. Several participants shared their concerns about customers having multiple identities, which complicates KYC processes and increases the risk of fraudulent activities. AI-based identity verification and fraud detection tools were discussed as potential solutions, helping banks verify customers more accurately and prevent fraud at the onboarding stage.

Balancing innovation with compliance and data privacy regulations

The conversation also addressed the balance between embracing innovation and ensuring compliance with evolving regulatory frameworks, particularly in the areas of data privacy and cybersecurity.

Rising compliance costs and the complexity of data privacy

Participants expressed concerns over the rising costs of compliance, especially as data privacy regulations become more stringent. Banks must comply with both local and international laws, which adds operational burdens, particularly when services involve cross-border data sharing. While AI and machine learning technologies are being explored as tools to automate compliance, participants stressed the importance of collaboration between regulators and banks to streamline these processes and ensure that innovation is not stifled.

Multi-party computation

This technique allows multiple parties to collaborate on processing data without revealing the actual data to each other, thereby maintaining privacy while ensuring compliance. During the roundtable, it was discussed how this privacy-preserving technology can help automate compliance processes while keeping a decentralised infrastructure, which is crucial given the fragmented regulatory environment. The adoption of such technologies allows banks to share necessary data for compliance purposes without compromising privacy

Regulatory coordination and data sharing

The coordination between regulators and banks was highlighted as a key challenge. As digital transformation accelerates, regulators must adapt their frameworks to support innovation while ensuring customer protection. Participants called for a more flexible and supportive regulatory environment, particularly when it comes to data sharing between banks and third-party providers.

Operational resilience and ecosystem collaboration

Participants acknowledged that operational resilience remains a priority as banks scale their digital operations. Ensuring that systems are robust enough to withstand cyber threats, regulatory changes, and market disruptions was deemed essential for sustaining customer trust.

Building resilience through cloud-native platforms

Cloud-native platforms were discussed as key enablers of operational resilience. By adopting these systems, banks can improve their scalability and flexibility while ensuring that security measures such as continuous monitoring and encryption are built into the infrastructure. Participants shared strategies for integrating cloud solutions to enhance their operational stability and better manage the risks associated with digital transformation.

Ecosystem collaboration as path forward

Collaboration across the financial ecosystem was seen as critical to driving innovation and resilience. Participants agreed that banks must work closely with fintechs, regulators, and other stakeholders to build a more robust and inclusive financial system. By leveraging API-based ecosystems and cloud-native technologies, banks can foster stronger partnerships and develop more innovative solutions to meet the evolving needs of their customers.

Embrace partnership and regulatory collaboration

The roundtable concluded with a strong call to action for banks, fintechs, and regulators to work together to overcome the challenges of legacy systems, compliance costs, and cybersecurity threats. Collaboration is seen as the key to accelerating digital transformation while ensuring resilience and security.

Leveraging partnerships for inclusive growth

Participants agreed that fostering partnerships across the ecosystem—through open APIs, cloud-native platforms, and fintech collaborations—is essential for expanding financial inclusion and driving innovation. Regulatory bodies also have a crucial role in creating a supportive framework that allows innovation to thrive while ensuring compliance and protecting customers. The path forward requires coordinated efforts to create a digital-first, inclusive financial landscape in the Philippines.

Presentation of Leading Practitioner certificates

The event concluded with the presentation of Leading Practitioner certificates to individuals who have significantly contributed to the transformation of their institutions and the Philippine financial sector. These leaders were recognised for their forward-thinking approaches to business transformation, financial inclusion and the adoption of modern technologies.

1. Maria Cristina L. Go – Executive Vice President and Head of Consumer Banking at BPI
   Recognised for her leadership in integrating retail banking post-merger and driving digital transformation to enhance customer engagement.
2. Alex Seminiano – Chief Technology Officer at BPI
   Honoured for spearheading BPI’s digital infrastructure modernisation, focusing on cloud computing and enhanced data management.
3. Dennis Tangonan – Chief Information Officer at Security Bank
   Acknowledged for leading Security Bank’s IT transformation, focusing on cloud-native systems and digital infrastructure improvements.
4. Lucose Eralil – Executive Vice President and Chief Operating Officer at Security Bank
   Recognised for his role in advancing digital transformation and operational efficiency at Security Bank.
5. Dennis Omilla – Chief Transformation Officer at UnionBank of the Philippines
   Celebrated for leading UnionBank’s digital transformation, adopting fintech partnerships and pioneering digital banking initiatives.