Thrift, rural, or cooperative banks under the Tier 3 category—at least 75 percent of clients, funds, or transactions are handled digitally—may be ordered by the Bangko Sentral ng Pilipinas (BSP) to convert into digital banks (DBs), as the central bank also moves to raise the minimum capital requirement to ₱1 billion.

In a draft circular published on Monday, July 28, the BSP has outlined three tiers based on the banks’ level of digital centricity, each tier reflecting a higher level of digital operations, with stricter regulatory requirements applied as the bank’s digital complexity, scale, and risk exposure increase.

As such, the BSP said it “may require a digital-centric thrift or rural or cooperative bank under Tier 3 to convert to a DB,” as they have become “eligible for conversion to a DB license.”

Banks categorized under the Tier 3 are those whose three-fourths of their clients, funds, or transactions are handled through electronic channels. This includes digital onboarding, mobile-based deposits or loans, and electronic payment and financial services (EPFS) activity.

A notable provision in the proposed regulation is the capital requirement for Tier 3 banks, which must meet a minimum capital requirement of ₱1 billion and comply with Basel III and other BSP prudential rules.

Basel III is a global banking rule aimed at strengthening regulation, supervision, and risk control in the financial sector.

Existing banks which will be ordered by the BSP to convert to a DB must build their capital to ₱1 billion by Oct. 8, 2027—five years after the effectivity of Circular No. 1154. They will also be required to submit an acceptable three-year transition plan upon approval by the Monetary Board (MB).

Meanwhile, banks fall under the Tier 2 category if at least 50 percent of their clients are onboarded via digital channels, or if half of their deposits or loans are sourced through digital services. Alternatively, they may qualify if at least half of their transactions are processed through EPFS.

When it comes to capital requirements, Tier 2 rural and cooperative banks must have at least ₱500 million in capital, while thrift banks need ₱600 million.

Lastly, Tier 1 banks hold an EPFS license, allowing them offer mobile banking with digital onboarding via e-know-your-customer (KYC) and digital account funding.

They may also fall under the category if at least 30 percent of their clients, funds, or transactions are handled through digital channels. Alternatively, they may qualify if they engage in loan channeling where borrowers are sourced digitally.

Correspondingly, Tier 1 rural and cooperative banks must have a minimum capital of ₱200 million.

Banks across all tiers are required to adopt electronic anti-money laundering (AML) systems and real-time fraud detection tools. If they are offering complex digital products, they are required to implement robust fraud management systems.

“Once a bank is classified under a specific tier, it shall no longer be permitted to adopt the capitalization or risk management requirements applicable to lower tiers, even if its level of digital centricity (i.e., percentage of digital accounts and/or transactions) subsequently declines,” the BSP noted.

Further, the BSP may also require banks to meet the minimum capital requirements right away if they are found to be taking on excessive risks, even if a longer timeline was originally allowed under the Rural Bank Strengthening Program (RBSP) or the proposed regulation.

Banks classified under each tier must meet the required minimum capital for their respective tier levels by Oct. 8, 2027. They are also required to submit an acceptable three-year transition plan upon approval by the MB.

Meanwhile, banks that voluntarily apply for a DB license must immediately meet the ₱1 billion minimum capital requirement. They must also submit an acceptable three-year transition plan to comply with other prudential requirements, starting from the MB’s approval of their conversion.

Banks have until August 12 to submit their feedback. The circular will take effect 15 days after it is published in a newspaper of general circulation or the Official Gazette.