THE CENTRAL BANK’S decision to cap new digital banking licenses at seven will prevent “destructive competition” and benefit traditional lenders in the country, Fitch Ratings said.
The debt watcher said while these online lenders are unlikely to have a material rating impact on its covered banks in the country, the Bangko Sentral ng Pilipinas’ (BSP) limit on digital bank entrants will allow traditional lenders to catch up on digitalization.
“Closing the door to new applicants helps to insulate conventional banks from more formidable competitors bearing these characteristics — at least until BSP’s moratorium on applicants is lifted. This also gives banks additional time to put forth digital propositions that are at least as compelling as those of the entrants,” Fitch said in a note sent to reporters late Wednesday.
BSP Governor Benjamin E. Diokno last week said the Monetary Board has capped digital bank licenses at seven, up from five previously, and will close the window for applications for new players and those seeking to convert their licenses on Aug. 31.
Mr. Diokno said the central bank will likely close applications for three years to monitor the development of the digital banking industry and ensure healthy competition among these new players.
The BSP has granted five licenses so far. One was given to the Overseas Filipino Bank, which is a subsidiary of state-owned Land Bank of the Philippines. UnionBank of the Philippines, Inc. also got a permit to operate an online lender which it said will be called Union Digital Bank and is expected to launch by the second quarter of 2022.
The three other licenses were given to Tonik Digital Bank, Inc. (Philippines), UNOBank, and a partnership between the Gokongwei Group and Singapore-headquartered Tyme called GOTyme.
Fitch said the BSP decision to cap its grant of licenses was likely driven by the regulator’s goal to promote financial inclusion “without introducing destructive competition into the sector.”
It noted that the country’s current cap on licenses is comparable to those of neighboring countries such as Singapore, which granted four licenses, while Malaysia said it would approve up to five licenses until the first quarter of 2022.
“Two of the five current licensees are bank-owned digital subsidiaries and we believe that while they may accelerate the groups’ digitalization efforts, they do not materially intensify competition beyond that already posed by their parents,” Fitch said.
“We maintain that the major rated Philippine banks have well-entrenched banking franchises and adequate resources to adapt to the potentially disruptive entry of neobanks,” it added.
Fitch believes the Philippines’ digital banking sector, like Indonesia’s and Vietnam’s, offers various opportunities due to the country’s unbanked population and its huge lending market. It cited findings from the World Bank, which showed just over one-third of Filipino adults are banked and less than 10% have accessed to formal credit, while over 41% has borrowed from family or friends, “indicating significant unfulfilled demand for credit.”
The debt watcher said new digital banking players will likely succeed if they are backed by a corporate sponsor that will help them gain access to a large existing user base and trim customer acquisition costs.
Digital banks should also closely integrate their offerings with other commercial platforms and consumer lifestyle services to boost user adoption and retention, Fitch said. They would also benefit from having backers that can fund heavy capital investments during their breakeven period, it added. — L.W.T. Noble