Can digital banks make a difference?

The brighter side of our demographics is that we have an increasingly tech-savvy young population readily adaptable to the latest technological innovations

The financial market landscape has dramatically evolved in recent years with the advent of groundbreaking digital technology and, by a bizarre twist of nature, the onslaught of Covid-19 which accelerated consumers’ dependence on financial technology. Financial access as a consequence has rapidly grown in emerging markets and developing economies worldwide. In the Philippines, however, according to a 3 May McKinsey & Co. report, the gains in financial inclusion, despite an impressive 6 to 7 percent GDP medium-term growth forecast, have not been as robust as compared to our regional neighbors. Why is this so?

It is widely recognized that access to digital financial technology should theoretically facilitate financial inclusiveness. Unfortunately, traditional Philippine banks invest only about 10 percent of their revenues in IT compared to the Asia Pacific average of about 15 percent. Consequently, revenues from digital channels are also lower at 5 to 15 percent of revenues compared to the regional average of 25 percent.

The sunny flipside to this regrettable situation is that it can only mean that a newbie banking fintech that is hoping to penetrate the generally impenetrable domain of large traditional banks — which primarily focus on the more costefficient wholesale corporate and commercial deposit and lending segments which McKinsey estimates take up about 76 percent of the industry’s loans — with a more focused approach on the retail client’s full range of needs from investments to loans, while aggressively employing digital technology — and the field is wide open for the taking.

In remittances, for example, approximately $30 billion inflows largely destined for the lower income households are generated annually by our OFWs. Such inflows which inevitably pass through traditional banking channels could very well serve as a fertile ground for algorithmic-based credit scoring decisions to enable banks to extend more liberal credit terms to the largely underbanked informal microentrepreneurs which are estimated to be well over 15 million people.

These remittance beneficiaries of the toil of their OFW loved ones are typically in rural communities where there is a dearth of bank branches. McKinsey estimates that the Philippines has an unbanked rate of as much as 44 percent of the population compared to Thailand’s 4.5 percent and Malaysia’s 11.7 percent as of 2021. For loans, McKinsey reported that of the total loan portfolio of the banking industry, in the Philippines, the retail share is only 24.4 percent compared to Malaysia’s 68.5 percent and Thailand’s 61.7 percent.

Unfortunately, traditional Philippine banks invest only about 10 percent of their revenues in IT compared to the Asia Pacific average of about 15 percent.

The brighter side of our demographics is that we have an increasingly tech-savvy young population readily adaptable to the latest technological innovations. As of 2022, Statista Research estimates smartphone users are at about 84.67 million and growing annually at a rate of percent, bringing users to about 95 million by 2028.

Cognizant of these trends, the Bangko Sentral ng Pilipinas opened the window for the creation of six Digital Banks when it issued Circular 1105 on 26 November 2020. Digital banks are considered to be in the category of thrift banks with a required minimum capitalization of P1 billion and are allowed 100 percent ownership by a foreign bank. These banks are only allowed to conduct their business operations digitally and are limited to only their head office. However, provided the appropriate risk management framework is in place, BSP’s Circular 1153 allows digital banks to experiment and adopt innovations to keep pace with the rapid development of fintech.

Last week at our regular Rotary Club of Makati meeting, our guest speaker was Ms. Long Pineda, the president and CEO of the country’s very first digital bank and the first neobank in Southeast Asia, Tonik Digital Bank

Inc., a banking newbie that is hoping to garner a significant first-mover share of the retail and small ticket customers.

So far, according to Ms. Pineda, after barely a year of operations, Tonik has successfully boosted its liquidity because of the rapid deposit build-up due to their very competitive interest rates and their unique “24/7, a digital bank in your pocket, in-app customer-centric service” proposition. Their next challenge, however, is more formidable. How to deploy this liquidity and their full suite of banking services to their targeted borrowing customers, the microentrepreneurs. We wish them success as this could pave the way for greater financial inclusiveness. Indeed, can Digital Banks make a difference?

Until next week… OBF!