Philippines Lifts Digital Bank Cap, Sparking Fresh Competition Amid Profitability Challenges

The Philippines' central bank has lifted its moratorium on digital banking licenses, allowing four new entrants to join the market in 2024. As the industry faces profitability challenges, experts are divided on the impact of increased competition and the innovation potential.

Philippines Lifts Moratorium on Digital Bank Licenses, Sparking Debate on Industry's Future Prospects

Years after the initial group's establishment, the Bangko Sentral ng Pilipinas (BSP) has authorized the operation of additional digital banks in the country. Experts disagree on the industry's future and prospects for new entrants, as the industry's leaders continue to require assistance in managing credit risk and generating profits.

The central bank, Bangko Sentral ng Pilipinas (BSP), has abolished a moratorium on new licenses for digital banks. The change will take effect on January 1, representing a significant advancement in the government's efforts to promote financial inclusion and accelerate digitization.

"With this [new] limit, the BSP can closely monitor developments in the digital banking industry, obtain broader perspective as these banks mature further in their operations, as well as assess the impact of the entry of new players on the banking system," BSP Gov. Eli Remolona said in a statement earlier this month.

The announcement states that the central bank will issue four digital banking licenses. This will introduce competition to the six digital banks established in 2020 in response to a BSP circular. In the subsequent year, the central bank declared a moratorium on establishing new digital banks to facilitate the expansion of the initial group and oversee their advancement.

The six digital banks—UNO Digital Bank, UnionDigital Bank, GoTyme, Overseas Filipino Bank, Tonik Digital Bank, and Maya Bank—experienced a combined net loss of 4.1 billion pesos ($72.58 million) in the April-June period, as indicated by the most recent data from the central bank. This figure exceeds the combined net loss of 1.3 billion pesos in the same quarter of the previous year.

The emergence of a wave of cashless options during the pandemic facilitated the development of digital banks in the Philippines. The transition to cashless transactions has benefited companies like digital wallet unicorn GCash, as more consumers are utilizing QR code payments.

Digital banks have "a different way of doing business" than traditional banks, as "they cater to a different market segment," said Angelo Madrid, president of Maya Bank and head of the Digital Banking Association of the Philippines. "Digital banks use digital technologies, so there is a difference in how we work, from reaching customers to giving out loans and collecting payments," he told Nikkei Asia.

Experts Debate Impact of New Digital Bank Licenses on Innovation and Competition in the Philippines

The central bank's licensing policy reflects Madrid's perspective. The monetary authorities emphasize that companies seeking licenses must present "new and innovative" business models.

Nevertheless, Tamma Febrian, director of Asia-Pacific institutions at Fitch Ratings, stated that the potential for new entrants will not significantly stimulate the development of new business models. Instead, he anticipates that the financing competition will "intensify," as these companies must establish deposit bases.

The six digital banks offer savings accounts with higher interest rates, ranging from 3% to 14% annually, to entice consumers to their platforms. Conventional commercial banks in the Philippines currently offer savings rates of less than 1%.

"In the Philippines' context, we see monetization and management of credit risk associated with lending to underserved and underbanked segments as the biggest challenge that these players face, with many existing digital players still unable to price these risks effectively," Febrian said.

Nikita Anand, director at S&P Global Ratings, maintains a slightly different perspective, asserting that the increased competition will significantly benefit the Philippines' digital banking sector.

"We believe the entry of new digital banks may accelerate innovation in the banking sector, raising technology investments over the next few years," she said.

The central bank intended to grant licenses to new players or banks contemplating a digital transition by removing the limit on new digital banks. Anand observed that conventional banks are well-equipped to compete due to their substantial client bases and offerings comparable to digital-only banks.

Nevertheless, she contended that entering more conventional banks into the Philippine banking industry could intensify competition for digital banks.

"It will be challenging for the digital players to chip away at the entrenched market positions of top banks, given their strong franchise and brand value, especially in Metro Manila," Anand said. "Digital banks will only meaningfully compete for the mass-affluent market if they provide significantly improved and cheaper products and services."

Asked about its interest in digital banking, GCash told Nikkei Asia in a statement, "At this point, we do not have plans of applying for a digital banking license." However, the digital wallet unicorn, backed by Philippine conglomerate Ayala and Japan-based Mitsubishi UFJ Financial Group, is weighing its options. "While we are not closing the door on this matter, it would still heavily rely on the correct benefits and timing."