THE ADOPTION of financial technology could reap better revenues for Philippine banks, which would provide some lift to narrowing margins at a time of increasing competition from these disruptors, global research firm McKinsey & Co. said.

Bank margins are on a downtrend worldwide amid emerging fintech service providers, which are likewise plucking bank customers and the profits drawn from their transactions, according to the McKinsey Global Banking Annual Review 2017 published last week.

“Banks cannot afford to wait any longer to extract the potential of digital to industrialize their operations,” the report read, noting that gains from digitization would lift a bank’s return on equity (RoE) by roughly 2.5 percentage points.

“A full-scale digital transformation is essential, not only for the economic benefits, but also because it will earn banks the right to participate in the next phase of digital banking.”

Across emerging Asia, McKinsey said average RoE among banks dropped to 9.5% in 2016 from 14.6% two years ago. The rate has likewise gone down to 8.6% globally, down by a full percentage point from 2014.

For the Philippines, the global firm said the pace of adoption of digital technology has been “increasing significantly,” although still far from being a strong contender in the local financial services market.

“We don’t see the fintech firms cornering the market because they have a big challenge in scaling-up effectively,” Joydeep Sengupta, senior partner and managing partner for Asia-Pacific Banking at McKinsey, said in an e-mail interview.

“Unless they are already existing large platform companies such as e-commerce players or a chat platform which already own a large number of customers, it is very hard for fintechs to scale up effectively and hence we don’t see them cornering the market.”

Despite this, local banks may have already felt the sting with the entry of more fintech providers on their bottom lines.

“We do see the impact of them on the margins, becoming fierce competitors in terms of getting margins down and as a consequence, creating a lot of revenue pressure for the existing banks,” Mr. Sengupta said.

McKinsey partner Kristine Romano said tapping the unbanked segment is a huge playing field for fintech players, noting recent tie-ups between Facebook and Paymaya, and Ant Financial and Globe Telecom, Inc. could help serve more Filipinos.

“In the end, it is possible that many of the existing banks will partner with or join these fintechs in many ways, or even co-opt them into their ecosystems. There will be some form of co-existence of the two,” Mr. Sengupta added. – Melissa Luz T. Lopez