The Philippines has a large untapped market that fintech companies can capitalize on given conventional banks’ slow progress in offering digital financial services, according to the latest report of Moody’s Investors Services.
In addition, social distancing measures due to the pandemic have provided the catalyst and will spur the adoption of digital financial services.
According to Moody’s analyst Joyce Ong, fintech companies and a new breed of digital-only banks threaten to surpass conventional banks in key retail banking areas, such as credit cards, depository services, remittances, and unsecured lending, with products that are more accessible and easier to use.
She noted that the country has a large untapped market because about 70 percent of adults in the Philippines still lack access to banking and financial services. Data from the World Bank shows that the Philippines is one of the most unbanked countries in Southeast Asia. Indonesia’s share of adults without access to financial markets is around 50 percent, while that of Thailand and Malaysia is around 20 and 15 percent, respectively.
The report said that the Philippines has a lucrative remittance market that fintech companies, such as providers of mobile wallet applications, can capitalize on. The country is the fourth-largest recipient of inbound remittances in the world with remittances in 2020 totalling $29.9 billion, which is around 8.3 percent of the GDP, generating about $1.4 billion in fees for banks and money transfer companies annually.
The mobile wallet market expanded substantially last year, with the number of active electronic money wallets in the country increasing 61 percent in the first nine months of 2020 from 2019, and total value of transactions on GCash, one of the top mobile wallet services in the Philippines, growing 254 percent in 2020 to $2 billion.
Digital transactions via InstaPay platform have likewise increased sharply amidst the pandemic, reaching more than P220 billion as of May 2021 from only around P40 billion at the beginning of last year. Volume also grew significantly to around 5.6 million in May from around 1.5 million in January last year.
Moody’s noted that competitiveness in the retail segment is critical for Philippine banks given its huge growth potential, and although fintech products will expand the pool of customers in the financial system by attracting the unbanked population, it will be a challenge for banks to win market share from fintech companies with established franchises, such as operators of GCash and PayMaya mobile wallets, since most of these banks have been slow in digitalization.
Moody’s observed that most banks are not proactively responding to the threat of finch companies, and in the Philippines, banks have been slow in developing digital offerings to tap into the unbanked population, be it on their own or in partnerships with external companies. Instead, banks prefer to maintain their current business model that is mostly focused on corporates.
Mobile wallets offered by fintech companies do not require a minimum deposit balance and are more accessible than bank deposits, making them attractive to the unbanked sector. Retail deposits make up a significant part of banks’ funding, accounting for 47 percent of domestic liabilities as of the end of 2019.
The report mentioned that limited accessibility to physical bank branches and insufficient income to meet minimum deposit requirements, especially in rural areas, are hindering majority of the Philippine population from holding bank accounts. Mobile wallets remove these difficulties, while smartphone and the internet are becoming more widely available in the country. As such, the adoption of mobile wallets is increasing fast, with users of GCash alone amounting to 45 percent of the adult population in the country at the end of 2020, far surpassing the share for bank accounts which is just slightly over 10 percent.
Mobile wallets are also gaining traction fast as a payment method as the network of merchants accepting them increases. Fintech companies, such as Tendopay, are also partnering with mobile wallet providers and e-commerce businesses to offer buy now and pay later options, in effect providing lending schemes that enable consumers to shop online without a bank account or credit card.
It was also observed that mobile wallets are a cheaper and more convenient alternative to remittances through banks, which usually charge customers fees for receiving money from overseas via international money transfer centers or other banks. On the other hand, mobile wallets generally allow users to receive remittances from banks and international money transfer centers for free on their applications, although the funds are saved in the form of electronic money that requires fees for withdrawal.
It said that while remittances to mobile wallets instead of bank accounts are still nascent, this could increase substantially because of their cost effectiveness and the increasing usability of electronic money as more businesses adopt digital payments.
Moody’s also said that a shift away from bank-issued credit cards and remittance services as a result of the growing adoption of fintech products would result in reduction in fee income from banks. Fee income from remittances, it emphasized, is significant for Philippine banks, accounting for about 18 percent of their non-interest income at the end of 2020.
Last year, leading mobile wallets GCash and PayMaya, in partnerships with other fintech companies, started offering micro loans to consumers directly through their payment platforms. The report warned that banks could lose share in a fast-growing segment if borrowing through mobile wallets becomes popular among consumers. It said that although retail loans accounted for only 11 percent of gross loans as of April 2021, they are more profitable than corporate loans, especially with weak credit demand among companies as businesses halt expansion plans due to the pandemic.
But it said banks can partner with mobile wallets to use their platforms and data for consumer lending. Last April, CIMB Philippines partnered with GCash to lend to eligible users of the mobile wallet.
But there is a downside to these digital services offered by mobile wallet companies. The report pointed out that an impediment to the adoption of electronic money is the absence of insurance for it. On the other hand, bank deposits are insured up to P500,000 by the PDIC. But a proposed scheme to protect electronic money, if implemented, will address this and boost public confidence by requiring electronic money companies to set aside additional funds to protect end users.
The report added that the introduction of digital banks will intensify competition as it allows new non-bank companies to enter the banking system and compete with conventional banks directly. UNOBank, a venture backed by a Singapore-based fintech company, has received approval to set up a digital bank in the Philippines. Meanwhile, Voyager Innovations, operator of Paymaya, has raised $167 million in funding to launch a digital bank here and is awaiting license approval from the BSP. Among the conventional banks, Overseas Filipino Bank and Tonik Bank have received approval to convert into full digital banks within three years.
Union Bank, RCBC, CIMB Philippines, and ING Philippines have invested early in the digitization of their retail offerings to expand their retail client base.
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