Tuesday,28 May 2024

UnionBank’s Edwin Bautista: “Digital transformation sets us apart as one of the top-performing banks in the country”

5 min read

Edwin Bautista, president and CEO of UnionBank, described how technology, culture and people play important roles in the bank’s digital transformation, and showcased the data centre network and Smart Innovation Campus deployed with technology partner Huawei

UnionBank has been overhauling its technology infrastructure over the last six years. One of the standout banks in Southeast Asia, it set out to serve the large unbanked population in the Philippines. Over the course of the COVID-19 pandemic, it deftly responded to the digital demands of consumers despite unprecedented disruptions.

UnionBank has been recognised as one of the standout banks in the Philippines. In partnership with Huawei Technologies, the UnionBank Smart Innovation Campus was launched in May 2022 to serve as a hub for research and development to boost the bank’s journey in digitalisation.

Said to be the first in Asia, the hub is driven by artificial intelligence (AI) and expects to revolutionise the bank’s processes, including risk management. It is a major part of the bank’s advocacy—Tech Up Pilipinas—to introduce technology transformation to the country’s businesses, big and small, so that they can become globally competitive.

Edwin Bautista, president and CEO of UnionBank, described how Huawei is not only a vendor but a partner in scaling up the bank’s digital transformation by introducing different solutions and approaches, making it possible for them to roll out new products and services in just two weeks.

UnionBank became a commercial bank in 1982 and is one of the top-performing banks in the Philippines today, ranking seventh in terms of assets among publicly-listed universal banks. UnionBank’s customer base is comparable to the largest banks in the Philippines, growing some 625% to over 12.5 million customers to date compared to just two million at the start of its digital transformation.

With the most recent acquisition of a considerable Citibank consumer portfolio, the bank leapfrogged from number nine, emerging as one of the top three in the credit card business. Today, UnionBank is the fastest-growing in personal loans, and ranks number one in teachers’ loans.

Bautista said: “Our consumer portfolio has been performing way beyond our expectations and we’ve been able to manage that growth because the technology infrastructure can support that. It made us dream bigger. Before, we just wanted to be one of the top three consumer banks. Now, our goal is to be the largest consumer bank in the next three years.”

The bank is also the only publicly-listed bank in the country to have its own digital-only bank, UnionDigital. Since its launch in July 2022, UnionDigital ended the year with PHP 9.4 billion ($170 million) in deposits and PHP 5.7 billion ($103 million) in loans. UnionDigital has also signed up its first corporate customer, cryptocurrency trading platform Philippine Digital Asset Exchange (PDAX).

UnionBank aims to be the leader in the country’s consumer banking sector by hitting its market share and volume targets by leveraging innovation and harnessing data. Bautista said: “Data science and AI would be at the heart of it, but the technology infrastructure has to be able to support the data. You can only achieve this if your architecture is robust to start with. I guess this is our advantage.”

Bautista joined UnionBank in 1997 as senior vice president leading the bank in transaction, retail, corporate product, and digital banking. He was previously the president of International Exchange Bank until its merger with UnionBank, and prior to that, he headed Citibank Global’s Transaction Services Group in the Philippines.

Here is the full transcript of the interview:

Foo Boon Ping (FBP): Good afternoon. I'm very happy to be speaking with Mr. Edwin Bautista, president and CEO of UnionBank of the Philippines, one of the standout banks in Southeast Asia that has remarkably transformed itself digitally in the last five years. What are the two projects significant to your digital transformation project?

Edwin Bautista (EB): Five, six years ago we realised that if we wanted to become a great retail bank focusing on the consumer, there was a huge opportunity in the Philippines because the unbanked population is pretty large and we also knew that as the country was getting wealthier, we're starting to see a huge portion of the market coming into what is possibly a banking wallet or a banking target. With those in mind, we prepared for it and so critical to us was the ability to handle volume and not just volume, but rapid volume. The successful fintechs around the world, it's not like in the old days, remember that, you grow 10%, 15% a year, 20% a year, you're considered very successful. Now you're talking 10% to 20% increase every month, not every year. The only way we could do that is to look at a different configuration for our data centre and it meant putting all our most important systems assets on the cloud. That was the key objective from the very beginning.

