Digital banks, fintechs seen to dominate retail banking

MANILA, Philippines — A new breed of digital-only banks and financial technology (fintech) companies are likely to take over  the retail space as some traditional banks remain slow in developing new digital services, according to Moody’s Investors Service.

In a report titled “Fintech companies can overtake incumbent banks in retail services,” Moody’s analyst Joyce Ong said fintech companies in the Philippines are poised to grow rapidly and threaten banks’ position in key areas of retail businesses as the pandemic continues to spur the adoption of digital financial services.

“Fintech companies and a new breed of digital-only banks threaten to surpass conventional banks in key retail banking areas, such as credit cards and remittances, with products that are more accessible and easier to use,” Ong said.

The debt watcher said the Philippines has a large untapped market as 70 percent of adults lack access to financial services.

Fintech companies can capitalize on large unbanked population, given conventional banks’ slow progress in offering digital services.

“Most banks are not proactively responding to the threat of fintech companies,” Ong said.

While Philippine banks are focused on corporates, the industry’s competitiveness in the retail segment is critical given the sector’s huge growth potential.

At the same time, retail deposits make up a significant part of banks’ funding, and fees from services such as remittances account for a substantial share of their non-interest income.

While increasing access to financial services to the unbanked population may widen the potential pool of customers, it would be challenging for banks to win market share from fintech companies with established franchises.

Moody’s said banks could fall behind if they fail to proactively respond to the fintech threat.

“Philippine banks have been slow to develop new digital services, such as digital micro loans and mobile wallets, to attract new customers from the unbanked population. Instead, they prefer to maintain the current business model that focuses mostly on the corporate segment and to some extent, the more affluent retail segment,” the debt watcher said.

A failure to respond quickly to the emergence of fintech companies, Moody’s said, would make it more difficult for banks to acquire new customers and create new revenue sources, especially from the large unbanked population.

The Philippines also has a lucrative remittance market that fintech companies, such as providers of mobile wallet applications, can capitalize on. These firms also align well with government policies to promote financial inclusion through the adoption of digital payments.

Cash remittances from overseas Filipino workers (OFWs) amounted to $30 billion last year or 8.3 percent of the country’s gross domestic product (GDP), while electronic wallet transactions jumped 61 percent from January to September last year.

Under its Digital Payments Transformation Roadmap, the Bangko Sentral ng Pilipinas (BSP) has committed to shift 50 percent of total retail transactions to digital channels and raise the number of Filipino adults with bank accounts to 70 percent by 2023 to transform the country from a cash-heavy to a cash-lite economy.

The central bank has also approved the digital banking license applications of Overseas Filipino (OF) Bank of state-run Land Bank of the Philippines as well as Singapore-based Tonik Digital Bank and UNObank. More players including Aboitiz-led UnionBank, Lucio Tan owned Philippine National Bank, PayMaya’s Voyager Innovations, Yuchengco-owned Rizal Commercial Banking Corp. are seen participating in the new banking classification.

Moody’s said only UnionBank, RCBC, CIMB Philippines and ING Bank have invested early in the digitalization of their retail offerings to expand their client base.

“One way for banks to quickly narrow the gap in digital competitiveness is to acquire existing fintech companies. Bank ownership can also be beneficial for fintech companies because they can receive capital and funding support to grow, while using their parents’ banking licenses to engage in direct lending and leveraging their customer bases,” it said.