Financial digitization is the hope of the future

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By Sergey Sedov

THERE are several distinct features in the financial landscape of the Philippines. Their correlation determines the medium-term forecast of the development of the financial market considering the involvement of fintech and alternative lending. According to Sergey Sedov, founder of the international financial holding AS Robocash Group which is known as Robocash Finance Corp. in the Philippines, foreign experience and capital can help to fill the gaps to facilitate a further dynamic growth.

To start with, the Philippines has one of the largest populations in the world. At the same time, the country of 7,000 islands can hardly be called a concrete jungle. Only Manila, with its suburbs, and Davao are the true megalopolises and there are no more than 30 cities with a population of over 300,000. The vast majority of 106 million Filipinos live in numerous relatively small settlements across the country and about 53% of the population lives in rural areas. The latter figure has been stable for about 30 years and it is higher than the total for Asia (50%) and Southeastern Asia (51%). The United Nations predicted that even by 2050, the share of rural residents in the Philippines would account for 38%, which will be above the projected average for Asia. In other words, the relative dispersion of the population will remain in the Philippines in the long term.

Secondly, the Philippines is a country with a huge but still not fully realized potential when it comes to a decent standard of living. The country has an annually growing income per capita, however the dynamic is quite slow — 1.4% in 2009-2015 (in contrast, Malaysia grew by 5.9% in 2011-2015 annually and Thailand had 3% per year in 2010-2015). Despite the longstanding efforts of several presidents, more than 21% of citizens lived below the poverty line as of 2015. Last year, the country’s gross domestic product (GDP) per capita ranked 118th. Moreover, this year’s inflation and growing trade deficit further add difficulties to the national economy.

The mentioned points, however, do not hinder the country’s gradual and steady progress. For example, the Philippines’ poverty rate was higher in the recent past (26.3% in 2009). Next, the nominal GDP has been growing by an impressive 7% per year, and it is projected to expand at this rate until 2050. In 2017, the country was the 34th largest economy by nominal GDP in the world and third among ASEAN countries in — there is obviously room for improvement. To realize the potential improvement in the standard of living for each Filipino, there is required a qualitative catalyst.

This is where my third point comes in: bank lending has traditionally been such a catalyst throughout the world by allowing borrowers to improve their quality of living here and now, as well as secure investments for a decent future. The latter is highly relevant for the Philippines due to a highly developed sector of micro, small and medium enterprises (MSMEs). In 2016, 99.6% of all registered local companies belonged to this category, which was higher than the overall score of 96% in the Asia Pacific (APAC).

The increased need for credit funds is relevant for different levels. According to a survey conducted by the Bangko Sentral ng Pilipinas, in 2017, funds were borrowed to start or develop a business (53% of respondents), to cover the gap in a family budget in a weekly or monthly perspective (45%) or pay for unexpected needs (34%). As the World Bank stated in Findex, 58.6% of Filipinos borrowed money in 2017 while the same score for APAC comprised 46.8%.

According to the central bank, 2.1% of adult Filipinos had a valid loan in 2015, and only 0.6% in 2017. The same report also stated the main factors that hinder clients from applying for a loan: requirements of banks for documents (53%), lack of collateral (44%) or absence of necessary identity card (34%), and insufficient level of salary (28%).

Geographic fragmentation is another serious hurdle as it prevents banks from establishing a widespread network of branches: a third of towns and communities, and two-thirds of the population remains underserved by banks.

At the same time, the country has high Internet penetration estimated this year at 63%, which is about 10% higher than the global rate. Mobile connectivity, meanwhile, is 10% lower than the global rate but is growing steadily. Moreover, the Philippines ranks 13th in the number of mobile cellular telephone subscribers.

Such a solid digital base stands in contrast to the fact that citizens of the country are still not prepared for the effective use of a convenient and accessible solution to solve financial issues. According to the Global Findex, only 25.1% of Filipinos made or received digital payments in 2017 (as compared to APAC’s 58%) and only 7% used a mobile phone or the Internet to access a financial account (way below APAC’s 31%).

The mentioned points — geographical dispersion with the widely spread Internet and mobile communications and the insufficient living standards with lacking bank lending — stipulate a logical scenario for the further development of the national financial sector.

“The future of the financial system lies in going digital and using it to achieve financial inclusion. We are too fragmented geographically to reach out using traditional means.

Digital technology provides such a chance,” — this is how the Governor of the Central Bank of the Philippines Nestor A. Espenilla, Jr. sees the situation.

Considering the typical and inflexible traditional banking globally, it is not surprising that various alternative lending sources are rapidly growing in the country with a prevailing number of online services. They comprise microlending, which is the only “official” financial sector demonstrating a serious increase from 4.7% in 2015 to 7.6% in 2017, then peer-to-peer (p2p) lending with a steadily growing number of websites and volumes, and even initiatives in cryptocurrency. Undoubtedly, the development pace of the financial digitization will only strengthen over time, especially given the liberal state financial policy.

In our opinion, both the expansion of local start-ups and the appearance of experienced foreign fintech players having sufficient investment and technological potential are able to accelerate the process. The latter is important for the following reasons:

• Foreign capital provides taxes, new jobs, and investment injections that decrease the load on the national economy and contribute to the rapid growth of its indicators.

• Business models have already been tested, usually in more than one country, and optimized in terms of data security, operational efficiency and convenience for customers. They usually consider the pipeline processing of big data, the use of deep learning, artificial intelligence and other advanced technologies that are not fully accessible to new entrants on the market. This simultaneously helps the country to integrate adequately into the mainstream of global digital realities.

• Foreign investors allocating funds to the local market are mostly interested in a strategic long-term presence. Thus, the main principle of customer service is not to press out all resources but preserve long-lasting respectful relationships with borrowers. At the same time, the status of foreigners demands from companies to provide excellent services and preserve an established business reputation.

• The advantages of an international experience in fintech are effective, scalable and high-quality scoring technologies. Operating on the international scale with a focus on the strategic presence is possible when serving a creditworthy audience. Otherwise, such a business model is not viable leading to wasted time and investments. This approach requires assessment of clients and provides an adequate debt burden of the population.

Thus, taking into account the national specifics, we think that fintech solutions (mainly remote ones) are able to unite the Filipino society in solving the issue of raising living standards in the immediate future. In this sense, inflation or the key interest rate increased by the Central Bank facilitates the expansion of alternative lending. The high degree of effective adaptation to global economic and technological processes that is inherent to the Philippines promotes this scenario. The rapid transformation of the country into a world leader by the number of outsourcing call centers is a bright example.

The main economic risk is the growth of the debt load on the population that should not be ignored. However, the expansion of fair competition on a market will contribute to the steady improvement of lending terms. The focus of experienced players on a financially reliable audience supported with initiatives designed to improve the financial literacy of the population can minimize the risk.


Sergey Sedov is chief executive officer of Robocash Group.