Credit watcher Fitch Ratings said the central bank’s decision to limit the number of digital banks or neobanks in the country will “insulate” brick-and-mortar regular banks from “formidable competitors” such as the large foreign banks.
“Closing the door to new applicants helps to insulate conventional banks from more formidable competitors bearing these characteristics – at least until BSP’s (Bangko Sentral ng Pilipinas) moratorium on applicants is lifted,” said Fitch in a commentary on Thursday. “This also gives banks additional time to put forth digital propositions that are at least as compelling as those of the entrants.”
Fitch said big local banks are still buffered by “well-entrenched banking franchises” that have “adequate resources to adapt to the potentially disruptive entry of neobanks.”
“(Conventional banks) are unlikely to see material rating impact from the entry of neobanks, which are fully digital, in the near to medium term,” said Fitch.
Other countries in the region, such as Malaysia and Singapore have also capped the number of their own digital banks to just four and five, respectively. In the Philippines, the limit is seven.
“We believe BSP’s imposition of a licence cap is motivated by a regulatory philosophy of promoting innovation and financial inclusion without introducing destructive competition into the sector. Moreover, an entrant needs to demonstrate sustainable financial viability in its business plan, which would reduce its ability to undertake predatory pricing and seize market share from incumbents,” said Fitch.
The BSP, since releasing the digital banking framework in December 2020, has approved five digital bank licenses: Overseas Filipino Bank of Land Bank of the Philippines; Tonik Bank of Singapore; UNObank of Singapore; UnionDigital of Union Bank of the Philippines; and GOtyme of Robinsons Bank Corp.
“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,” noted Fitch.
The credit watcher considers the Philippines, Indonesia and Vietnam as attractive markets for digital banks because of a still large unbanked sector in these countries.
“In our view, new digital bank entrants with the following features have an edge that make them more likely to succeed: having a large existing user base – such as from a ubiquitous corporate sponsor – to reduce customer acquisition costs; having deep pocketed shareholders that can sustain heavy capital investments during the breakeven period; and being closely integrated to consumer lifestyles and/or commercial platforms to enhance the likelihood of user adoption and retention,” said Fitch.
BSP Governor Benjamin E. Diokno said the current limit on the number of digital bank licenses could be modified “or lifted at any point as warranted (but) subject to review and approval of the Monetary Board.”
Diokno announced the three-year digital bank moratorium last August 19, and applications will be received until August 31 only.
Diokno said the application window will be closed until December 2023, or three years from the effectivity of Circular No. 1105 on the Guidelines on Establishment of Digital Banks, which was approved last December.
From date of Monetary Board approval, applicant banks are given a year to complete pre-operating requirements and commence banking operations. Existing banks converting to digital banks should complete the transition within three years from date of acquiring a Monetary Board approval.