Price-focused strategy to support digital banks
The price-focused strategy is seen supporting the expansion of the six digital banks operating in the Philippines in the next three years, according to Fitch Ratings.
However, the credit rating agency said the strategy used by digital banks to compete with traditional banks is not sustainable in the long run.
“We believe that this pricing-focused strategy is unlikely to be sustainable in the long run, although it should support continued expansion of the digital bank segment over the next two to three years,” Fitch said.
Despite the rapid growth over the last two years, Fitch said the aggregate market share of digital banks in terms of system deposits was still less than 0.4 percent at end-June last year.
According to Fitch, the relatively low average deposits per customer also suggest they have yet to capture a significant chunk of their depositors’ operating accounts.
“We expect digital banks will continue to compete aggressively for deposits over the next two years as they seek to refine their business models and build the scale necessary for sustainable operations. Most compete largely on pricing to attract new customers – given their relatively nascent franchises – but this has become more difficult in the recent higher-interest-rate environment,” Fitch said.
Some digital challengers, it added, are offering promotional deposit rates as high as 15 percent versus average time-deposit rates of about four to five percent.
It pointed out that increased digitalization has lowered barriers to account-switching, and allowed customers to move deposits relatively quickly when promotional rates run out, making it harder to retain customers for the digital banks that compete solely on pricing.
“We believe those digital banks that are backed by established corporates with complementary business lines and extensive customer bases will enjoy a competitive advantage relative to other digital peers in the longer run, and are likely to enjoy stronger growth in the near to medium term,” Fitch said.
High funding costs, it said, influence digital banks’ risk appetite, encouraging lending to higher-yielding, albeit higher-risk segments, such as unsecured personal, as well as small and medium enterprise (SME) loans.
“This should help the banks maintain positive credit spreads, although we expect most digital banks to continue to make a loss in the near term due to high credit costs and sustained investments as they build their franchises and expand their customer base,” Fitch added.
Digital banks in the Philippines have grown rapidly since its inception less than two years ago due to the large unbanked population in the country.
However, Fitch said digital banks remain modest as a share of the total market.
“We do not believe it will shake competitive dynamics within the Philippine banking sector significantly in the medium term. We expect their impact on the ratings of Fitchrated banks will be limited,” it said.
It explained that digital banks that are backed by established corporates with complementary business lines and extensive customer bases would enjoy a competitive advantage relative to other digital peers in the longer run, and are likely to enjoy stronger growth in the near to medium term.
3-YEAR MORATORIUM
The BSP has granted digital banking licenses to Overseas Filipino Bank Inc. of state-run Land Bank of the Philippines, Tonik Digital Bank Inc., UNObank Inc., Union Digital Bank of Aboitiz-led Union Bank of the Philippines as well as GOtyme Bank Corp. – a joint venture between the Gokongwei Group and Singapore-based digital bank Tyme.
Maya Bank emerged as the biggest digital bank in terms of assets with P23.22 billion as of end March, followed by UnionDigital Bank with P15.16 billion, Tonik Digital Bank with P10.71 billion, OF Digital Bank with P4.5 billion, UNObank with P3.05 billion and GOtyme with P2.74 billion.
In August 2021, the regulator announced it was imposing a threeyear moratorium on the grant of digital banking licenses to closely monitor the performance and impact of the new banking classification on the industry.
BSP Governor Eli Remolona Jr. earlier said many groups, both foreign and local, have expressed interest in obtaining a license from the central bank to operate digital banks.
“I’m hoping that we can begin issuing licenses again pretty soon,” Remolona said.
The BSP embarked on a Digital Payments Transformation Roadmap to convert 50 percent of total retail transactions in the country to electronic channels and to raise the number of Filipinos owning financial accounts to 70 percent by 2024.
With the COVID-19 pandemic serving as catalyst, the share of digital payments to total retail payments further increased to 42.1 percent in 2022 from 30.3 percent in 2021, while the number of banked Filipino adults almost doubled to 56 percent in 2021 from 29 percent in 2019.