Digitalization Is Not An Option But A Must

Q:What are the biggest challenges banks are facing right now?
Rising Non Performing Loans (NPLs) are one of the main challenges that the Banks are encountering right now. In 2018, both the banking and non-banking financial services sectors experienced a substantial deterioration in asset quality with the gross non-performing ratios (NPL) of the banking sector rising to 3.4% as at end 2018 compared to a historically low figure of 2.5 % at end 2017. Highest NPL ratios were seen in agriculture, construction, manufacturing, tourism and wholesale & retail trade sectors.
In 1Q, 2019 the gross NPL ratio of the sector had further increased to 4.2%.This trend is likely to continue in 2019 as asset quality continues to deteriorate, especially after the recent terrorist incidents which have adversely affected many sectors in the economy.
The new accounting standard IFRS 9 which came into effect from this year requires higher impairment provisions due to the shift in focus from the incurred loss to expected loss resulting in slowing down of profits. The prevailing volatile economic conditions will continue to increase impairment provisions of the banks, further challenging the sector.
Banks are required to maintain high Capital Adequacy Ratios (CAR) under Basel III. However, banks are facing difficulties in raising fresh capital due to the adverse macro economic conditions and their impact on the Capital Market. Further, banking industry bottom lines have been affected due to the increased tax burden coupled with additional impairment provisions that have further squeezed the regulatory capital of banks, making it difficult for the industry to meet the increased capital adequacy requirements imposed by the regulator effective from January 2019 and making the sector less attractive for investors. The banks’ inability to increase capital will eventually affect their ability to expand the loan book, thereby slowing down overall economic growth.
Cyber security is another key challenge faced by the sector. Banks are increasingly going digital and apart from substantial investments already made for IT systems, even higher investments have to be made to ensure optimal cyber security levels. These investments are not only monetary but also in terms of man hours and skill levels as well since you have to be on your toes all the time monitoring this ever evolving area.
The digital era has brought about fresh challenges and a fresh set of competitors also for the sector. Threat due to digital disruption, where banks face not only the threat of new digital entrants such as FinTechs, but also traditional competitors that have established a new digital edge is substantial.
Banks have to balance their investment in people and technology if they are to create an agile culture to suit the changing environment. As macro economic conditions get tougher and customers get more sophisticated, banks face the uphill task of upgrading, up skilling and managing its talent within tighter cost frames.
Q:How do you meet the above challenges?
In view of the rising NPL ratio, the Bank has taken steps to strengthen post sanction monitoring by introducing various follow up action to be taken at the branch level, region level and also at the Head Office. Additionally, the Bank has taken steps to upscale its call center operations. Regional recovery hubs have also been strengthened. Regular customer visits and close evaluation of problematic advances is in progress and wherever possible steps are being taken to reschedule such advances to suit the borrower’s future cash flows.
In relation to cyber and information security, the current threat landscape is likely to exist and continue to evolve for quite some time, and there is no single solution or panacea to the issues of cyber and information security. Each organization should assess what their needs are, how it intends to conduct its business activities and related vulnerabilities.
We strive to ensure that our security architectures are developed to reflect the needs of the business. Today, CIOs and IT teams have to wear multiple hats such as being strategic in order to effectively face the traditional and non-traditional competition, while keeping up with ever-changing technological advances and maintaining security of the systems. While there is an increased awareness of threats, often we have witnessed, both locally and globally, that the increased adoption of security comes only after data breaches and system failures. In this context, it would be important for Banks to focus on preventive, proactive IT risk management rather than being reactive. Risks and vulnerabilities need to be identified through a systematic process of risk evaluation and management practice, while documented policies and procedures should be used to drive the operations of the Bank to effectively manage the IT/ cyber risk exposures.
Commercial Bank is gradually moving into more risk / capital based pricing models for better selection of loans. This approach will result in optimum allocation of scarce capital among different loan products with better customer profiling. The Bank has also taken steps to re-evaluate its advances portfolio and measures are in place to move into more profitable and capital efficient transactions.
Q:Digital transformation is occurring at every level in the banking industry. How do you adapt your marketing strategies to cater to this transformation?
Commercial Bank has aligned its digital marketing strategies under two main focus areas; i.e. Internal Customer & External Customer.
The Bank is actively educating, enhancing and engaging the staff to actively participate as change agents of the Bank’s digital transformation journey.
Commercial Bank employs various digital marketing strategies to engage our customers that go beyond just business transactions. Whilst we create new digital journeys that create utmost convenience to the customers through products such as Online Banking, Mobile Banking, Automated Banking Centers, Digital Experience Zones, e Passbook and Digital Banking Accounts, our social media platforms and other digital platforms aim to engage customers through appealing content.
