A new McKinsey report sheds light on how incumbent banks in the Philippines are unusually vulnerable to disruption by digital upstarts. Unlike their Singaporean counterparts, which have spent heavily on digital technology, or even Indonesian digibanks, which are teaming up with tech giants and tycoons alike to improve their digital game, traditional banks in the Philippines have underinvested in digitization. The McKinsey report notes that Philippine banks devote less than 10% of their revenues to IT, compared to an average of about 15% among incumbent banks elsewhere in Asia Pacific. Further, digital channels account for just 5 to 15% of their revenue, well below the average of 25% for their peers in Asian emerging markets.
At the same time, the Philippine banking penetration rate is just 56%, higher than Indonesia, but still low by the standards of emerging markets. Philippine incumbent banks remain focused on wholesale banking and have been slow to reach new customers outside their existing client base. Rural areas are home to nearly half the population, yet rural households are especially underserved, and many have little or no access to brick-and-mortar banking infrastructure.
Against this backdrop, the Philippine central bank has swiftly greenlighted six digital banks, among them two genuine startups, Singapore-headquartered Tonik (which started as a rural bank) and UNObank, a fintech also headquartered in the city-state. Among the other four holders of digital banking licenses are two state banks, Maya Bank, spun off from the Tencent-backed Philippine fintech giant PayMaya, and GoTyme, which was formed by a tie-up between the South Africa-based Tyme digital banking group and the Philippine conglomerate Gokongwei Group.
Not only do they have a big opportunity in retail banking, but also in the SME segment. McKinsey notes that corporations receive 76% of all loans, one of the largest shares worldwide (Exhibit 3), while SMEs continue to face binding credit constraints. This segment is arguably the ripest for disruption of any in the Philippines.
Finally, challenger banks in the Philippines benefit from that rarest of precious commodities: genuine regulatory support. While regulators in markets like Singapore and Hong Kong and Taiwan have taken measures to restrict the growth potential of digital banks, the BSP has done the opposite. It intends to reach 70% banking penetration by 2030 and expects the new digital banks to help it reach this goal. To attract foreign entrants, the authorities have relaxed limits on foreign ownership, national hiring quotas, and data localization requirements. Even the bank-licensing process has been streamlined.
With all of this in mind, we expect that the Philippine digital banking market will be among the most competitive in the region. There is lots of low-hanging fruit to be plucked, and minimal constraints on market participants.
In addition to the six holders of licenses, we expect that Alibaba-backed GCash will be one of the most competitive players in digital banking, even without a license. GCash’s userbase is so large and it has so many partnerships that it can effectively offer similar products to its customers as the formal digital banks.