Digital banking gaining foothold in local market

MANILA, Philippines — Digital banks are seen gaining ground in the Philippines and challenging existing players in the banking sector, resulting in steep deposit price competition, according to international analysts.

In a webinar, Nikita Anand, primary credit analyst at S&P, said the start of commercial operations by more digital banks in the country could trigger fierce competition in deposit pricing.

The Bangko Sentral ng Pilipinas (BSP) has granted digital banking licenses to six entities two of which are already operational – Overseas Filipino (OF) Bank of state-run Land Bank of the Philippines and Tonik Digital Bank.

Four others – UNObank, Union Digital Bank of Union Bank of the Philippines, GOtyme – a joint venture between the Gokongwei Group and Singapore-based digital bank Tyme, and Maya Bank of PLDT’s Voyager Innovations and PayMaya Philippines – are scheduled to start commercial operations this year.

“Many of them are planning to launch operations by mid of this year and this could trigger deposit price competition. Many of these digital banks have very high deposit rates to attract funds,” Anand said.

She said digital banks offer deposit rates as high as six percent, beating what conventional banks are offering.

“There’s a huge market out there to capture as Philippines is a very under-penetrated market especially when it comes to retail loans or small-ticket loans,” Anand said.

However, she pointed out it would take digital banks more time to really build trust and build a good asset base.

“While they may be able to capture deposits through higher rates to start with, to build a real real good loan book would take time,” Anand said.

Moody’s, meanwhile, said the accelerated shift to digital brought about by the pandemic has been a boon for the digital challenger banks that have proliferated across the globe over the last decade.

“Most expanded their customer base and broadened their products. A few that were knocked back by the economic turmoil have since rebounded. While they face some key challenges ahead, we expect they will continue to gain in scale, through innovative, low-cost offerings, steadily building market share and widening their product base,” Moody’s said.

The debt watcher reported that the aggregate assets of the 20 largest challenger banks tripled to $319 billion between 2017 and 2020, while their aggregate customer base jumped to 610 million from 167 million.

Moody’s said digital challenger banks are facing obstacles but are expected to continue to gain in scale.

“Challenger banks struggle to achieve primary bank account status, particularly in developed countries. Monetary tightening may also mean that venture capital becomes less abundant in the months to come, while shortcomings in compliance may result in regulatory fines and slower customer growth,” Moody’s said.

It said the aggressive customer acquisition, continued innovation, consolidation and cross-border expansion, particularly into emerging markets, would ensure the challengers continue to grow in the years ahead, steadily increasing their competitive dynamic with incumbents.