The Philippines currently has six online lenders that have received digital banking licenses: UNO Digital Bank, UnionDigital Bank, GoTyme, Overseas Filipino Bank of state-run Land Bank of the Philippines, Tonik Digital Bank and Maya Bank. In addition, there are other entities that operate as de facto digital banks but face more restrictions than the six licensed lenders.
The reason that the BSP is willing to boost the number of licensed digital banks to 10 is twofold. First, there is sufficient market demand. The Philippines is the second largest market in Southeast Asia after Indonesia, with a population of about 116 million, and like Indonesia it is a vast island nation where it can be costly and complex to build a comprehensive network of physical branches. Second, the Philippine central bank remains focused on boosting financial inclusion and digitization. With more official online lenders, it can do these things faster.
Yet some analysts are circumspect about the introduction of more online lenders when the existing ones are still struggling to turn a profit. To that end, the Philippines current licensed digital banks recorded a combined net loss of 4.1 billion pesos ($72.58 million) in the April-June period, according to the BSP, a significant increase over the 1.3 billion pesos they lost during the same period a year earlier.
The Philippines’ digital banks also have a relatively high non-performing loan (NPL) ratio. According to the BSP, as of May 2024, P4.9 billion of digital banks’ total loan portfolio was considered non-performing — more than 90 days late on a payment — resulting in a gross NPL ratio of almost 21%, compared to the 3.57% ratio for the overall Philippine banking sector.
It is possible that one of the new digital banks in the Philippines will focus on Islamic banking. Philippine regulators have spoken about their interest in seeing such an online lender in recent months. It would be a niche market that bank would be targeting given that the Philippines’ Muslim population stands at around 7 million, compared to about 86 million Roman Catholics. Still, applicants that showcase a compelling Islamic banking business model could be among the most likely to win a digital banking license next year.
Meanwhile, the arrival of new digital banks in the Philippines will cause market competition to intensify. It is doubtful that the new license holders will innovate dramatically to build market share. Instead, we expect that there will be lots of generous customer subsidies offered at the beginning so that the new arrivals can rapidly build up their respective deposit bases – which they must do in order to develop lending products.