Now we're at the tail end where almost 100% complete. But even early on what we experienced was during the lockdown, all of a sudden digital adoption happened in the Philippines rapidly. We were the key beneficiary.

FBP: I'm sure that there were challenges that were presented as you went through your digital transformation process. What do you think UnionBank did better than the rest in addressing them?

EB: When the lockdown happened and all of a sudden there was a big boom in e-commerce and there were new requirements from the customers, we were able to quickly roll out new products, the time to market was an amazing two weeks. The other important thing is you need high reliability on your network that's even higher than what it was before. But just imagine if you have... a million digital transactions and what's the 1%? That means you have a failure rate of 10,000, it cannot be. It's almost got to be Six Sigma in terms of reliability. So we need to configure our systems to be double redundant, triple redundant, and we need to have equipment that are extremely reliable. And this is where Huawei has been a big help because they introduced a lot of new approaches and they've not only been vendors to us, but more of partners that they helped guide us to the path going forward and this is most critical. You mentioned, for example, the innovation hub that was conceptualised even before the COVID lockdown.

The only difference is many of our competitors will do it thinking of doing something like... they stopped working during the lockdown. We continued ours, so when the lockdown was over, it was ready for roll out. Now that one, Huawei helped us a lot in that, in fact they were our original inspiration and they said, we're putting together this smart building, smart campus, come and see it. We thought we could have something similar in the Philippines so that Philippine companies can be exposed to it. This will be a big attraction to local companies whom we may want also to help in terms of their transformation projects. The statement there is 'Tech Up Pilipinas'. Our mission is to help to bring technology to Philippine companies, big and small so that they can become globally competitive. In this world of open finance, it's about collaboration. I mean, we were already of that mindset to start with. But I think for banks that would be critical. So since we started early, we actually we're in a position to create platforms. Of course we kept it open, so it's like we're inviting other banks to participate, but we're there.

FBP: I want to ask you about this collaboration with Huawei, this collaboration between Union Bank and Huawei especially on the data centre and the smart campus implementation, what brought you together?

EB: The proposition that we offer to them is something like this, we know you've got lots of things. And if you're looking for someone who's willing to try these new things, consider UnionBank because we're the bank who's open to exploring, to try to, to see whether this new technology can work or not. Our approach is, there's something potentially great, we want to be the first to execute it. We want to make sure, although that we ring-fence the downside risks, but because it works, we know that a small lead time advantage can be a tremendous competitive advantage in this new world. Many years back, it didn't matter, right? You could be a fast follower, but now things move so fast, if you're not there in the first, the first iteration, you'll be left behind. That's the mindset. And so we collaborated with Huawei and try these new things, and we were pleasantly surprised to see that they... we thought initially that they were just focused on a narrow, product set, but it turns out that they had holistic solutions.

And in many cases, even if they did not offer it themselves, their partners who had already proven to be able to integrate with their core systems so that it's easy for it to come together. That's the key value that that they brought to us in this collaboration effort. In terms of total number of individual customers, I'm talking of individual customer count, we have the second highest number of customers already in the banking industry. We came probably from number 11 or number 12 in terms of number of customers, now we're number two. Our credit card business, because we recently acquired the huge Citibank consumer portfolio. We've leap frogged from number nine to we're now, number two. There are other areas where all of a sudden we emerged to be top three. We're top three in pension loans. In teachers' loans we’re actually even number one, on personal loans we're the fastest growing in that particular area of unsecured loans. So our consumer portfolio has been performing way beyond our expectations and we've been to manage that growth because the technology infrastructure behind it supported that. That's the great thing. What this has done is now, it got us to dream bigger. Before, we just wanted to be a top three consumer bank. Now, our goal is to be the largest consumer bank in three years. We're moving from number ten to now, top three in terms of consumer.

