Virtual lenders dip their toes in the banking waters

By Luz Wendy T. Noble

LONG QUEUES are a familiar scenario for bank clients transacting over-the-counter. Avoiding this waiting time, and the ability to transact during off hours, have long been a selling point for the online banking industry. The question for this age of improved connectivity, broader smartphone penetration, and an up-and-coming digital-first generation is whether a point of no return has been reached, giving the industry critical mass.

Twenty-three-year-old Adrien Aleksey I. Benitez has no plans for now to close his savings account with a bricks-and-mortar bank, an account he has held since high school. But Mr. Benitez has tried out virtual lenders, which he thinks offer him a better chance to save money and attain his goal of buying a franchise business someday.

“Hindi ko pa talaga na-plan ’yung future ko. Pero parang gusto kong mag-franchise. Eh minimum nu’n eh half a million. Kaya habang di ko pa abot ’yun, nasa higher-yielding bank deposits sa online banks (I haven’t really planned for my future yet. But it looks like I want to buy a franchise someday. The minimum is half a million pesos. In the meantime, I’ll keep my money in a higher-yielding bank deposit account with an online bank),” he told BusinessWorld in December.

Mr. Benitez said he was attracted by an online bank’s mall promotion, which offers a gift certificate for those opening accounts.

The Bangko Sentral ng Pilipinas (BSP) started licensing fully digital banks in 2018. CIMB Bank and ING NV officially launched their operations in 2019, seeking out clients like Mr. Benitez through promotional offers and interest rates of up to 4% per annum.

THE DIGITAL BANKING WAVE
Elsewhere in Asia, virtual banks have been gaining momentum. This year, the Monetary Authority of Singapore (MAS) said that it will accept applications for digital bank licenses open even for nonbanks and technology firms. The MAS will issue up to three wholesale bank licenses and up to two retail licenses.

Two virtual only-banks are operating in South Korea — K Bank, operated by telecommunications firm KT Corp. and Kakao Bank, operated by the parent company of messaging app KakaoTalk.

Lee Hyejeong, speaking to BusinessWorld in a video call, said it was a “no-brainer” to open an account with KakaoBank. Most of her friends are using the service, which among other benefits allows her and her friends to split bills digitally when going out.

“It’s very convenient and we can do payments to other users through KakaoTalk. There’s an icon in the app where you just have to click to send money to another person,” she said.

This level of convenience is what makes an all-online bank account attractive for its users, according to Bangko Sentral ng Pilipinas deputy governor Chuchi G. Fonacier.

“Digital-only banks enable customers to perform a wide range of (transactions) using their phones, tablets and similar devices without the need to physically go to brick-and-mortar branches. Moreover, the concept of banking hours has become (irrelevant) as customers can access mobile banking applications anytime, anywhere,” she said.

In the Philippines, the application process to become a virtual lender is the same as the licensing process for a traditional bank, and may have to stay that way for some time.

“At this point, we see no pressing need to formulate and implement a separate virtual banking licensing framework since offering digital-only services is already covered by existing regulatory frameworks,” Ms. Fonacier added.

According to Ms. Fonacier, BSP’s main concern for digital-only banks is the same as its approach with traditional banks — to ensure “safety and soundness, governance, consumer protection and compliance with prudential requirements including anti-money laundering.”

“But since the operations of digital-only banks are largely driven by technology, we put greater focus on cyber and operational resilience, availability, scalability and interoperability,” she added.

Among the virtual bank operators is ING, a Dutch lender that had a presence on the Philippines’ wholesale banking market before its foray into retail banking via its virtual bank.

“As a new brand, we not only look at the growth in customer base but also place a lot of attention on other metrics such as usage and customer experience. On that, we are also bullish with the level of interactions we have with our customers since the launch,” ING said in an e-mail in response to a BusinessWorld query.

The bank said that it has more than 1.5 million interactions with customers and a rating of above 4 from the App Store and Google Play apps, which it takes as a positive development despite being new to the scene.

ING’s entry product, a savings account, charges no fees for registration, requires no maintaining balance and pays out 4% worth of interest if certain conditions are met.

