By Luisa Maria Jacinta C. Jocson, Reporter
DIGITAL BANKS in the Philippines remained in the red in 2024 and will likely continue to post losses in the near term as they struggle to expand the reach of their credit products, a central bank official said.
“Fintech startups, including digital banks (DBs), often face losses in their initial years due to significant pre-operating and establishment expenses,” Bangko Sentral ng Pilipinas (BSP) Deputy Governor Chuchi G. Fonacier told BusinessWorld.
“As startups, it is expected that most of the DBs will not reach positive net results within the first five to seven years of operations,” she added.
Preliminary data from the BSP showed that the digital banking sector posted a P7.07-billion net loss as of end-December.
The digital bank industry has been in the red since the BSP began consolidating data from the sector starting March 2023.
Ms. Fonacier said the losses were mainly due to digital lenders putting in large investments for technology and personnel, as well as high customer acquisition costs.
Digital banks have also been unable to expand their lending products, she added.
“While DBs have been able to attract deposits at a fast rate, the rollout of credit products has not kept pace, as shown by the low industry loan-to-deposit ratio of 36%.”
“There are difficulties in securing high-quality loans due to the limited financial data or credit history of their target market,” she added.
Latest BSP data showed that deposits in digital banks stood at P87.39 billion as of September 2024, jumping by 34.1% from P65.18 billion a year prior. The number of deposit accounts stood at 16.25 million, while depositors stood at 10.55 million.
Meanwhile, the sector’s gross loans stood at P29.78 billion as of September 2024, up by 1.2% from P29.42 billion a year prior.
“In addition, retaining customers over a long term can also be a challenge given that the market still has low switching barriers,” Ms. Fonacier said.
“While this pattern aligns with the experiences of DBs in other regions, we have also observed that our DBs continue to face scaling challenges, particularly in expanding their credit market.”
She noted that digital lenders must be able to “enhance their credit scoring models, accelerate the deployment of credit products, and demonstrate their role in expanding financial access for underserved communities.”
In a recent report, Fitch Ratings said that most digital banks in the Asia-Pacific region are subject to higher credit risks as they target small businesses as their main borrowers.
There are currently six digital banks operating in the Philippines, namely, Overseas Filipino Bank, a subsidiary of Land Bank of the Philippines; Tonik Digital Bank, Inc.; GoTyme Bank of the Gokongwei group and Singapore-based Tyme; Maya Bank of Voyager Innovations, Inc.; UNObank of DigibankASIA Pte. Ltd.; and UnionDigital Bank of Union Bank of the Philippines, Inc.
Overseas Filipino Bank was the first to obtain a digital banking license, which launched in 2020. By 2022, all six digital banks were in operation.
Ms. Fonacier said the public is also still wary of using digital services, which is another barrier online banks must overcome.
“With concerns emanating from potential cybersecurity risks, lack of awareness regarding the benefits of digital banking may affect market growth, customer adoption and loyalty, and opportunities for financial inclusion.”
“To address this, DBs should continue their push for financial inclusion and invest in financial education initiatives, emphasizing the advantages, risks involved, and safe use of digital financial solutions,” she added.
One of the primary concerns of the digital banking sector has been its financial stability.
“Several rating agencies and multilateral organizations still view that DBs in the Philippines are unlikely to turn a profit soon, as they continue to face bad loans and high operating costs,” Ms. Fonacier said.
Data as of end-September showed that just two out of the six digital banks have posted net income as of the reporting period.
“For DBs to achieve profitability, they must exhibit their capacity to achieve business goals to realize overall positive margins and financial sustainability,” Ms. Fonacier said.
“DBs also need to strengthen governance, particularly oversight practices across business functions to properly direct the business operations towards achieving business goals and eventual profitability.”
Digital banks can also engage with partners that already have “established digital capabilities and broader customer base.”
“This collaborative approach has been successfully applied by DBs in other jurisdictions as it provided them the essential foundation for growth and innovation,” she added.
Digital banks are also seen to be catalysts in “deepening financial inclusion and driving digital transformation in the banking industry,” Ms. Fonacier said.
“While pain points were experienced in their first two years of commercial operations, DBs are expected to refine their business strategies and propositions to better serve the customers and the financial sector as a whole.”
The share of Filipinos with bank accounts reached 65% of the adult population in 2022, according to latest data from the BSP.
The central bank wants to onboard at least 70% of adult Filipinos into the formal financial system.
NEW DIGITAL BANKSMeanwhile, profitability is just among several considerations the central bank will look into as it reviews new applicants.
“While profitability is a valid concern for DBs, the BSP takes a more holistic approach and does not focus solely on profitability when assessing new applicants,” Ms. Fonacier said.
“Rather, new DB applicants will undergo a more comprehensive review process that will primarily focus on value proposition, business models, and resource capabilities which should include a demonstration of their potential for sustained profitability.”
The Monetary Board in January lifted the three-year moratorium on new digital banking licenses.
The BSP is now set to allow four more digital banks to operate in the country, which would bring the total to 10.
These can either be new applicants or banks that will convert their existing license to a digital one.
“Applicants must also demonstrate sufficient capabilities and readiness to deploy their digital solutions and to sustainably grow their business given inherent challenges in the Philippine market,” Ms. Fonacier said.
While there has been no official filing yet, she earlier said there are two foreign digital banking players interested in entering the Philippine market.
“Relatedly, these new players will be assessed not only on their ability to help the digital banking industry recover from recorded losses but also on their contribution in achieving the policy objectives of the digital banking framework,” she said.
“This includes promoting wider adoption and use of digital financial services in the country and expanding their reach into underserved markets.”
