The Philippine central bank plans to issue four more licenses by 2025, however, concerns remain as to whether these new players can truly solve the country’s financial inclusion challenges.
the Philippines is preparing for a potential surge in digital banks (digibanks).
The number of players may soon exceed 10 as the Bangko Sentral ng Pilipinas (BSP) has hinted at issuing more licenses by 2025.
While the expansion is intended to promote financial inclusion and innovation, a look at the current situation shows a potential pitfall of over-reliance on incumbent, dominant digital banks.
A Homogenous Playing Field?
The six existing digital banks in the Philippines — Tonik Digital Bank, GoTyme Bank, Maya Bank, Overseas Filipino Bank, UNObank and UnionDigital Bank — have certainly made progress in addressing key challenges.
They expand access to financial services for the unbanked by providing convenient mobile banking solutions while offering competitive pricing.
However, a closer look reveals a certain trend.
Many digital banks are either subsidiaries of traditional banks or have close ties to large conglomerates with existing financial interests.
For example, Overseas Filipino Bank is a subsidiary of Land Bank of the Philippines, while United Digital Bank is operated by UnionBank of the Philippines.
This model, dominated by incumbents, has raised concerns about whether these digital banks are truly independent and can drive the kind of radical innovation seen in other markets.
Or do they offer truly differentiated products and services, or are they simply replicating existing models in new digital formats?
Source: Unsplash
A Mixed Bag of Problems and Progress
On Going Problems
The Philippines is one of Southeast Asia’s fastest-growing economies, but faces huge challenges in financial inclusion as its traditional banks are corporate-centric, leaving a large number of customers unserved.
While digital technologies have boosted financial access in emerging markets around the world, Philippine banks have been slow to adopt these technologies, allocating less than 10% of revenue to IT departments, compared with an average of 15% for banks in the Asia-Pacific region.
Furthermore, digital channels contribute only 5-15% of their revenue, according to McKinsey, lagging far behind the 25% average in other emerging Asian markets.
Meanwhile, local fintech companies are still mainly focused on the payment sector, with limited coverage due to infrastructure constraints.
This has resulted in a widening gap between the country’s large underbanked population and the increasingly popular innovative financial technologies in neighboring markets.
Additionally, banking penetration remains among the lowest in the region (only 56% of Filipino adults have a formal account at a financial institution in 2021).
Additionally, digital literacy issues persist.
Many Filipinos, especially those in rural areas, lack the skills and confidence to use digital platforms, which limits the potential impact of digital banks in reaching the most underserved populations.
Source: Unsplash
Progress Amidst Challenges
But to our credit, we have made significant improvements and progress.
The percentage of adults in the Philippines with bank accounts has increased significantly, with the central bank governor saying the figure has risen to 65%.
Eli M. Remolona, Jr
Eli M. Remolona, Jr., Governor of the Bangko Sentral ng Pilipinas, said: “By 2022, the share of digital payment transactions will reach 42%; account ownership will be 56% in 2021; and by 2022, 65% of households will have an account.
Furthermore, the six digital banks’ collective depositor base will expand to 8.7 million by June 2024, from 3.6 million in the same period last year.
This growth has driven a sharp increase in total deposits to Php82 billion, a 32.26% annual growth rate%.
In contrast, deposit accounts for the entire Philippine banking system increased by 13.84% to 1.19 billion, while total deposits increased by 9.5% to PHP19.5 trillion.
Digital banks in the Philippines have also successfully leveraged technology to provide convenient and cost-effective solutions.
Features like mobile check deposit, instant loan approval, and 24/7 customer support have resonated with users.
However, it remains to be seen whether these features are truly innovative or simply replicate services that traditional banks already offer through their own digital channels.
Although digital banking in the Philippines has made some progress, there is still a long way to go.
Who Are the Potential Digibanks Applicants?
Despite these shortcomings, the BSP said it will give priority to applicants with compelling value propositions and innovative solutions targeting underserved markets.
This opens the door to a variety of potential players.
First, non-bank fintech companies, such as GCash and PayMaya, have demonstrated their ability to reach a large customer base and provide innovative financial solutions.
For example, GCash has disbursed PHP155 billion in loans and served 5.4 million borrowers, a figure that grew more than 70% year-over-year.
Their entry into the digital banking space could further disrupt the market and drive financial inclusion.
Then we have the dedicated players.
Digital banks that focus on niche markets in the Philippines, such as MSMEs, rural communities, or specific populations, can offer customized products and services that address unmet needs.
Let’s not forget the foreign players.
International digital banks with a proven track record can bring in best practices and expertise, fostering competition and knowledge transfer.
However, key questions remain.
Will these potential applicants be truly independent and bring real diversity to the market, or will the incumbent-led model continue to dominate?
Can New Entrants Add Value?
To truly maximize the potential of digital banking, the Philippines needs more than just an increase in the number of players.
It requires diversity, innovation, and a focus on creating real value.
New entrants must go beyond simply digitizing traditional banking services.
They need to offer truly differentiated products and services, leverage cutting-edge technology, and focus on reaching the most underserved populations.
BSP values quality over quantity, which is a step in the right direction.
However, it is crucial to ensure that the licensing process promotes a level playing field and encourages the entry of diverse players, including non-bank entities and foreign players.
The Philippines has an opportunity to create a truly vibrant and inclusive digital banking industry.
But to achieve this, it will need to move beyond the incumbent-led model and embrace a more diverse and innovative ecosystem.
Only then can digital banking truly reach its full potential and benefit all Filipinos.
Featured Image Credit: Freepik and Freepik Editing