ING Country Head and Managing Director Hans B. Sicat estimates that the people who have downloaded the app and put money into their accounts number in the six figures.

“(It) is indicative of Filipinos wanting to save more. The interest rate helps… We started out with 2.5% per annum earlier this year, which is either infinitely larger or 10 times more than what you would get from a brick-and-mortar bank,” he told reporters on the sidelines of a bank Christmas event at Bonifacio Global City.

BSP’s Ms. Fonacier said that digital-only banks’ top propositions are geared towards “removing friction for onboarding clients and retaining them by offering greater and easier access to information and services.”

Such “friction” is removed by partnering with other entities that are already widely used by consumers, according to CIMB Bank Philippines Chief Executive Officer Vijay Manoharan.

“Imagine being able to use your bank account from another app, which then makes it much more convenient to the customer,” he said.

The bank’s most prominent tie-up has allowed GCash Users to access GSave, where their savings can earn up to 4%.

“We are not just a stand-alone digital bank, we are a platform bank. So we work with partners across multiple ecosystems across multiple industries,” he said in an interview with BusinessWorld in December.

Aside from GSave, CIMB also offers an UpSave Account which is what Mr. Manoharan recommend “to inculcate savings behavior,” calling it the service’s highest-yielding product. It also has a Fast Plus account suited for “transactional” use as it comes with a Visa debit card that can stand in for an ATM, online shopping and overseas transaction card.

BUT WHAT ABOUT THE LOANS?
Banks traditionally make money by lending, not attracting deposits — which are technically liabilities because depositors have to be paid for keeping money in their accounts. So how do the online banks propose to go about their loan business? The answer involves ease of approval, enabled by fintech to determine which applicants are good credit risks without the tedious credit-evaluation process.

CIMB offers unsecured personal loans which, Mr. Manoharan said, take about 10 minutes to process.

The lender has tapped Singapore-based fintech firm CredoLab to streamline loan applications to enable “instant” credit scoring of clients. Mr. Manoharan said loans have been growing by about 15-20% each month since the product’s launch in May.

“We use very complex algorithms but all with customer consent… to assess customers’ creditworthiness,” he said.

CIMB offers loans of one to five years and borrowing amounts of between P50,000 and P2 million.

ING’s Mr. Sicat said the bank hopes to introduce its loan product lineup by the second half of 2020. The lending process will involve app-based credit applications.

“I hope (the application process can) be done in a very short period, literally minutes. We’re still calibrating the appropriate levels and we’ll give you the details in time,” he said.

ING’s priority for 2020 is the payments business, as a means of driving deposit numbers.

“We also know that with the payment proposition, the deposit numbers as well as those who hesitated to put maybe huge amounts will actually put in more because they will be dealing with daily banking on the platform,” he said.

THREE’S A CROWD?
So far, only foreign lenders have secured licenses from the BSP to operate online-only banks. But this may soon change with Rizal Commercial Banking Corp. setting its sights on the industry.

RCBC Executive Vice-President and Chief Innovation and Inclusion Officer Angelito M. Villanueva told reporters in November that the bank can compete at deposit interest rates of up to 4% with a business model geared towards mass-market scale.

Asked whether the bank has submitted an application to the BSP, Mr. Villanueva said: “Not yet. It is something that I think will happen by January.”

Because the BSP has no specialized licensing process for digital banks, Mr. Villanueva said the process could involve applying for a rural bank license en route to setting up a virtual-only platform. The group already has universal and thrift-bank operations with brick-and-mortar networks.

Ms. Fonacier said that one bank, which she did not identify, is in the process of applying to become a virtual bank.

“Interest of both incumbent and new players for setting up digital-only banks is very high particularly in the past two years,” she said.

With two incumbents and one looking to come aboard, banking continues to evolve to beyond more than just the savings and loan business. Pair this up with the bricks and mortars, lenders at the end of the day should look into how to carry out a mission to bring into their system the seven in 10 Filipinos that have yet to own and access their own formal account.