Overseas Filipino Bank (OF Bank), a subsidiary of government-owned Land Bank of the Philippines, has become the country’s first online-only bank after the Bangko Sentral ng Pilipinas (BSP) granted it digital banking license on Maundy Thursday.

BSP Deputy Governor Chuchi G. Fonacier, head of BSP financial supervision sector which recommended OF Bank’s application for approval to the Monetary Board, said the Landbank unit is officially the first digital bank in the country based on Circular No. 1105 or the guidelines for the establishment of digital banks that the BSP issued last November 2020.

Photo credit: https://www.ofbank.com.ph/about-us

Fonacier said besides OF Bank, Tonik Digital Bank of Singapore is on its way to become the second digital bank. Both banks applied for digital bank license by conversion of their respective existing licenses.

Finance Secretary and ex-officio Monetary Board member Carlos G. Dominguez III said the central bank issued the OF Bank's digital banking license last March 25, a month after it submitted a Letter of Intent (January 20) and a formal application on February 1.

OF Bank, which used to be Philippine Postal Savings Bank, has an existing thrift bank license and authorized to operate as a foreign currency deposit unit.

Finance Secretary Carlos G. Dominguez III (Photo credit: https://www.dof.gov.ph/about/secretarys-page/)

The bank is already operating as an online-only bank since June last year prior to BSP’s issuance of its digital bank circular in November. Landbank, the country’s biggest state-controlled bank, established OF Bank after a Malacanang executive order was approved in 2017. It applied for a conversion of its thrift bank license into a digital bank license.

Dominguez said OF Bank, which mostly caters to overseas Filipinos, will help “leapfrog (the Philippines into) the digital economy” as the first branchless and digital-only banking institution.

In the meantime, Tonik Bank is also converting its rural bank license into a digital bank license, according to a BSP official.

“Tonik Bank was licensed as a rural bank. It will transition to a digital bank by among others, complying with the P1 billion minimum capital requirement,” said Fonacier.

The Singapore-based bank, a unit of Tonik Financial PTE Ltd, was granted rural bank license last September 2020 and officially started operation only in November last year.

Based on BSP rules, existing banks converting to digital banks should complete the transition within three years from date of acquiring a Monetary Board approval.

Fonacier said earlier in March that three out of five banks that are interested have advanced to the application stage of getting a digital bank license. She said that a foreign digital bank or foreign firm must form a partnership with a local company to come apply for a digital bank license.

Based on BSP’s digital bank framework, foreigners – individual or non-bank corporation – can own or control up to 40 percent of a digital bank, the same rule of ownership applied to commercial banks and thrift banks.

The central bank issued Circular No. 1105 last November 2020 for the establishment of digital banks which is the BSP’s seventh bank category. Digital banks will have minimal or zero-reliance on physical touchpoints but it will have to set up one office as central hub in the Philippines to receive and resolve customer complaints.

The BSP said the approved applicant bank will continue to be subjected to assessments or examinations to “ensure that the necessary governance structure, risk management system and internal controls, among others, are in place.”

In the meantime, under the transitory provision of the circular as in the case of OF Bank and Tonik Bank which are already digital banks by design, full conversions will be based on what BSP will deem an acceptable plan on the management of the transition to a digital bank. Three years is the time limit to implement the transition plan, including closure of branches or branch lite units for conventional banks.

Based on BSP rules, a digital bank license requires a minimum P1 billion capitalization. In comparison, commercial banks should at least have P2 billion to P15 billion capitalization depending on the location and number branches while a universal bank license should have P3 billion up to P20 billion. Thrift banks' capitalization is P500 million to P2 billion while rural banks is at least P50 million up to P200 million.

While digital banks’ minimum capital requirement is P1 billion, the BSP could impose a higher minimum amount and capital ratio based on its assessment of the risk profile of the digital bank.

In an additional memo after the issuance of the circular, the BSP said applicants that are proposing to operate business models that looked like digital banks will be approved as digital banks. It also clarified that even if new bank applicants have not stated which of the seven bank license category they are applying for, the BSP will assign them the category that fits their proposal.

Fonacier in the memo said the BSP may require all banks with digital banking services to apply for the appropriate digital bank license as per its transitory provision. She 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.

BSP Deputy Governor Chuchi G. Fonacier (Bloomberg file photo)

The BSP describes a digital bank as performing the following: grant loans, whether secured or unsecured; accept savings and time deposits including basic deposit accounts; accept foreign currency deposits; and invests 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. A digital bank is also a correspondent bank for other financial institutions and as collection agent, as well as issue electronic money products, credit cards and buy and sell foreign exchange, and market microinsurance products.

Other known digital banks in the Philippines such as East West Banking Corp.’s KOMO by its rural bank unit East West Rural Bank, and Dutch bank ING Bank N.V. Manila, which has a commercial and universal banking license, have yet to submit applications for conversion or spin-off digital bank license. Malaysian CIMB Bank Philippines, a digital-only bank, also has an existing commercial and universal banking license.

Lee C. Chipongian and Chino S. Leyco

OF becomes PH first digital bank