The Philippines could see their first purely digital banks by 2022 as the central bank prepares to license them. But the challenge for neobanks will be to build trust and convince customers in a country with low penetration of financial services and a preference for face-to-face interaction, analysts said.
The Bangko Sentral ng Pilipinas approved in November 2020 a new license category for digital banks. The central bank received two requests in February – one from a new player and one from an existing bank to convert to a digital bank, BSP Deputy Governor Chuchi Fonacier told S&P Global Market Intelligence.
“Digital banks can help reduce barriers that hinder financial access, such as low and irregular client incomes, high transaction costs, geographic distance and lack of proper documentation,” Fonacier said in comments. sent by email on March 15th. digital banks as future partners to advance financial inclusion in the country by leveraging digital technology to deliver financial products and services that fill market gaps in unserved and underserved segments. “
The Philippines has one of the lowest bank penetration rates in Southeast Asia. The number of unbanked Filipino adults was estimated at 51.2 million, out of a total adult population of 72 million in 2019, according to the 2019 BSP Financial Inclusion Survey released in 2020. However, the year of the pandemic has also seen a surge in financial inclusion as more Filipinos have opened accounts to receive cash assistance from the government. BSP Governor Benjamin Diokno said in December 2020 that around 4 million new accounts were opened digitally from March 17 to April 30, 2020 as a result of the government’s pandemic relief program.
The central bank sees the digital banking framework as an “integral component” of its efforts to transform the Philippine financial sector. He aims to move at least 50% of all retail payment transactions to digital platforms and wants 70% of adults to have digital bank accounts by 2023, Fonacier said. “We expect Filipinos to benefit from new digital banking players offering more affordable financial products and personalized financial solutions that meet the diverse and changing needs of the market,” she added.
Challenges for neobanks
A challenge for neobanks will be to gain the trust of consumers because they are starting from scratch, compared to incumbent banks that have already built their reputations for many decades, said Shweta Jain, director of digital and cloud products and strategy. at Finastra. “Since neobanks are faceless and branchless, an effective way for them to build consumer confidence is to forge partnerships with local merchants such as convenience stores, to allow some level of face-to-face interaction. deal for things like payments and money transfer services, ”she added.
Bernardi Susastyo, Commercial Director of ADVANCE.AI, said digital banks will need to design innovative products and services that meet consumer needs and trends. They will also have to contend with low internet penetration rates.
Besides the relatively low confidence in digital products, the Philippines also faces infrastructural challenges, such as the lack of a single national identity card, said Raphael Bick, partner of McKinsey and Co. in Shanghai.
The central bank will support a strategic outreach program to educate the public on the range of digital financial products available, their risks and consumer rights, Fonacier said. The Philippines Identification System program using secure biometric data will contribute to the efficient delivery of digital financial services once it is operational. The PhilSys program is expected to improve the authentication and integrity of digital banking services, she added.
Under the BSP guidelines, which came into effect on December 23, 2020, digital banks will need to have a minimum capitalization of 1 billion pesos and will be allowed to offer traditional banking services. They will not be allowed to establish physical branches and will need to maintain a head office in the Philippines.
Even before the new framework was announced last year, some companies attempted to launch digital-only services under a rural banking license. This meant offering digital services alongside agencies in non-metropolitan areas. For example, Tonik Digital Bank Inc. received a banking license in February 2020 as a rural bank and plans to launch its new digital banking platform by the end of the first quarter of 2021. Rizal Commercial Banking Corp. announced in January 2020 its intention to establish a 100% rural bank to engage in purely digital banking activities.
TymeBank, a South African digital bank, has raised $ 110 million in private capital and has partnered with local conglomerate JG Summit Holdings Inc. to apply for a digital banking license in the Philippines, Reuters reported on February 22. retail in malls, grocery stores and drugstores to reach customers. Others are looking to tap the digital space as well, with local boxing star Manny Pacquiao announces two fintech companies in 2020.
“Virtual banks have a huge opportunity in the Philippines, where most of the country is young, online and without access to any banking services. A young demographics, a large untapped market, low costs and regulatory leeway make the Philippines a attractive market, ”said Nikita Anand, analyst at S&P Global Ratings, said.
Strong local banks
However, digital banks may find it difficult to reduce the well-established market positions of traditional lenders given their strong franchise, especially in Metro Manila, the center of the country’s wealth. The top five banks by assets in the Philippines manage around 60% of the country’s loans and deposits.
“Digital banks will only truly compete for the affluent mass market if they provide significantly improved and cheaper products and services. Otherwise, even if they may make inroads into specialist finance, their market share will remain low. “said Anand.
Meanwhile, incumbent banks have stepped up their digital offerings. East West Banking Corp. launched its Komo digital banking service in May 2020. Union Bank of the Philippines began its digital transformation four years ago and launched the country’s first fully digital branch in 2017. Foreign banks active in the Philippines such as CIMB Bank Bhd. and ING Bank NV have has also announced purely digital products in the past two years.
Despite the challenges, neobanks have some advantages over traditional banks. Digital players typically have lower operational costs, which allows them to offer higher deposit rates, Anand said.
Traditional banks “have old, slow and unreliable legacy technologies, while having to serve much larger customer segments through many services,” said Jain of Finastra.
Digital banks can scale faster and innovate quickly and integrate new services easily, Jain said. “They may not take a significant market share from the incumbents in the first few years, but over a period of time they will start to become the primary account holders for clients who currently have primary accounts with banks. in place, ”she added.
As of March 15, US $ 1 was equivalent to Philippine pesos 48.62.