BSP mulls new license rule for digital banks

Published December 3, 2020, 7:14 PM

by Lee C. Chipongian

BSP Governor Benjamin E. Diokno (FILE Bloomberg)

The Bangko Sentral ng Pilipinas (BSP) said it may require all banks with digital banking services to apply for the appropriate digital bank license based on a new circular’s transitory provision.

“Existing banks may apply for conversion to a digital bank (and the BSP) may likewise require banks that already meet the definition of a digital bank (under the new circular) to convert their existing banking license to digital banking license,” BSP Governor Benjamin E. Diokno said in the memo. He signed Circular No. 1105 (“Guidelines on the Establishment of Digital Banks) last December 2.

The circular also said that “only a bank that is granted a digital banking license may represent itself to the public as such in connection with its business name.” An example of this is Union Bank of the Philippines, which has been marketing itself as the country’s “best digital bank”.

The Aboitiz-controlled bank may be required to apply for a digital bank license. Another known digital bank in the Philippines, which is a foreign-owned bank, is ING Philippines but its president and country manager, Hans Sicat, has already expressed an interest to get a digital bank license from the BSP.

The BSP noted that “said banks shall comply with the applicable requirements for a digital bank and submit an acceptable plan which shall address how the transition to a digital bank shall be managed.”

The circular also directed existing banks converting to digital banks to make the transition within three years from date of acquiring a Monetary Board approval.

A digital bank license has a required capitalization of at least P1 billion, and they have to implement the transition plan, including divestment or closure of branches or branch lite units, within three years.

If an existing bank is 60 percent owned by a foreign individual or non-bank corporation, the BSP said this stockholding may be “retained or reduced, but once reduced, shall not be increased thereafter beyond 40 percent”. And upon receipt of notice of approval of conversion, the BSP said the bank “shall no longer engage nor renew transactions under authorities not associated with those allowed for a digital bank.”

Existing banks that will opt to convert to digital banks will also have six months to phase-out “all inherent powers and activities under special authorities not normally associated to a digital bank”.

Based on the circular, a digital bank offers financial products and services that are processed end-to-end through a digital platform and/or electronic channels with no physical branch/sub-branch or branch-lite unit offering financial products and services.A digital bank may perform any or all of the following services: grant loans, whether secured or unsecured; accept savings and time deposits, including basic deposit accounts; accept foreign currency deposits; invest in readily marketable bonds and other debt securities, commercial papers and accounts receivable, drafts, bills of exchange, acceptances or notes arising out of commercial transactions; act as correspondent for other financial institutions; act as collection agent for non-government entities; issue electronic money products; issue credit cards; buy and sell foreign exchange; and present, market, sell and service microinsurance products.

The BSP crafted a digital banking framework at the onset of the COVID-19 pandemic — which was declared globally on March 11 — and by July, they released the first draft of proposed guidelines. The second draft circular was circulated in October. 

Diokno in the circular said the digital platforms have a role in making more efficient the delivery of financial products and services to the unserved and underserved market segments. “(The BSP) is cognizant that the adoption of a digital banking business model should be underpinned by sound digital governance, robust, secure and resilient technology infrastructure, and effective data management strategy and practices,” he said.Since digital banks are also exposed to risks faced by other banking classification, they are expected to have “effective governance structures and risk management processes that appropriately identify, measure, monitor and control the risks attendant to its business model, strategies, processes and products.”

So far, according to BSP Deputy Governor Chuchi G. Fonacier, there are five banks that are expected to submit an application for digital bank license.