Adopting new technology? Here's some advice from two ADB fintech pilots

MANILA — New technologies are helping expand financial inclusion among the unbanked, but their uptake requires several careful considerations, as gleaned from two fintech pilot projects supported by the Asian Development Bank.

Cantilan Bank, a rural bank operating across several provinces in Mindanao and Visayas, Philippines, started piloting cloud computing technology in July. Their goal: Manage costs and improve operational efficiencies to maintain and potentially expand their financial services in the countryside. The cloud essentially helps them store and access their data online, eliminating the need for physical IT infrastructure.

FINCA Bank Georgia, an affiliate of the international microfinance network FINCA Impact Finance, meanwhile, has three technical assistance projects with ADB. One is on small and medium enterprise lending development. The second involves the deployment of tablet devices to their loan officers in an effort to reach more populations across Georgia’s remote areas. The third has to do with credit scoring, allowing the bank to improve its processes to simplify, bring objectivity, and cut down the time it takes them to approve loans for micro, small and medium enterprises.

Both of these organizations’ pilots are ongoing, but in the few months since launching the projects, Tanya Hotchkiss, executive vice president and head of the strategic management office at Cantilan Bank, and Giorgi Samadashvili, chief operating officer at FINCA Bank in Georgia, picked up some lessons in adopting these new technologies. Devex, in conversation with the two officials at the 2nd Asia Finance Forum in Manila, identified some of the key lessons for organizations operating in the financial sector — and beyond.

1. Adopt because you need the technology, not because it’s on trend.

Cantilan Bank operates in remote, underdeveloped areas in the Philippines where limited physical infrastructure and high poverty incidence rates are contributing to financial exclusion. Under these circumstances, the bank is faced with the challenge of maintaining and expanding its operations at a high business cost.

A big contributor to the jacked up costs is the lack of ICT infrastructure in the areas where the bank operates. Cantilan Bank had to invest in and rely on IP VPN — a service that allows the bank’s network of branches and offices in 43 locations across 11 provinces in Mindanao and the Visayas to connect to the internet through their own Virtual Private Network. This means the bank has to have its own data centers and security operations centers, for example. And as per the Bangko Sentral ng Pilipinas — Bank of the Philippines, or BSP — requirements, Cantilan Bank, like any bank, had to maintain two of everything, onsite and offsite, as a disaster recovery strategy.

“So if you could just imagine what that’s like when we’re already operating at a disproportionate cost, compared to, let’s say, a company that is located in Manila, Cebu or Davao [where the] infrastructure is complete,” Hotchkiss told Devex. “We have to set aside so much capital just for IT, which if you think about the obsolescence rate of servers (2-3 years), you have to keep refreshing that.”

Identifying this problem led Hotchkiss to hunt for a solution — and she arrived at the cloud, which she said not only lowers their IT operational risks, but could also significantly cut the cost in maintaining physical IT infrastructure.

“It’s not a matter of it being new and you need to adopt it. No. It’s about matching the weaknesses you find in your own organization with the opportunities out there and the advantages that you can take, if you are in a position to do so,” the executive said.

And to her, the cloud serves a purpose for Cantilan Bank, and has the potential to raise competitiveness and sustainability in the rural banking industry, whose survival is crucial to expanding financial inclusion in rural parts of the country.

“When there’s infrastructure in place, it makes it easier for commercial banks to go downstream. But do you think that’s an actual fit, where you have a giant commercial bank talking to a farmer? It just doesn’t make sense from a market perspective. So there is still a lot of room for rural banks. But what’s key is to increase competitiveness, and to do that, we really need a digital transformation,” Hotchkiss said.

2. Do the benefits outweigh the risks?

The decision to go with cloud cancelled a lot of risks Cantilan Bank faced in maintaining its own IT infrastructure. Apart from cutting down on costs, Cantilan Bank no longer has to worry if it has enough servers to keep its data or on how to deal with cyber security threats. Subscribing to the cloud also meant the bank no longer need to pay a huge sum of capital upfront, as it’s a subscription service. It also no longer has to worry where it will find its next best IT hire.

It’s rare for them to find someone with necessary IT skills in their places of operation whom they can “hire and afford.”

“Cantilan is a second-class municipality. So just imagine where in the world will we get that kind of skill?” Hotchkiss said.

“We are not an IT company. We will never be an IT company, and we will never attract those skills ever,” she added. “What [the cloud] effectively does is it leaves the IT to the IT professionals … and on our end that leaves the banking to us, which is as it should be.”

3. Education is key ...

Cantilan Bank is the first bank in the Philippines to use cloud technology, even though the BSP has approved its usage among financial service providers as far back as 2013.

“If last year you’d spoken to people in the rural banking industry, or even just the general banking industry, talked to them about putting your core banking on the cloud, most of them would say, ‘that’s not allowed,’ and just stop the conversation,” Hotchkiss said.

But Hotchkiss was confident in the BSP’s drive to creating opportunities and operational efficiencies among the rural banking industry through technology, and she was determined to try this technology, armed with that knowledge and the information she’d gathered from her own research on the cloud.

