Weak readiness, structural hurdles hamper AI-driven financial inclusion

ARTIFICIAL INTELLIGENCE (AI) could help bring more Filipinos into the formal financial system, but structural barriers and weak institutional readiness would limit its impact and introduce potential risks, the Philippine Institute for Development Studies (PIDS) said.

In a policy note, PIDS said high costs and low trust continue to keep a large share of Filipinos unbanked despite growing adoption of digital financial platforms.

Citing data from the World Bank, it said the Philippines made progress in financial inclusion as formal account ownership reached 56% in 2021 and digital payments at 57.4%, exceeding the government’s 50% target.

Despite this, more than half or 51.4% of Filipino adults remain unbanked, trailing regional peers like Singapore and Thailand.

“While AI could help bridge these gaps through better credit assessment and fraud detection, its adoption necessitates safeguards to address data privacy and potential inequality risks,” it said.

The Philippines also lags its Association of Southeast Asian Nations (ASEAN) peers in AI readiness, scoring 0.50 in the International Monetary Fund’s AI Preparedness Index. Although slightly higher than Vietnam’s 0.48, it is lower compared to Singapore’s 0.80, Thailand’s 0.54, and Indonesia’s 0.52.

“Broader ASEAN indicators place the Philippines in the middle range for AI preparedness, digital readiness, financial inclusion, and digital economy size,” the PIDS said.

“What sets the country apart, however, is the contrast between its very high consumer interest in AI and its relatively weak institutional capacity.”

This gap explains why AI adoption in the financial sector has been gradual, it added, as the capacity to adopt and govern AI systems varies greatly among institutions, according to the Bangko Sentral ng Pilipinas (BSP).

“Expansion remains uneven, with rural banks and cooperatives facing greater capacity constraints compared to universal and commercial banks,” it said.

During the coronavirus pandemic, cybersecurity emerged as a critical concern across the financial sector as phishing scams increased by 200%.

“This surge has heightened institutions’ caution toward digital and AI technologies, particularly among smaller financial service providers with limited cybersecurity infrastructure,” it said.

“Additionally, regulatory compliance requirements pose disproportionate burdens on smaller institutions that lack dedicated compliance teams and resources.”

FINANCIAL ENGAGEMENT
Account usage also remains limited even as more Filipino adults own formal accounts. Many continue saving and borrowing informally through family (42.8%) and savings clubs (48.4%), PIDS said.

“Despite high mobile phone ownership (96.3%) and internet access (87.4%), only 54.7% made digital payments, with lower rates for bill payments (30.2%) and merchant payments (26.3%).”

This suggests that connectivity alone is not enough to drive financial engagement, it said.

Usage barriers include lack of money (76%), high costs (55%), distance (40%), documentation issues (39%), and low trust (29%), while 34% said that a family member already had an account, pointing to household-level financial decision-making.

Still, PIDS said greater engagement with digital financial platforms significantly increases the likelihood of owning various types of financial accounts and using them for different financial activities, based on its own analysis.

However, AI-driven financial services will remain concentrated among digitally literate, urban, and higher-income groups if financial literacy remains low, it said, as a BSP survey showed that only 2% of Filipinos are able to correctly answer all basic financial literacy questions.

“This low literacy, combined with age-related digital divides, means vulnerable populations (older adults, low-income households, and rural residents) risk being left behind,” it said.

“Experts emphasized that without targeted financial and AI literacy programs, the benefits of AI-driven financial services will remain concentrated among digitally literate, urban, and higher-income groups, potentially widening existing inequalities.”

To address these gaps, PIDS said the government should enhance digital infrastructure, strengthen cybersecurity frameworks, develop AI education roadmaps, align policy frameworks, and reduce regulatory burdens.

Meanwhile, the education sector must integrate financial and AI literacy into school curricula and use AI as a tool to broaden financial education. Industry and private financial institutions should also ensure algorithmic fairness, strengthen security and transparency, expand services to underserved populations, and work with regulators to ensure AI adoption is aligned with national development goals.

The PIDS policy note was authored by Nikka C. Pesa, economist and instructor at the University of Asia and the Pacific; Mary Grace R. Agner, PIDS supervising research specialist; and Rutcher M. Lacaza, supervising legislative staff officer III at the Congressional Policy and Budget Research Department of the House of Representatives. — Justine Irish D. Tabile