Banking in rural areas is still a big problem in most parts of the world. With the population of the unbanked remains high, rural banking is key to ensuring financial inclusion, especially with societies becoming more digitalized today.
These banks help promote and expand 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 those in the retail sector and the unbanked or those unreached by bank services or similar financial institutions.
In fact, statistics show that the population in Nordic countries, Australia and Canada have a 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 about 51.2 million unbanked Filipinos, translating to a whopping 71% of the entire adult population.
The figures have improved slightly since the pandemic started, but the unbanked population still remains high and a concern in the country. Rural banking is one way of dealing with this problem but it also faces mounting 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 that rural banks currently face numerous challenges.
“Rural banking is a segment most vulnerable to economic stops brought by calamities and the pandemic. It also requires approaches that are more personal, inclusive, and far-reaching. And while competition is fierce, regulatory compliance is a must. That is why rural banks need more than good people and sufficient capital. It requires an upgraded and robust IT infrastructure to keep pace with the evolving technology landscape,” commented Ong.
Innovating rural banking
To deal with the challenges of rural banking, Nitin Vohra, Director of 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 provide customers with different accounts and labeled products and services, such as mortgages and credit cards. However, this model contains several providers that offer a lower price, less friction, and better customer experience in the value chain. And with legacy software, competing with these providers is impossible.
“Banks should rationalize their product offerings and concentrate on areas that command a competitive advantage. Another option is to become a service provider to other banks or fintech companies to eliminate the need for others to engage in heavily regulated industries and activities, readily taking on the compliance burden,” Nitin explained.
Banks can also operate as aggregators of financial services and products. In this way, Nitin said that banks do not have to incur the costs of manufacturing products and services to be compliant. It also provides its customers with access to a broad range of products.
“On the other hand, they need to adopt a vertically integrated yet open platform to take advantage of their execution capabilities and extend their ability to offer levels of customer fulfillment. It also helps enable banks to capture the network effects and capitalize on their existing competitive advantage,” he added.
Becoming an Intelligent bank
For SAP, rural banking can be seamless if banks transform their business and become intelligent, sustainable enterprises that consistently apply advanced technologies and best practices within agile, integrated business processes.
For example, SAP provides integrated applications and technologies in a digital platform. Among its current offerings include RISE with SAP, a Business Transformation as a Service (BTaaS) solution that aids in ensuring transformation readiness and access to simpler support models by consolidating the solutions and services businesses require in one package.
“RISE with SAP provides cloud delivery capabilities that enable the journey to become intelligent banks. It mitigates risk, reduces cost, and accelerates time to value. It leverages the SAP reference architecture built with the industry’s best practices over the last five decades. It has predictable and lowers total cost of ownership to help banks run today and become intelligent banks of tomorrow,” mentioned Nitin.
At the same time, to boost the rural banking industry, BSP will also be raising its minimum capitalization of small banks. BSP said that the increased requirement for minimum capitalization is part of the country’s Rural Bank Strengthening Program’s goals. The program was created to help rural banks improve their operations, capabilities, and competitiveness.