Digital banks urged to tap youth, small firms to boost presence

VIRTUAL BANKS in the Philippines looking for growth opportunities must target the young and unbanked as well as small businesses, S&P Global Ratings said.

“Digital banks may carve a niche by catering to the non-affluent retail market and small businesses — segments long ignored by traditional banks,” the debt watcher said in a report on Thursday.

Aside from risks associated with low-income borrowers, the cost of building branches in rural areas also made big banks turn away from these segments, S&P said.

In 2019, only P579.13 billion or 7.10% of the P8.14 trillion in total loanable funds was disbursed for lending to micro-, small- and medium-sized  enterprises (MSMEs). This was short of the 10% threshold mandated by Republic Act 6977 or the Magna Carta for MSMEs.

“Large banks prefer to pay the penalty for noncompliance with the minimum MSME lending requirements rather than deal with high operating costs and credit losses,” S&P said.

Virtual lenders have an advantage in this case as their reduced need for infrastructure gives them the leeway to introduce offerings at a low cost for these underserved segments, the debt watcher said. However, they have to use data correctly to be successful in pricing risk.

“Digital banks’ lower operational costs give them room to offer higher deposit rates, which may trigger deposit price competition,” S&P said, noting virtual lenders operating in the country currently offer 3-4% rates for deposits, much higher than the 0.1% to 0.25% regular savings rates of peso deposits of brick-and-mortar banks.

However, S&P said it will take three to five years for digital banking entrants to become profitable. The debt watcher said they see no ratings effect for traditional banks in at least the next two years given these lenders’ strong market share, boosted by brand recognition and long-standing customer relationships.

For the time being, new digital bans have potential to grow amid the significant number of underserved and unbanked in the Philippines as well as the increased preference for digital transactions due to the coronavirus pandemic, S&P said.

“This contrasts with developed markets such as Australia, Hong Kong, Singapore, and Malaysia where incumbents compete fiercely for digital share, and the underserved market is small,” it added.

A central bank study showed only 29% of the 72 million adult Filipinos had access to formal bank accounts as of 2019. This was already an improvement from the 23% seen in 2017 and represents five million Filipinos gaining access to a financial account in the two-year period. — Luz Wendy T. Noble