How digital banks reshape the Philippine financial landscape

By Abigail Marie P. Yraola, Deputy Research Head

EMBRACING digital banking was a leap the Bangko Sentral ng Pilipinas (BSP) took since it began opening its doors to the idea of fully digital banks to operate in the country alongside traditional banks.

In December 2020, the BSP released guidelines on the establishment of digital banking licenses and by 2021, it approved six digital banks: Overseas Filipino Bank, Tonik Digital Bank, Inc., UNO Digital Bank, GoTyme Bank, Maya Bank, Inc., and UnionDigital Bank, Inc.

Shortly after, it then imposed a three-year pause in granting licenses for the central bank to monitor the banks’ performances.

The central bank believes that these banks are key drivers for financial inclusion and will contribute innovative financial solution.

Fast forward, these frontrunners will now face competition as the BSP allow four more banks to operate, meaning, a total of 10 banks will hold digital licenses, wherein the four will probably be fully operational by next year.

Issued on Dec. 26 last year, the BSP Circular No. 1205 approved the issuance of digital banking licenses, including the conversion of existing bank’s license to digital bank license beginning Jan. 1, but still subject to prudential limits and conditions.

“This move further advances BSP’s agenda on greater financial inclusion and digital transformation by encouraging the entry of new players with robust, distinctive customer value propositions and innovative business models,” the BSP said in an e-mail.

This proves the central bank’s significant efforts and initiatives to support the growth of digital banking.

Additionally, it shows that digital banks are positioned for growth and reshape the financial landscape in the country, however, it would raise a concern on how these banks will leverage its potential while managing risks and establishing fair competition in the banking industry.

DIGITAL BANKS vs. TRADITIONAL BANKS
George N. Manzano, an economist from the University of Asia and the Pacific, said that digital banks are not necessarily threats but rather should be seen as complementary players that can better serve specific market segments, which includes the unbanked, tech-savvy clients, or small digital entrepreneurs.

“To stay relevant and competitive, traditional banks may find it strategic to establish digital bank subsidiaries. This allows them to test new models, reach underserved markets, and offer a full suite of services that cater to both traditional and digital-first customers,” Mr. Manzano said in an e-mail.

He added that instead of viewing digital banking as a zero-sum game, the future may lie in finding synergies and complementarities between the two approaches.

For Reinielle Matt M. Erece, an economist at Oikonomia Advisory and Research, Inc., while digital banks emerge, this doesn’t mean that it will replace traditional banking institutions and practices in the short term.

He added that there are still a lot who are concerned with security and still prefer face-to-face transactions for availing their banking needs plus poor digital infrastructure is also a reason why consumers will favor traditional banks.

For UnionDigital Bank, the rise of digital banks is not a disruption to traditional financial institutions, but as a complementary force that expands the reach and depth of financial services across the country.

“We believe that the BSP’s initiative to issue digital banking licenses is a bold and necessary step to bridge the gap in financial access. It’s not about replacing traditional banks — it’s about working alongside them to build a more inclusive, resilient, and future-ready financial ecosystem for every Filipino,” it said in an e-mail.

For Greg Krasnov, founder and chief executive officer of Tonik Digital Bank, digital banks are fundamentally shifting how banking services are accessed, delivered, and scaled.

“Traditional institutions have historically relied on physical infrastructure and manual processes, with a focus on affluent segments and corporate clients, [while] digital banks, by contrast, are mobile-first, data-driven, and designed for scale across underserved mass-market segments,” Mr. Krasnov said in an e-mail interview.

MORE PLAYERS
Mr. Krasnov explained that the lifting of the moratorium reopens a crucial avenue for innovation in the sector. This, he added, is a positive step that recognizes the need for increased competition, better services, and broader coverage — especially for consumers who are underbanked or entirely excluded.

Manish Bhai, founder and president and chief executive officer at UNO Digital Bank, said that the interest from new players confirms that the country is a highly promising market for digital banking.

“The central bank’s decision to reopen the window — this time with stricter differentiation requirements — is a clear sign of confidence in the sector’s long-term potential,” Mr. Bhai said in an e-mail.

For Shailesh Baidwan, Maya Group president and Maya Bank cofounder, the central bank has set a high bar for new applicants, requiring them to present unique value propositions, innovative business models, and demonstrate their readiness to operate sustainably.

He further explained that this rigorous licensing process ensures that only players who can set themselves apart and contribute to the financial ecosystem — particularly by reaching untapped or underserved segments — will be granted a digital banking license.

“The added focus on value and innovation aligns with the BSP’s vision of advancing financial inclusion through meaningful, differentiated services,” he said.

The entry of more digital banks can enhance competition and financial inclusion, provided that the regulatory capacity of the central bank is strong enough to manage the associated risks, Mr. Manzano said.

He highlighted that the core issue lies in supervision if the BSP can effectively oversee digital banks, especially in areas such as credit risk, cybersecurity, and compliance.

However, he cautioned that if supervision capacity is limited, the risk of destabilizing the system increases.

“In that case, stricter entry requirements would be prudent. The long-term viability of these banks will depend on both their business models and the strength of the regulatory environment,” he said.

PITFALLS IN REGULATORY COMPLIANCE
The BSP said that digital banks are facing various operational and regulatory challenges as they navigate the nascent of their operations. Among these, is the need for sustained investment in cybersecurity infrastructure to protect against increasingly sophisticated cyberthreats.

Additionally, maintaining strong capital buffers to support rapid business growth, and the establishment of comprehensive risk management frameworks tailored to digital banking operations is crucial.

