Traditional banks face less competition from digital counterparts

MANILA, Philippines — Traditional banks in the Philippines are likely to face less intense competition from digital banks, according to Fitch Ratings.

In a report, Fitch said majority of the digital banks, which were given licenses to operate, are subsidiaries of existing banks or are smaller tech start-ups. “This indicates that competitive pressures for incumbents will be less intense than in other markets, especially as the country has a large pool of unbanked consumers,” it said.

The BSP has granted digital banking licenses to Overseas Filipino Bank of state-run Land Bank of the Philippines, Tonik Digital Bank, UNObank, Union Digital Bank of Aboitiz-led Union Bank of the Philippines, GOtyme – a joint venture between the Gokongwei Group and Singapore-based digital bank Tyme, as well as Maya Bank of PLDT’s Voyager Innovations and PayMaya Philippines.

“In the Philippines, aside from Maya Bank, the majority of the approved digital banks have bank parent firms or are smaller tech start-ups,” Fitch said.

Fitch said the expansion in the lending business, particularly for micro, small, and medium enterprises (MSMEs) looks most viable in the Philippines, Indonesia, and Vietnam, where only 10 to 21 percent of adults have access to credit from formal channels.

Faced with a shifting business landscape and growing threat from new digital banks, as well as the impact of the pandemic, Fitch said Philippine banks have continued to de-emphasize physical branches in their distribution strategy, as reflected in shrinking branch networks across ASEAN.

“Even in the Philippines, where physical branches have been growing and are a differentiating competitive factor, the growth of branches has plateaued since the start of the pandemic as banks prioritized to improve their digital-banking channels to serve customers under mobility restrictions,” it said.

According to the debt watcher, the push for digitalization would help banks close gaps in operating efficiency or user friendliness relative to digital peers.

Fitch also said banks in Southeast Asia have been digitalizing internal processes, beefing up their digital propositions and venturing into new engagement models, such as robo-advisory and digital wealth management planners, to shed overheads and keep up with the competition.

“The pace may be uneven and the investment focus in each market has been different, but we believe the investment budgets of the largest incumbent banks in each market are sufficiently large to fend off the near-term threats from digital players,” it said.

Fitch pointed out much of the investments of incumbent banks in the Philippines, Indonesia, and Vietnam have been focused on further digitalizing existing operations, while some partnered with leading fintech players, such as CIMB Bank Philippines that managed to increase its customer base to more than three million in just two years after partnering with e-wallet giant GCash.

“We believe the new digital banks and leading incumbents can coexist, with the former focusing on under-served segments, while the latter consolidate around their core customer groups. However, the journey toward that new equilibrium could subject banks to significant competition, disruption and attrition,” Fitch warned.