FBP: What is UnionBank's next focus as you go set your new target to be the leader?

EB: First is, in terms of market, we are obsessed with hitting our market share and volume target. And then the second one is innovation again, will be very high in the agenda. But the difference is we already have the core systems infrastructure. Any innovation or investment will now have to be directed towards the question of does it mean more customers? Does it mean better products, better services? The impact has to be tighter, whereas before we did lots of stuff just to complete the network, The third one is, we're focusing on making sure that we hit the volume objectives while maintaining that the risk management is tight, that the systems are in order, the control systems are in place because the danger is if you grow too fast, some of the things can break and we don't want that to happen. It's all about, harnessing the data. So data science and AI would be at the heart of it. But the tech infrastructure has to be able to support the data. So one is, can we get the data easily? Because the problem is when you're running different businesses. Your first problem is how do you gather the data in such a way that it could easily be processed in? The second one is we're now moving away from static old historical data to live data and to be able to process the data on real time. pipe it back into the system, so that the different channels are properly alerted. And then we know when certain events take place that certain sales transactions could take place. So that is what I would say, the holy grail in all of these things, how they all fit together. And you can only achieve this if your architecture is robust to start with. I guess this is our advantage.

FBP: What benefits has accrued to your customers and how do they see UnionBank today?

EB: The end goal is market segment of one until we reach that, which is probably couple years forward, we want each customer to feel that they are welcome in whatever product or entity that services them. Because we're dealing with data and one entry point to the customer, which is probably going to be mobile. I can create a new product within two weeks, that's fantastic. Never heard of before. All of these things that we're doing will come down to that, that we will have the ability to provide customers superior value. because we can pivot and match whatever new product will be introduced by our competitors in two weeks. We realised that there are advantages, but sometimes when you put these minds together in a room, you come up with consensus much faster and sometimes the creative juices flow much more. So that's why I want to put them all together. The second one is we're also using the Innovation Campus to evangelise tech to even our own employees because not every employee of the bank had access or had seen what we were doing. They get to see the new things that we've created and that increases commitment.

FBP: Can we get you to provide some more specific details of where you are in terms of these goals. For the first time, that you are now setting your goals for the next three years to be the absolute leader in consumer banking.

EB: In terms of number of customers we already crossed, I think the 12.5 million mark. I think we were about two million customers. Twelve million is still far away from 50, but they say, the first ten is the most difficult to get. After that, you now move in increments of ten. Hopefully, that's going to happen, but this is something we're preparing for. We didn't have a digital bank before, so now we have the ability to service the mass marketin an efficient way. When we designed our digital bank, we designed it from scratch. So we use the same our core banking systems that are used by the most recent digital banks around the world, we're using the same systems. T

hey did not have a problem migrating to the cloud. They were born on the cloud. Their systems are cloud-based from the very beginning. It's easier when you're starting afresh because unlike in the parent, we need to talk about migration our systems where in old legacy systems. So we need a transition. And if that works to scale up, we can transport a lot of the learnings from the digital bank back into the parent bank to season the systems. and replace the existing systems of the mother bank. So the experimentation will be completed at the digital bank site. So that's the strategic value of it. And that's the reason why from the beginning, we said we are going to build this the right way. As we got close just before COVID, I was already starting to get nervous because we spend a lot of money on enterprise architecture and we promised the board that was it was in preparation for this big digital shift of the country. And it was very slow. When the central bank said, we're going to have this interbank clearing system. At the time, the percentage of of digital payments was only 2%. and they announced that they were going to increase this to 20% by 2023. People said, yes, we're on board, but on the side, people were laughing. You think you can go from 2 to 20% in four years? That's a dream. You know what? Because of COVID, it's now more than 25% It was a very tough dream at that time. And we've exceeded that and we were the beneficiary of that.

