Long way ahead for the Philippines’ digital banking hopes

Infrastructure and consumer issues remain, even with the framework laid out.

Digital banks eyeing licences in the Philippines may find themselves awash with an untapped market of young and tech-savvy Filipinos eager to ride on the waves of digital disruption. But the country will need a strong network infrastructure if it wants digital players to succeed, as well as ensure learning opportunities for those in the peripheries of financial inclusion.

In a circular published December 2020, the Bangko Sentral ng Pilipinas (BSP) approved the recognition of digital banks as a new and separate category from existing classifications. They are required to have a minimum capital of $20.6m (PHP1b), maintain a physical office in the Philippines, and are subject to the same stringent requirements as traditional banks in terms of risk compliance and cybersecurity.

The number of digital banks that will be allowed to establish their presence may be limited depending on the number of applicants and the overall banking environment.

“Essentially, the BSP is looking to attract players with strong value proposition, sufficient financial strength, technical expertise of management and effective risk management," central bank governor Benjamin Diokno emphasised.

The central bank highlighted the importance of financial inclusion in expanding the Philippine banking system to digital lenders. Whilst BSP noted in a separate report that the number of Filipinos with bank accounts have risen to 29% in 2019 and that the pandemic has pushed more people to go digital, a “perceived lack of utility” was cited as amongst the top reasons why Filipinos choose not to have a bank account.

“We see these banks as additional partners in further promoting market efficiencies and expanding access of Filipinos to a broad range of financial services, bringing us closer to the realization of our target that at least 50%t of total retail payment transactions have shifted to digital, and 70% of adult Filipinos have transaction accounts by year 2023," Diokno said.

Moreover, a separate banking classification will help challenger banks bring innovations that will help customers choose which bank they prefer, thereby driving competition in the other categories, Bank of the Philippine Islands (BPI) chief digital officer Noel Santiago told Asian Banking & Finance in an interview. 

‘Revolution’

The Philippines is “on the cusp of a digital revolution”, a S&P Global Ratings report proclaimed, as a youthful market, low costs, and regulatory latitude may help early digital bank entrants. Like in other countries, early targets would be retail clients and MSMEs, segments that have been “largely ignored” by big banks due to the risks of catering to low-income clients and the expenses of branching out to the rural areas, analysts Nikita Anand, Ivan Tan and Geeta Chung said.

And just like in other countries, the pandemic ushered in a rapid ascent of digital adoption in the country. S&P noted that electronic funds transfer services PESONet posted a 100% surge in transaction value and 125% growth in volume, whilst InstaPay saw its transaction value skyrocket 200% and its volume jump 275%. 

Rachelleen Rodriguez, an analyst with Maybank Kim Eng, said in an email interview that the digital adoption in the country will be “sticky”: people that have become used to digital transactions are unlikely to go back to doing things over-the-counter.

It helps that digital entrants have lower operational costs than their brick-and-mortar counterparts, S&P added. CIMB and ING, which established retail banking platforms in the country in 2018 and 2019 respectively, are offering higher interest rates than their traditional peers with no minimum balance requirements.

Despite these developments, there is still a lot of work needed in order for the Philippines to finally catch up with its regional peers. It doesn’t help that top domestic banks have already captured much of the public’s loyalty and have a tight grip over urban areas, making it hard for new players to compete with them.

“Digital banks will only meaningfully compete for the mass-affluent market if they provide significantly improved, and cheaper, products and services. Otherwise, while they may make inroads into specialized financing, their market share will remain small. Entrants also need to earn consumers' trust, which traditional banks have locked in,” S&P’s Anand, Tan and Chung said.

There will always be competition, Santiago maintained, but it is more important for BPI to make its products and services stand out from others.

In addition, Maybank’s Rodriguez believes that there is a low risk of digital banks stealing the market share of their traditional peers given how much the banking industry in general has been investing in their technological capabilities.

And whilst many banks have launched their own digital offerings and have reduced their presence in urban areas, rural customers still find it hard to trust technology and hence, still prefer visiting physical branches, the S&P analysts wrote.

“It’s challenging for first-time and non-tech savvy users to learn how to use online banking channels, especially mobile banking apps, which is why some clients still prefer face-to-face transactions,” Rodriguez stated, stressing that there has to be a “learning curve” for those who do not yet have enough grasp of technology.

“Disadvantaged individuals and communities become even more pressured as issues of connectivity, ability to own digital devices, and tech-literacy arise,” Santiago shared.

Moreover, there has to be major improvements in the country’s network infrastructure for digital banking to flourish, Rodriguez said. A lack of a fast and reliable internet connectivity hinders digital transformation, she added, citing a May 2020 study by OpenSignal which ranked the Philippines at 83 out of 100 countries in terms of average mobile data speed at 8.5 Mbit/second. Heightened cybersecurity risks may also pose threats to opening the country to digital entrants, but Rodriguez believes that the BSP has robust IT risk frameworks in place. 

BPI hopes that the National Broadband Plan, which aims to speed up the deployment of fibre optic cables and boost internet access and affordability in the country, will finally be implemented, Santiago said. “This will go a long way in improving our ability to use technology for our financial inclusion programs for the underserved sectors of the Philippines.”

On the bright side, regulation does not appear to be overly restrictive. The required minimum capital is lower compared to other ASEAN countries, said Rodriguez, and there is no limit to a foreign bank’s stock ownership in digital banks, making it possible for them to enter the market without seeking a local partner. The BSP has also not yet limited the number of applicants given its early stages.

S&P believes that the central bank could allow digital banks more time before bringing its regulations up to par with universal and commercial lenders. The BSP would also likely give them several years to meet minimum capital and liquidity requirements.

But analysts warned that a longer gap may debilitate system resilience, and that digital lenders’ underwriting and risk management capabilities may be tested in the next three to five years due to their speedy growth.

“There is no revolution without risk,” they wrote.

The players

So far, three banks have formally applied for a digital licence in the country, BSP deputy governor Chuchi Fonacier told the Manila Bulletin, with two of them being foreign lenders. UnionBank of the Philippines has expressed its interest in applying for a licence whilst the Philippine National Bank has established its digital-only banking business. In March, Singapore-based Tonik unveiled its operations in the Philippines as the country’s “first neobank”, offering retail services with interest rates as high as 6% for savings accounts.

Since embarking on its “multi-digitalisation strategy”, BPI has launched over 100 online and mobile app banking features on its retail digital platforms BPI Online and BPI Mobile Banking, Santiago said. The lender has also built a digital ecosystem based on five imperatives, namely omni-channel experience, customer experience, “high-tech high-touch”, “the bank of everyday”, and cybersecurity and privacy.

“We have created our pillars of our digital transformation that stand on platform, people, analytics and journeys. With these pillars, we continue to assure our clients that we have industry-best security systems and processes to keep BPI’s digital infrastructure and client accounts safe.”

For now, the lender will continue to recalibrate its plans this year and spend more on digitalisation, Santiago said, but it will still invest in its brick-and-mortar operations as these remain important.