And so she went and engaged in dialogue with BSP officials, including then-BSP Deputy Governor Nestor Espenilla, Jr., who is now governor of BSP. She also served on panels where she spoke about Cantilan Bank’s situation and experience — which eventually led her to find their cloud service provider Oradian, and secure funding and technical support from ADB.

Today, when other banks ask her how she did it, Hotchkiss often responds with, “I just took Step 1,” which included educating herself about Cantilan Bank’s problem, about the opportunities out there, and the requirements by the regulatory institution for approval to use their identified solution of cloud technology.

“Most people thought it was the solutions provider that was supposed to get approval. But it’s not. It’s actually the bank, which I understood,” Hotchkiss said. “I knew that BSP would never issue endorsements of any kind to service providers. What they would do is wait for a bank who’d say, ‘I understand my risks as a bank, and the risks that this technology poses, and we believe we can manage that risk.’ And that’s basically what you’re supposed to do with the application.”

4. … so you can educate your organization to create buy-in.

Any organization implementing a new policy, new initiative or new way of working is likely to face resistance, and Hotchkiss expected as much from Cantilan Bank’s board, management and staff, especially as not everyone is knowledgeable about what cloud is and how it works. Case in point was Cantilan Bank’s efforts a couple of years ago to upgrade their firewall.

“I needed to get board approval as it required a huge capital investment. I told the board we needed to upgrade the firewall and it’s going to cost an X amount. And then I get a question from the board: ‘I don’t understand. Where will you have space to put all the hollow blocks? I was like: ‘Oh no,’” the young executive recalls.

So for the cloud, Hotchkiss knew she had to educate the whole organization, although there was a particular emphasis on the board as it was a big decision and she needed their approval. And she started off with the two highest ranking officials in the bank: Board Chair Lt. Gen. William K. Hotchkiss III, her father, and Brig. Gen. Charles Y. Hotchkiss, her uncle.

“That was quite easy for me, but for the rest of the board I’d wrangled their help. I said, since we’ve been dialoguing about this for some time, I really need help so that the board has buy-in,” she said.

5. Give careful consideration to staff ...

When organizations go digital, it’s often the staff who bear the brunt of the change. So keeping them in mind and having an open and transparent communication with them as organizations roll out changes is helpful.

When FINCA Bank Georgia started digitizing its processes toward faster and more inclusive loan disbursements, it became clear that some positions within the bank have become unnecessary, and that they had to let go of some of their staff.

“As the processes become more efficient, the redundancies keep bumping up obviously, and there are some painful processes that the organization has to solve,” Samadashvili, FINCA Bank Georgia’s COO, said. “So first lesson learned for us moving forward is people management and change management has to be ready for this. There has to be an open and transparent communication with all the stakeholders and especially the employees on what we’re doing and why we’re doing it, especially for projects that bring automation and then redundancies.”

Their experience also reminded them that careful thought should be given not only to their end users, but also to their own people. When the bank deployed its tablet device to its employees, not as much thought was given to ensuring the device was user friendly, thinking they are “our employees and they will do it anyways.”

“But the lesson for us doing the tablet implementation pilot was that we absolutely need to make it as simple and user friendly as possible so our own employees have buy-in, feel the difference and appreciate the project,” the executive said.

6. … including the time to learn and adjust to the new technology.

Another lesson for FINCA Bank Georgia is not everyone has the same learning curve when it comes to adopting new technology.

“With the usage of tablet devices, we probably underestimated the time required for people to reach their optimum performance through the learning curve,” Samadashvili said. “So when planning the project, it’s also important to take into consideration how complex is what we’re trying to implement, and how much time do people actually need to reach their maximum capacity.”

7. Capture the lessons.

Cantilan Bank sought ADB’s assistance to help lower the risks they were to face in trying out a new IT system and to defray the cost that comes with running two parallel systems during the pilot phase of using the cloud.

“That was a [BSP] requirement, running it in parallel. Now what happens when you run things in parallel? You double your IT costs. IT and management costs increase quite a bit, and project management costs as well. So I knew I needed help,” Hotchkiss said.

But the most important part of getting ADB’s institutional support, Hotchkiss said, was to ensure that whatever their bank is trying could lead to replicability and scalability in the sector. She said if they do the whole pilot on their own, there’s a huge chance that all the learnings would “dissipate.”

“One of the objectives of our project was we wanted to see if the impact, once it’s measured, is something that would lead toward replicability within the rural banking industry,” the executive vice president of Cantilan Bank said.

ADB will be carrying out evaluations of the project throughout its life cycle, capturing lessons along the way.

Samadashvili seconded the importance of capturing the lessons from the pilot.

“Being in the mindset of a learning organization, [we] want to get lessons from the pilot and project implementation itself,” he said. “It’s important we learn as we move on.”

Editor’s Note: The international microfinance network mentioned in the article is FINCA Impact Finance. This article has been updated to reflect that.

Read more Devex coverage on financial technology.