Digital banking to boost financial inclusion in PH

Banking revenue and unbanked population in Southeast Asia

Digital banking is transforming the traditional financial landscape. There are now 249 digital challenger banking players globally, comprised of dynamic digital upstarts and transitioning legacy operators.

The Philippines offers an attractive opportunity for this expanding market. The release of the Digital Banking Guidelines in April this year, swiftly followed by agreed licenses for Overseas Filipino Bank and, recently, Tonik Digital Bank and UNObank, show this potential is being recognized and pursued.

Digital transformation in banking is not new—internet banking triggered a similar transition. What sets this shift apart is its remarkable acceleration, driven by the expectations of customers who are used to the services of technology brands such as Amazon, Grab and Lazada.

This market is the focus of Boston Consulting Group’s (BCG) new report—Emerging Challengers and Incumbent Operators Battle for Asia-Pacific’s Digital Banking Opportunity.

Competition and growth in Apac

Asia-Pacific (Apac) is home to 20 percent of global Digital Challenger Banks (DCBs). They are largely dominated by consortium-led players driven by technology giants and nonfinancial institution players, with the likes of WeBank, Kakao Bank and Tonik, to name a few.

Competition for market leadership is wide open—no DCB has yet captured more than 2 percent share in its operating market. Apac is home to more than two-thirds of profitable players, with just 5 percent of all DCBs achieving break-even globally.

What unites these players is their ability to leverage a substantial existing ecosystem, benefiting from strong brand recognition, data-rich insight and an established customer base.

Korea’s Kakao Bank is a prime example of success. Since its launch in 2017, Kakao Bank has gained more than 13 million customers. It reached a customer penetration rate of 26 percent with a far lower acquisition cost per customer than traditional banks, leveraging the significant ecosystem of parent company Kakao Corp.

With plans to award five digital banking licenses—three of which have now been issued—players in the Philippines must consider their own path to success.

Digital challenger banks in the Asia-Pacific region

Success in Philippines and Southeast Asia

Southeast Asia offers a promising ground for digital banking growth, with large, underserved populations, reliable economic growth and high digital penetration.

The Philippines is a particularly fruitful market for this expansion, with its large and young population’s high levels of digital engagement—as much as 10 hours spent online daily, digital banks can be championed as a powerful platform to boost formal financial system engagement. Cash remains the dominant payment method, suggesting significant room for digital growth in both the banking and payment space, providing an avenue to engage the 70 percent of the population who remains unbanked.

Governor Benjamin Diokno of the Bangko Sentral ng Pilipinas recently announced an ambition to see half of all financial transactions to be undertaken digitally by 2023, with a parallel goal to ensure that 70 percent of Filipino adults have access to a formal financial account.

There are a few challenges, which will have to be overcome. The lack of a national ID, for example, makes it difficult to verify the identities of applicants quickly and securely. The new national ID system being piloted should help address this, but full rollout would take some time. Changing the “cash first” culture will also take time and new entrants will have to find effective ways to assess credit worthiness and handle lending in a sustainable manner.

Given the large white space, the many pain points for Filipinos and the positive economic outlook, the Philippines ranks among the most attractive markets for Digital Banking in the region.

Strategic path forward

Incumbent banks must weigh up the challenges of transitioning legacy IT infrastructure and organizational processes against the significant hurdles of establishing a winning solution to compete against new entrants.

These operators must find a path to either digitalize themselves, launch a separate DCB entity, or establish a secondary brand—potentially supported by FinTech partners.

DCBs driven by nonfinancial institution operators (such as tech players or fintech companies) must reflect on the significant complexity of the financial services industry and how best to leverage their existing skill sets and experience to succeed in this space.

This report highlights five models for nonbanks to become either lending marketplace platforms, online P2P lenders, online self-funded lenders, ecosystem platforms capturing value from life events, or true Digital Challenger Banks.

Understanding the local banking landscape is a vital consideration in charting the best path forward. A tailored strategy that addresses the Philippines’ polarized wealth structure will be key to success, with 30 percent of the population belonging to the lowest income segment and an emerging affluent segment expected to become dominant by 2030.

Partnerships will be an important consideration to build local brand presence. Players such as Singapore-based UNObank and Indian-backed Tonik Digital Bank must carefully consider how to ensure local appeal and customer reach.

The ability to penetrate informal banking markets will also be critical, with nonbanking institutions acting as primary providers of financial services currently.

Operators should ask some key questions to inform their path forward. Can we afford to become a Digital Challenger Bank? Why would we be successful? How do we accelerate success? What are my alternative strategies if not DCB?

While the addressable market is significant, operators face a challenging landscape on a three-part journey: application for partnership agreements, business plan development and regulatory approval; building of an effective digital bank structure, with agile leadership and appropriate talent and launch with defined channel strategies, marketing initiatives, and brand positioning.

With a large population, high digital engagement and significant push to engage the unbanked population, the Philippines offers a substantial opportunity for digital banking growth. -BY JUNGKIU CHOI AND ANTHONY OUNDJIAN

Jungkiu Choi is managing director and partner while Anthony Oundjian is managing director and senior partner both at Boston Consulting Group.

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