The Philippines could see their first all-digital banks by 2022 as the central bank prepares to license them. But the challenge for the neobanks will be to build trust and convince customers in a country with low financial services penetration and a penchant for face-to-face interaction, analysts say.
Bangko Sentral ng Pilipinas approved a new license category for digital banks in November 2020. The central bank has received two requests by February – one from a new player and the other 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 break down the barriers that hinder financial access, such as low and irregular customer incomes, high transaction costs, geographical distance and the lack of proper documentation,” said Fonacier in a March 15 email Mail e-mailed digital banks as future partners in promoting financial inclusion in the country by using digital technology to offer financial products and services that fill the market gaps in the unserved and underserved segments. “
The Philippines has one of the lowest bank penetrations in Southeast Asia. The number of Filipino adults without a bank account was estimated at 51.2 million out of a total adult population of 72 million in 2019, according to the 2020 GNP Financial Inclusion Survey. However, the pandemic year also saw a surge in financial inclusion as more Filipinos opened accounts to get cash from the government. BSP Governor Benjamin Diokno said in December 2020 that approximately 4 million new accounts were opened digitally from March 17 to April 30, 2020 following the government’s pandemic relief program.
The central bank sees the Digital Banking Framework as “an integral part” of its efforts to transform the Philippine financial sector. The aim is to move at least 50% of all retail payment transactions to digital platforms, and 70% of adults should have digital bank accounts by 2023, Fonacier said. “We expect Filipinos to benefit from new digital banking players who offer more affordable financial products and tailored financial solutions that respond to the diverse and changing needs of the market,” she added.
Challenges for neobanks
One of the challenges for neobanks will be to gain consumer confidence as they are starting from scratch compared to established banks that have built their reputations over many decades, said Shweta Jain, director of Digital and Cloud Product and Strategy at Finastra. “Since neobanks are faceless and branchless, they can build consumer confidence by partnering with local merchants like convenience stores to allow some level of face-to-face interaction for things like payments and remittance services.” She added.
Bernardi Susastyo, ADVANCE.AI’s Chief Commercial Officer, said that digital banks need to develop innovative products and services that meet consumer needs and trends. You also have to deal with low internet penetration rates.
In addition to the relatively low level of trust in digital products, the Philippines are also confronted with infrastructural challenges, such as the lack of a uniform national ID, said Raphael Bick, partner at McKinsey and Co. in Shanghai.
The central bank will support a strategic awareness program to educate the public about the range of digital financial products available, their risks and consumer rights, Fonacier said. The Filipino identification system, which uses secure biometric data, will help in the efficient delivery of digital financial services once it is up and running. The PhilSys program aims to improve the authentication and integrity of digital banking services, she added.
According to the guidelines of the BSP, which came into force on December 23, 2020, digital banks must have a minimum capitalization of 1 billion pesos and are allowed to offer traditional banking services. You are not allowed to establish physical offices and must have a head office in the Philippines.
Even before the new framework was announced last year, some companies tried to bring purely digital services to the market under a rural banking license. That meant offering digital services alongside branches in non-metro areas. For example, Tonik Digital Bank Inc. received a banking license as a rural bank in February 2020 and plans to launch its new digital banking platform by the end of the first quarter of 2021. Rizal Commercial Banking Corp. announced plans to start a wholly-owned rural bank with a purely digital banking business in January 2020.
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 Feb.22. Grocery stores and pharmacies to reach customers. Others are also trying to tap into digital space with local boxing star Manny Pacquiao announces two 2020 financial technology companies.
“Virtual banks have great opportunities in the Philippines, where most of the country is young, online and with no access to banking services. Youthful demographics, a large untapped market, low costs and regulatory space make the Philippines an attractive market,” says Nikita . Anand, an analyst at S&P Global Ratings, said.
Strong local banks
However, digital banks may find it difficult to break through the entrenched market positions of traditional lenders given their strong franchise, particularly in metropolitan Manila, the country’s affluent hub. The five wealthiest banks in the Philippines manage approximately 60% of the country’s loans and deposits.
“Digital banks will only compete sensibly for the mass market if they offer significantly improved and cheaper products and services. Otherwise, their market share will remain small, although they penetrate into specialized financing,” said Anand.
Established banks have now accelerated their digital offerings. East West Banking Corp. launched its digital banking service Komo in May 2020. Union Bank of the Philippines started the digital transformation four years ago and launched the country’s first fully digital branch in 2017. Foreign banks operating in the Philippines such as CIMB Bank Bhd. and ING Bank NV haveV also announced purely digital products in the last two years.
Despite the challenges, neobanks have some advantages over traditional banks. Digital players tend to have lower operating costs that allow them to offer higher deposit rates, Anand said.
Traditional banks “are overwhelmed with old, slow, unreliable legacy technology, but also have to serve much larger customer segments across many services,” said Jain of Finastra.
Digital banks can move forward faster and integrate innovations quickly and easily, integrate new services, Jain said. “They may not take away significant market share from incumbent banks in the first few years, but over time they will become the primary account holders for customers who currently have primary accounts with incumbent banks,” she added.
On March 15, US $ 1 was equal to 48.62 Philippine pesos.