FBP: What are the kind of changes that has happened to the bank? Describe UnionBank of today and in the next five years.

EB: The fear in the beginning was that a lot of jobs would disappear, right? And that people will lose their jobs. As it is, what happened was there were jobs that were eliminated, job titles and jobs specs that were eliminated, but we also created new job families. In fact, 30% of the job descriptions of what we have today did not exist five years ago. We did not let go with a single team member. So, all of those two whose jobs were eliminated, we were able to migrate into the new jobs because we were expanding very fast, the rate of promotions was also accelerated. So, people feel two things, one is they're moving up faster and in terms  of skills, they're also improving much faster and they see the results in the market. And so, the pride that ‘I am part of this organisation that delivered” is very strong. That's why in the last few years, our rating on employee engagement, it's also in the fourth quartile among, among those that are surveyed not in the Philippines but globally.

If you're going to invest, there will be a period where your financials are going to be not so good because, you make an investment. So you are a leader. But what is funny is when you look at the performance of all the banks in the last five years, we had the highest share return and overall return highest share price with an overall return and the highest ROE among all the banks in the Philippines. And yet we were doing this at the time when we were making huge investments. I think what has happened there is, as you were investing, the people were also levelling up. It's like you get the feeling that, ‘Okay, I need to work harder because the institution is really moving up and I'm part of this great thing’ and so things just simply happen. I think the secret is because we are focusing on retail banking. Consumer banking would be consumer plus middle market. That's the sweet spot because the country, the Philippines had a very high growth rate.  And so the GDP is growing. The savings rate is also moving up. So we're in that close to that sweet spot, the demographic sweet spot, whereas corporates, the spreads have always been low. You can be the most profitable bank in the Philippines, you can be the most one of the most valuable.

You need not have the highest asset size because if you have the highest asset size, you must be big in corporate. I don't want to be the biggest in terms of assets. I don't want to be the biggest corporate bank. I want to be the biggest where the money is and where the future is and the future is consumer banking. Technology is going to disrupt the market. If the market gets disrupted, someone will emerge higher. And that's the thing. We want to be the one who will emerge if the market gets disrupted. But we need to prepare for it. If you are not prepared from a technology standpoint, not being able to deliver scale, you don't go on the cloud, you don't partner with the right technology providers, there's no way you can be the largest consumer bank.  You might be, but for a short time, you're going to be dislodged,

FBP: UnionDigital has grown faster and bigger with 1.73 million customers for the first four months.

EB: By the end of the year, I expect our loan book to be the highest among all the digital banks. At the end, it's really the loan book that matters because that's how money is made. And I'm confident because I already saw the numbers recently, we will be the largest terms of loan book in November. By 2023, I think we will be the most profitable digital bank. We behave like a fintech, but we're also a bank. And of primary importance is you deliver the promise of a digital bank.

The reason why we've created the digital bank is not because I have the most number of customers. That's important. But you have to be careful. What is important is you have a revenue, you have a cost to income ratio that is superior, the market is about 60%. Your digital bank has to target somewhere around 30%. If you will get that 30%, your ROE has to be 20% and above because that's why you exist. You're supposed to have a better cost infrastructure than your regular bank counterpart. You have an advantage in terms of raising funds because you have a lower reserve requirement. All of these things need to mean something. If you do it correctly, you can be because you are still a bank at the end of the day. To me, that's what digital banking is going to be all about. It's to prove to the world that the promise of a digital bank can happen and has to happen.

FBP: This conversation can continue but it's so exciting to catch up with you, Mr. Bautista we'll continue this when I'm in the Philippines, in Manila very soon and I look forward to visiting your smart innovation campus.

EB: You're welcome to visit.

FBP: Great. Thank you so much for your time.

EB: Thank you so much.

Keywords: Digital Banking, Financial Technology, Digitalisation, Fintech, AI, ROE
Institutions: UnionBank
People : Edwin Bautista
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