• Mon. May 20th, 2024

Philippines poised for a digital banking revolution

  • The Philippines is experiencing significant growth in its digital banking sector, with an emphasis on credit expansion and increased financial literacy
  • Fintechs are gaining prominence in the market, driven by regulatory support and initiatives like standardised QR code payments
  • Potentially a key player in south-east Asia’s wider digital banking revolution, the financial landscape in the Philippines is set for rapid transformation

While the Philippines’ banking revenue pools are set to treble by 2030, nearly half of the country’s bankable population are considered unbanked, according to McKinsey. There are more people with mobile phones than bank accounts living in the Philippines, where poor access to formal banking systems prevails.

But as one of the fastest-growing economies in south-east Asia, with regulators looking to new players to enhance financial inclusion, the Philippines is poised for a digital banking revolution.

Indeed, the market value of the country’s traditional banks increased by $2.2bn between 2021 and 2023, while the total market value of the top three fintech firms rose by $3bn, according to McKinsey. 

Driving a digital revolution

Financial inclusion and financial literacy are key areas of focus for the country, according to the Philippines’ central monetary authority Bangko Sentral ng Pilipinas (BSP). 

In June 2022, the Paleng-QR Ph programme — jointly developed by the Department of the interior and local government and the BSP — built on the country’s existing QR payments system to maximise the use of digital payments.

As the Philippines’ central bank works to standardise QR Ph payment codes and the regulator encourages new players to enter the market, fintechs and neo-banks are increasing their market shares. One such fintech is Manila-based firm Salmon.

Co-founder and chairman Pavel Fedorov says the Philippines’ success in modernising the financial sector is down to its regulatory approach: the BSP has a bold vision for transforming the market, and its regulatory style is “unique”.

“The BSP’s position in the sector is thoughtful and balanced, and its drive to increase financial inclusion and digital payments in the economy is visionary, but at the same time it’s incredibly actionable,” he says. 

“For consumer lending companies in some south-east Asian countries, the regulator may govern by how many percentage points a firm can increase its loan book in a particular year, on an individual company basis. The BSP doesn’t do this. It is systemic regulation.” 

Philippines president Ferdinand Marcos Jr continues to reiterate the importance of financial literacy among ordinary consumers and small and medium-sized enterprises (SMEs), including the use of electronic wallets and other digital payment applications.

This month, via hologram video recording at the Singapore Financial Technology Festival, Mr Marcos highlighted the Philippines’ commitment to digital transformation, urging fintechs to explore the opportunities presented by the country.

The country’s government foresees that a QR-enabled growing digital database of consumers’ payment habits will develop a substitute for credit scoring, too, addressing banks’ challenges to assessing consumers lending options.

New data can serve as a base for evaluating the creditworthiness of households and SMEs which are ‘without credit histories or sufficient collateral’, the BSP reports.

In line with this, the BSP developed a Cybersecurity Roadmap in 2023 focused on capacity building, collaborative engagements and continuing policy framework and supervisory enhancements. 

E-money regulations were also updated this year to strengthen the capital and liquidity position of electronic money issuers. As such, the Philippines’ digital assets market is expected to show revenue growth of 32.7% in 2024, while the number of users within the digital payments market is expected to exceed 60 million by 2027.

Steering regional transformation

Salmon is one of the first companies to build a retail credit product using the uniform QR Ph introduced by the BSP. Leveraging such technologies to open up credit to the country’s underbanked population is already having a “tremendous” impact, Mr Fedorov says.

The company later launched Salmon Credit in September 2023, the firm’s first credit line product with built-in QR Ph payment options.

“Making a payment with a credit card or debit card in the Philippines is often a painful experience: there are only 60,000 Visa/MasterCard terminals, yet now there are more than 600,000 merchants that accept QR Ph. That’s 10 times the size,” says Mr Fedorov.

“Only six million people are unique credit card holders in the Philippines, in a nation of 115 million. That’s how under-invested legacy banks are in credit provision for the economy.”

The introduction of standardised QR codes is “just the beginning” for the country; Mr Fedorov predicts the Philippines will move towards a model similar to China’s with QR codes as the predominant mode of payments. “It’s the future of the Philippines payments world,” he adds.

As Salmon works towards becoming a full-service credit-led and data-centric bank, with possible expansion to other parts of south-east Asia, Mr Fedorov says that the Philippines’ financial sector will see rapid transformation in 2024.

The Philippines can lead south-east Asia in digitally transforming the financial sector with modern credit and debit products, Mr Fedorov says, pointing to an “incredible compounding” of effects underway: a population increasingly aware of the financial inclusion agenda, the introduction of a single, modernised national ID, increasing data and more credit bureaus which will prove “transformative” for the market.

“Four years ago, credit bureaus were irrelevant with some 10% coverage of the population,” he says. “Today, it’s 55%. In the next year it will be 70%. Credit bureaus are really picking up their game.” 

This combination of factors, together with the country’s regulatory approach, means the Philippines’ markets will be “unrecognisable” in the next 12 to 18 months, he adds.

As the International Finance Corporation and the Philippines’ central bank continue to focus on promoting disruptive technology to improve financial inclusion and efficiency, early fintechs are well-placed to spearhead the country’s digital banking revolution.


By admin