According to the latest report from Moody’s Investors Services, the Philippines has a large untapped market on which fintech companies can capitalize given the slow progress of conventional banks in offering digital financial services.
In addition, social distancing measures due to the pandemic have served as a catalyst and will drive the adoption of digital financial services.
According to Joyce Ong, an analyst at Moody’s, fintech companies and a new generation of digital-only banks threaten to outperform conventional banks in key areas of retail banking, such as credit cards, deposit services, remittances and unsecured loans, with products more accessible and easier to use.
She noted that the country has a large untapped market as around 70 percent of adults in the Philippines still do not have access to banking and financial services. World Bank data shows the Philippines to be one of the least banked countries in Southeast Asia. Indonesia’s share of adults without access to financial markets is around 50 percent, while that of Thailand and Malaysia is around 20 and 15 percent, respectively.
The report says the Philippines has a lucrative remittances market that financial technology companies, such as mobile wallet application providers, can capitalize on. The country is the fourth largest recipient of inbound remittances globally with remittances in 2020 totaling $ 29.9 billion, or about 8.3% of GDP, generating about $ 1.4 billion in fees for them. banks and money transfer companies every year.
The mobile wallet market has grown significantly over the past year, with the number of active e-money wallets in the country increasing by 61% in the first nine months of 2020 from 2019, and the total value of transactions. on GCash, one of the leading mobile wallet services in the Philippines, growing 254% in 2020 to reach $ 2 billion.
Digital transactions through the InstaPay platform have also increased sharply amid the pandemic, reaching over 220 billion pesos in May 2021, up from just around 40 billion pesos at the start of last year. The volume also increased significantly to around 5.6 million in May, down from around 1.5 million in January last year.
Moody’s noted that competitiveness in the retail segment is essential for Philippine banks given its enormous growth potential, and although fintech products are expanding the customer base in the financial system by attracting the unbanked population, it will be a challenge for banks to gain market share from fintech companies with established franchises, such as mobile wallet operators GCash and PayMaya, as most of these banks have been slow to go digital.
Moody’s has observed that most banks are not reacting proactively to the threat from finch corporations, and in the Philippines, banks have been slow to develop digital offerings to exploit the unbanked population, either alone or on their own. partnership with external companies. Instead, banks prefer to maintain their current business model which is primarily business driven.
Mobile wallets offered by fintech companies do not require a minimum deposit balance and are more accessible than bank deposits, making them attractive to the non-banking sector. Retail deposits represent a significant portion of bank funding, accounting for 47% of domestic liabilities at the end of 2019.
The report mentions that limited accessibility to physical bank branches and insufficient income to meet minimum deposit requirements, especially in rural areas, prevent the majority of the Filipino population from holding bank accounts. Mobile wallets eliminate these difficulties, as smartphones and the internet become more and more available in the country. As such, the adoption of mobile wallets is growing rapidly, with GCash users alone making up 45% of the country’s adult population at the end of 2020, far exceeding the share of bank accounts which is just over 10%. %.
Mobile wallets are also gaining traction as a payment method as the network of merchants accepting them grows. Fintech companies, such as Tendopay, are also partnering with mobile wallet providers and e-commerce companies to provide buy-now and later-payment options, providing loan programs that empower consumers to ” buy online without a bank account or credit card.
It has also been observed that mobile wallets are a cheaper and more convenient alternative to sending remittances through banks, which typically charge customers a fee for receiving money from abroad through money transfer centers. international or other banks. On the other hand, mobile wallets typically allow users to receive wire transfers from international banks and money transfer centers on their apps for free, although the funds are saved in the form of electronic money that requires withdrawal fees.
He said that while remittances to mobile wallets instead of bank accounts are still nascent, it could increase dramatically due to their profitability and the increasing ease of use of e-money as more and more. more businesses are embracing digital payments.
Moody’s also said that a move away from bank-issued credit cards and money transfer services following the increasing adoption of fintech products would result in reduced commission income for banks. Commission income from remittances, he said, is important to Philippine banks, accounting for around 18% of their non-interest income at the end of 2020.
Last year, major mobile wallets GCash and PayMaya, in partnership with other fintech companies, started offering microloans to consumers directly through their payment platforms. The report warned that banks could lose stakes in a rapidly growing segment if borrowing through mobile wallets becomes popular among consumers. He said that although retail loans made up only 11% of gross loans in April 2021, they are more profitable than business loans, especially with weak demand for credit among businesses as companies halt their plans. expansion due to the pandemic.
But he said banks can partner with mobile wallets to use their platforms and data for consumer lending. Last April, CIMB Philippines partnered with GCash to lend to eligible mobile wallet users.
But there is a downside to these digital services offered by mobile wallet companies. The report pointed out that an obstacle to the adoption of electronic money is the lack of insurance for it. On the other hand, bank deposits are insured up to 500,000 pesos by the PDIC. But a proposed program to protect e-money, if implemented, will solve this problem and build public confidence by forcing e-money companies to reserve additional funds to protect end users.
The report adds that the introduction of digital banks will increase competition as it will allow new non-bank companies to enter the banking system and compete directly with conventional banks. UNOBank, a company backed by a Singapore-based fintech company, has been granted permission to establish a digital bank in the Philippines. Meanwhile, Voyager Innovations, operator of Paymaya, has raised $ 167 million in funding to launch a digital bank here and is awaiting license approval from BSP. Among conventional banks, Overseas Filipino Bank and Tonik Bank have been approved to convert to fully digital banks within three years.
Union Bank, RCBC, CIMB Philippines and ING Philippines invested early in the digitalization of their retail offerings in order to expand their retail customer base.
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