Our focus is not only on the retail customers, we have various digital solutions for our corporate customers as well. Paymaster, our corporate payment platform allows users to effect a multitude of payments such as salaries, bonuses, building rent, utility payments, statutory payments such as EPF and ETF and customs payments at a click of a button. In the cards business, merchants are empowered with sophisticated digital payment methods such as QR code enabled payments, Easy POS solutions for small time businesses and facilitating web integration.
In 2018, Commercial Bank launched Sri Lanka’s first Digital Banking Account “Flash”, which the Bank will keep developing to suit our customers’ requirements. Today usage of digital applications has become part of the lifestyle of people and it is not limited to the millennials. Being mindful of this fact, Commercial Bank invests in technology which is relevant to the customer with a view to enhancing the convenience afforded to the customer in line with their changing lifestyle .
Q:Mobile banking is definitely trending upward. How successfully do you market it when compared to your competition?
ComBank Mobile Banking Solution focuses on the needs of the banked, under banked and unbanked segment of Sri Lanka and South East Asia.
Whilst there are digital offerings that focuse on facilitating payments we realized that very few facilitate critical financial wellness goals such as budgeting, saving and investing. The Bank’s innovative product “Flash” offers a comprehensive banking solution catering to all communities in the country through an app enabled in all three languages (Sinhalese, Tamil & English). In a world of financial uncertainty, Flash helps customers to manage their finances better through transparency, simple tools and innovative products such as pay-as-you-go insurance.
All Bank accounts created digitally via the mobile application or created physically at Commercial Bank PLC are accessible from any of our 266+ branches and 800+ ATMs.
At Commercial Bank we believe in introducing technology that creates significant value addition to the lives of our customers and realize that the adaption rates vary among segments and geographical locations. This realization has prompted us to adopt a staggered, gradual approach culminating with an island-wide drive in digital products roll out. We believe this will increase the rate of adaption, usage and more importantly allow us to keep evolving the product in line with user expectations and digital innovations. This mirrors the strategy used by several similar initiatives internationally in the recent past.
Q:Brian Caplen, the editor of The Banker Magazine says that banks may be closing branches in developed countries, but in emerging markets they are opening new ones. What is your opinion? What is the present situation of your Bank when it comes to branch networking?
Big or small all banks must strategically focus on both macro and micro level changes happening in the global market and in the industry and adopt the most suitable service delivery channels mix (Digital = Digital + Physical). The future leaders of the banking industry must understand that digitalization is not an option but a strategic imperative.
Moving to digital enables data driven decision making. Further, digital banking facilitates financial inclusion with very limited cost compared to traditional modes of banking. Digital banking is also environmentally friendly since it enables branchless/paperless banking and it is therefore sustainable, while helping to curb the cost of setting up physical branches. Digital banking also enables customer segmentation and behavior analytics, which when combined with the application of Artificial Intelligence (AI), helps to generate customized products to suit all while enhancing customer convenience.
However, it is evident that being a developing country with a substantial portion of the population in the early adapter status of technology, branch banking is here to stay for few more years, if not decades
Commercial Bank has an islandwide network of 266 branches and over 800 delivery channels with ATMs and other machines. As the largest private Bank in Sri Lanka, our focus has been to introduce assisted automation through machines installed at our branches, both urban and rural alike. Channel migration has been a key focus area for the Bank as well. Whilst we are very much aware of global trends, the main focus of the Bank will be to cater to the needs and create convenience for customers. Right now we believe that a mix of brick and mortar branches with digital channels are serving the needs of different segments of clients and their specific needs.
Q: Branch banking should evolve to meet the changing needs of the customer. Some identifies this as the renaissance of modern branch banking. Is your Bank aligned with this new trend?
We are mindful of the need for a technological and digital transformation to meet the demands of the modern customer, especially focusing on future consumer needs. Many industry players as well as players from other industries such as telcos have engaged in the digital transformation and substantial investments in technology is visible in almost all the financial service entities in the country.
“Mini Digital Experience Zones” at selected branches are just one recent initiative taken by the Bank to facilitate the evolving needs of the customers. These zones are strategically setup inside the branch customer lobby area to attract the conventional customer and equipped with Smart touch panels carrying “how to use” product demo videos. These units are equipped with smart phones and tablets with wi-fi access for the customers to experience the Bank’s digital offerings and to migrate to the digital platform with the guidance of “Digital Assistants” assigned to such branches to facilitate hand held migration.
The Bank possesses extensive knowledge of the Sri Lankan banking customer behavior, wants and needs and will not hesitate to consult external experts where required . The Bank’s openness for collaboration and partnership with fintechs and capacity to resort to world class vendor support will further strengthen and fast-track digital transformation, enabling the Bank to add value to all key stakeholders.bmd