The central bank also highlighted that strengthening risk management capabilities across key areas, including credit, technology, and internal control functions (such as audit and compliance is significant.

It added that enhancing these core areas is vital for sustaining financial soundness and aligning operations with long-term business strategies.

For UNO’s Mr. Bhai, compliance in digital banking is multifaceted but mainly, the challenge is balancing the speed of technology with the rigor of regulatory expectations.

He added that while digital banks operate in real time, regulations tend to prioritize stability and thoroughness over speed.

“As digital banks begin to serve more previously unbanked and underbanked customers, the regulatory framework will naturally evolve,” he said.

Additionally, these new segments may have different needs, vulnerabilities, and risk profiles and forward-looking institutions must be prepared to adapt “and that means building with compliance baked into the company’s DNA from day one.”

Meanwhile, Maya’s Mr. Baidwan reiterated that the central bank has been clear and consistent in laying out the regulatory requirements for digital banks.

“These standards — whether around capitalization, governance, cybersecurity, or consumer protection — are straightforward and aligned with the broader goal of ensuring trust and stability in the financial system,” he said.

He emphasized that similar with any fully regulated bank, the challenge is not in understanding the requirements, but in executing them consistently.

He also pointed out that for the new players, building the necessary infrastructure can be demanding, particularly in areas like risk management, compliance systems, and IT security.

INCREASED COMPETITION
The BSP said that the emergence of these digital banks is expected to intensify competition within the banking sector, particularly regarding product innovation, service delivery, and customer experience.

Traditional banks, which are burdened by high costs of maintaining extensive branch networks, may struggle to compete effectively in terms of market reach unless they accelerate their digital transformation and innovate their product and service offerings.

“While this heightened competition may exert downward pressure on traditional banks’ margins, it also presents an opportunity for them to modernize, enhance operational efficiencies, and better align with evolving consumer demand for digital financial services,” the central bank said.

Latest BSP data showed that as of end-March, digital banks’ total assets reached P125.49 billion, higher than the P96.9 billion posted a year earlier.

Meanwhile, these banks posted a combined net loss of P1.04 billion during the first quarter from a net loss of P2.07 billion a year earlier.

In comparison with traditional banks, Oikonomia’s Mr. Erece said that to remain profitable and competitive in the long run, traditional banks must embrace digital transformation to meet the demands of customers seeking efficiency, convenience, and speed.

“Traditional banks will still have robust revenue streams from traditional users such as older demographics and larger institutions,” he said.

For Maya, with banking penetration in the country still low, access to formal credit for individuals and small businesses is still highly limited.

“The vast majority of loans from the banks are extended to corporates, while consumers and small businesses have limited access to unsecured credit. These gaps underscore the ongoing need for inclusive, accessible, and technology-driven financial solutions.”

For Tonik Bank, traditional banks have focused on corporate lending and high-net-worth retail customers, while overlooking unsecured consumer credit and small businesses.

Given this, Mr. Krasnov explained that the gap exists due to legacy banks lack the operational models and risk appetite needed to profitably serve these markets.

“Digital banks are now capturing that opportunity by deploying alternative data, automated underwriting, and embedded distribution models like payroll deduction or point-of-sale lending.”

He said that these models are structurally better suited to serve the mass market at scale.

For UNO Bank, the biggest shift is not only technological but also behavioral.

“Customers today expect more from their banks. It’s no longer a seller’s market. It’s a buyer’s market — driven by expectations shaped by seamless experiences in retail, transport, entertainment, and logistics,” Mr. Bhai explained.

He further explained that banks are no longer just compared to other banks but to the best digital experiences available.

Digital banks, he added, are structurally designed to meet these expectations.

“With leaner cost bases and modern tech stacks, we deliver faster onboarding, lower fees, and deeply personalized services — especially for mobile-first and underserved segments.”

However, he pointed out that this shift is not a zero-sum game. Traditional banks will still hold advantages — such as capital scale, brand equity, and long-standing client relationships.

“Institutions that can’t evolve may see margin compression and market share loss, especially among younger, more digital native users.”

ECONOMIC GROWTH ‘DRIVERS’
Digital banking services can improve access to credit, leading to higher consumer spending and potential business expansions which are both vital to economic growth.

“A well-managed growth of credit to pair along with growth in productivity leads to faster economic growth. In addition, more players mean more competition and hopefully leads to better services and even job generation if more players are willing to enter the space,” Mr. Erece said.

UNO Bank’s Mr. Bhai said that the entry of new digital banks has the potential to contribute to long-term economic growth — but not by simply increasing the number of players.

“The real value lies in how these banks expand access to new services capital, especially for individuals and small businesses that the traditional system often overlooks.”

Moreover, he said that digital banks are structurally better equipped to cater to the evolving nature of work. As more people earn income through freelance platforms, remote work, and digital entrepreneurship, there is a need for financial institutions that can understand and support non-linear income patterns, thin-file customers, and real-time financial needs.

Meanwhile, Mr. Krasnov of Tonik Bank said that access to formal credit is a proven driver of household resilience and economic activity, explaining that when consumers can borrow safely — whether to manage expenses, invest in education, or purchase durable goods — it stimulates consumption and improves quality of life.

Similarly, when small business can access working capital, they grow and have increased profits and hire more staff.

“Digital banks, by lowering the cost of service delivery and expanding reach, have a unique role in catalyzing this type of growth,” he said.

He said that digital banks can drive both broader access and better quality — and that’s the engine of long-term impact.

For Maya Bank, digital banks have the potential to support long-term economic growth, particularly if players can meaningfully reach underserved segments, enable financial activity, and introduce innovation that deepens trust and engagement in the financial system.