Digital banks seen profitable in 5-7 years

Digital banks in the Philippines need five to seven years to become profitable, as only two out of six online lenders are doing well so far, according to the Bangko Sentral ng Pilipinas (BSP).

“I can’t tell, but maybe one or two are doing well in terms of being able to make reasonable loans,” BSP Governor Eli Remolona Jr. told reporters. “These digital banks are competing amongst themselves and some will win, some will lose. There’s a natural attrition, driven by the market on who will survive,” he said.

Digital banks in the Philippines are a new formal category of banks, only approved by the BSP in 2020. The BSP has given digital banking licenses to GoTyme Bank, Maya Bank, Overseas Filipino Bank, Tonik Digital Bank, UnionDigital Bank and UNOBank.

“There are two among the six banks that are profitable, but the expectation is that it would take around five to seven years before a digital bank becomes profitable,” BSP director Melchor Plabasan, who heads the central bank’s Technology Risk and Innovation Supervision Department, said.

He said that only five percent of digital banks are profitable globally. Thus, the BSP expects some losses for local digital bank in the coming years.

The BSP is also looking at the impact and the contribution of digital banks to the overall financial system, Plabasan said.

“But so far, the six digital banks have already generated around 8.7 million deposit accounts, which represent around seven percent of the total of the Philippine banks,” he said.

While there are several interested players which plan to venture into online banking in the country, Remolona said the BSP is still studying whether to extend or end the moratorium imposed on the granting of licenses to digital banks.

In August 2021, the BSP imposed a three-year moratorium on the grant of digital banking licenses to closely monitor the performance and impact of the new banking classification on the industry.

“We have given only six licenses. But once we know more, once we understand more, we’re happy to open it up so that we can issue more digital licenses,” Remolona said, adding that “the reason why we issued only six licenses for digital banks is because we want them to try different things and try to succeed in doing banking in a purely digital way.”

Plabasan said the BSP is targeting to finalize an industry report by April. The report will recommend whether to partially or completely lift the ban on digital banking licenses this year, or if the BSP should extend the moratorium.

“Based on the performance of digital banks here in the Philippines and also in AsiaPacific, the indicator of success when it comes to lending is ecosystem partnership. It means that those that have access to huge amounts of data can develop a suitable credit scoring model,” he said.

Plabasan said that in South Korea and China, the successful digital banks are partnered with telco companies, giving them access to telco data that they can use to input to their credit scoring model.