Moody’s Investors Service said digital banks in the Philippines and around the region, especially banks with popular e-wallets, will narrow the financing gap for micro, small and medium enterprises (MSMEs) and increase financial inclusion.
However, the debt watcher said for most countries in Southeast Asia such as the Philippines, the business model is untested over credit cycles, and the profitability of underwriting the unbanked and underserved sector. Most digital banks in the region are still in the early stage of development.
“Some digital banks in Indonesia and the Philippines have started operating, and their financials so far suggest that most have yet to expand their loan portfolios sufficiently to turn profitable. Their lack of track record warns that they will take considerable time to develop underwriting models that are sustainable across credit cycles,” according to Moody’s sector in-depth report on Southeast Asia’s digital banking sector. “The potential volatility in financial support from technology companies is another concern,” it added.
The credit rating agency said one of key reasons why digital banks are increasing in the region is due to its positive impact on financial inclusion by improving access to financial and banking services and products. It said the “potential benefit is large because financial inclusion remains modest in most parts of the region”.
“A significant proportion of the region's population does not own a bank account, and a much higher proportion does not own a credit card. The financing gap for (MSMEs) also remains sizable in the region, particularly in Indonesia and the Philippines,” said Moody’s.
Based on both World Bank and Moody’s data, in the Philippines the size of the finance gap for MSMEs was more than 70 percent of GDP, compared to less than 20 percent in Indonesia, Vietnam, Thailand and Malaysia.
In terms of e-wallet transaction growth, Malaysia who has the least finance gap for MSMEs, has the fastest growing e-wallet sector in the region followed by the Philippines, Indonesia and Singapore.
The Bangko Sentral ng Pilipinas (BSP) has granted six digital bank licenses in 2021 before closing the application window for two years or until 2023.
These digital banks are: Overseas Filipino Bank of Land Bank of the Philippines; Tonik Bank of Singapore; UNObank of Singapore; UnionDigital of Union Bank of the Philippines; GOtyme of Robinsons Bank Corp.; and Maya Bank, owned by PayMaya of PLDT Inc. Moody’s included in its review two existing digital banks --Malaysia’s CIMB and Dutch-owned ING -- prior to BSP’s release of its digital banking framework in December 2020, for a total of eight banks with online-only operations.
Indonesia also has eight digital banks while both Malaysia and Singapore have five digital banks each. Thailand, meantime, will issue its digital bank licensing rules within the year.
Moody’s said the unbanked or the “uncontested market” is what is making digital banks seem preferable to non-traditional bank licensing applicants such as technology companies and non-financial conglomerates.
“The largest tech firms in the region – Singapore-based Grab Holdings Inc. and Sea Limited, Indonesian tech giants GoTo and Bukalapak, and Philippine e-wallet PayMaya – have invested in the region’s digital bank startups. Incumbent banks are setting up their own digital banks as well to compete directly with the new entrants,” Moody’s noted.
These companies are not new to offering digital financial services, said Moody’s. They have been providing payment technologies, micro-insurance, micro-investment and micro-loans to serve the needs of the unbanked and underserved, potentially creating synergies in a digital bank migration, it added in the report.
“Despite being new to the banking system, digital banks affiliated with popular e-wallets and online platforms will have the advantage of brand familiarity among the public,” said Moody’s.
Some of the unbanked and underserved potential customers are “freelancers and proprietors” offering products and services on the e-commerce market. “Incumbent banks traditionally avoid these segments because they cannot provide verifiable salary income. However, digital banks can overcome that hurdle by drawing on a broader set of behavioral and transaction data via their affiliated platforms to assess the creditworthiness of these potential borrowers,” according to the report.
BSP Deputy Governor Chuchi G. Fonacier said earlier that banks that are converting into digital banking operations may start its new business sooner or within the first three months of 2022.
“We expect to see new digital bank players operating in the market starting mid-2022,” said Fonacier in an email to Manila Bulletin. “With respect to converted banks, we anticipate the shift in their operations under their digital banking licenses by early 2022,” she also said.
For the time being, Fonacier said the BSP is still finalizing some of the regulatory framework for digital banks. “We have yet to release the next phase of regulations to clarify the supervisory expectations on digital banks in relation to capital and liquidity, corporate and risk governance, and risk management,” she said.
There are a few more guidelines that BSP will be releasing before the full operation of the new digital banks.
Under existing regulations, applicant banks and non-banks which have been approved by the Monetary Board are given a year to complete requirements and commence their banking operations. Meantime, banks converting into digital banks are given three years to make the transition.
The BSP has limited the number of digital banks to allow them the space to closely monitor the performance and impact of digital banks to the banking system and their contribution to the financial inclusion agenda.