The Philippines is, in many ways, a promising market for the growth of digital banks. As of today, six digital banking licenses have been issued.
The question is, can these new players become profitable and hold their own against incumbent banks
Challenges and opportunities for digital banks
According to figures from the Bangko Sentral ng Pilipinas (BSP), over 70 per cent of the Philippines’ adult population is unbanked as of 2019, which presents a large unaddressed potential customer base. World Bank data showed that 41 per cent of Filipinos have borrowed from family and friends, showing a high demand for credit and a lending gap that digital banks can help plug.
Many traditional bank accounts have costs or minimum balance requirements that many people cannot afford. Documentation, or lack of it, is also a common issue, as millions of Filipinos do not have any formal identification.
Millions of people in the Philippines, an archipelago of more than 7000 islands, also live in remote areas with no access to a branch and, therefore, no way to open a traditional account, presenting a huge pool of untapped opportunities for digital banks to expand into.
Today, fintech solutions used by digital-only challenger banks have made it possible and cost-effective for banks to provide digital bank accounts for people who cannot get to a branch; non-bank fintech has made digital payments increasingly widespread, and alternative lenders can now use a range of methods to assess creditworthiness and grant SMEs access to vital finance.
Indeed, a study by the Asian Development Bank (ADB) found that digital financial solutions can address around 40 per cent of the unmet demand for payment services and about 20 per cent of the credit requirements of poor households and small businesses in Asia.
A key challenge for digital banks is differentiation because they are targeting the same customer base, offering similar products and services and trying to build a similar elevated digital experience. It will be hard for consumers to find significant differentiating factors between them, so they will be drawn in by two main factors, rates and trust.
Whilst the digital-only banks, with their lower startup and operational costs, will look to attract customers with loss-leading rates, they will not be able to compete with the trust and brand recognition enjoyed by digital spin-offs from existing banks.
State of play in the Philippines
With the Philippines’ final digital bank license issued in September last year, it was notable that the BSP decided to cap the number of licenses at six instead of the original seven, as well as imposing a three-year moratorium on digital banks.
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This development is significant for both incumbent banks and traditional banks. For traditional banks, this can mean more time to adjust and adapt to the emergence of challenger banks. The additional time window to implement upgrades and revamp their digital offerings would no doubt be welcomed.
If traditional banks can evolve successfully to meet the customer’s needs, they can leverage their relatively larger customer bases, well-established infrastructure and offerings, combined with strategic investments into digitalisation, to gain an advantage.
However, digital banks also stand to benefit from the BSP’s decision. Under the BSP’s digital banking framework, scalability has been identified as a key criterion for a license, and the three-year moratorium can help new licensees secure first-mover status in the industry to attract a critical mass of customers.
Additionally, a cap on the number of digital bank licenses, along with the three-year moratorium, instils certainty on the level of competition, meaning the licensed digital banks can focus on developing innovative financial products that best serve the needs of Filipinos in a sustainable and scalable manner.
Need of digital banks to do to succeed in a competitive environment
In the Philippines, there are several technologies and infrastructure drivers that will play in favour of virtual banks over the coming years. These include the rapidly rising adoption of mobile and e-payments, expansion of the country’s credit data infrastructure and increasingly open access to relevant digital information via APIs.
Digital banks will also likely benefit from lower technology costs by being built on cloud infrastructure. Instead of investing in their own expensive hardware, digital banks can dedicate more of their funding and revenue to attracting new customers and eroding incumbents’ market share by focusing on customer experience, something the established banks have traditionally not done well.
Also Read: How digital banking is driving financial inclusion in SEA
Just as incorporating cloud capabilities can help reduce hardware costs, neobanks can also harness the potential of Open Banking and leverage the expertise of fintech instead of spending much-needed resources to develop solutions themselves.
A ‘plug and play’ Open Banking model will enable them to build a technology stack tailored to suit their specific needs and objectives, with proven fintech solutions that are cutting edge, substantially reducing the time to market.
Banking as a Service (BaaS) also offers opportunities for digital banks. BaaS is the provision of retail or wholesale banking products and services, in context, as a service using an existing licensed institution’s secure, regulated infrastructure with modern API-driven platforms.
BaaS simultaneously creates the opportunity to reach more customers whilst lowering the acquisition cost per customer significantly. In short, BaaS makes it simple, fast and cost-effective to integrate regulated products into the customer journey.
Another opportunity for digital banks is the rise of cashless services like Buy Now Pay Later (BNPL). The adoption of such services has been accelerated by COVID, and BNPL is now the fastest-growing in the Philippines.
To take advantage of this additional revenue channel, digital banks collaborate with e-commerce players to embed banking products, such as unsecured loans, in merchants’ point-of-sale processes.
BNPL options often do not require an interest payment or minimum monthly payment, which can make it more attractive to customers than borrowing on a credit card whilst also exposing banks to a new segment of consumers who don’t have access to credit cards.
Final thoughts
The Philippines is on the cusp of a digital banking revolution. While concerns about the viability of digital banks are certainly not unfounded, the technology is now turning the Philippines unbanked and underbanked populations into a viable demographic with enormous potential for financial institutions.
By choosing the right technology and the right strategies, digital banks can be profitable and make a significant contribution to solving financial inclusion in the country.
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