A recent report by Fitch Ratings that cites data from Bangko Sentral ng Pilipinas as of June 2023 found that no digital bank in the Philippines has more than 0.14% of total bank deposits – that is Ant Group-backed Maya Bank. Union Digital has a 0.10% market share and Tonik Bank .04%. GoTyme, UNO and Overseas Filipino Bank (OFB) respectively have just 0.01% of overall deposits.
One challenge is that customers are not yet putting much money in their accounts. This is not a problem confined to developing economies – we have seen it in advanced economies like the UK too. To be sure, those customers who are transitioning from being unbanked to having their first account with a digital lender will likely have limited funds to deposit, but at the same time, we reckon that the Philippines’ digital banks need to spend time building customer trust as well.
While there is little doubt that the digital lenders will try to quickly grow their deposit bases by offering high interest rates, the current macroeconomic environment makes doing so harder than in the days before high inflation. Trying to compete mainly on price has never been a sustainable strategy and Fitch points out that that increased digitalization has made it easier to switch accounts once promotional rates run their course.
Another challenge for digital banks in the Philippines is retail loan risk, which has historically been more volatile and weaker than in the corporate segment. If digital lenders intend for higher risk customer segments to be their bread and butter – which is what they have been saying all along – managing that risk could get complicated. To that end, Fitch notes that the country’s online lenders had an average non-performing loan (NPL) ratio of 8.5% in September 2023, well above the banking system average of 3.5%.
Suboptimal asset quality has weighed on their earnings, with impairment charges equivalent to more than 40% of revenue through the first nine months of 2023.
To be sure, plenty of fundamentals remain in favor of the digital lenders, from the central government’s digitization targets to an unbanked population of 35 million – and millions of others who are underbanked. Plenty of low-hanging fruit remains to be plucked, but it will take some time before the digital banks see results and they could burn a fair bit of cash if they rely too heavily on subsidies to grow their businesses.