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Digital banking in the Philippines: How long until super apps join in?

Philippines Digital Banking
Southeast Asia’s digital banking wave has reached the Philippines and the Super Apps of the region are expected to enter the fray at some stage – the market is huge

Neobanks or digital-only banks are being licenced in many places in Southeast Asia including Singapore and Hong Kong, and digital-only banks have seen creditable success in South Korea. Malaysia and Philippines have announced their plans to licence digital-only banks. Outside of Hong Kong and Singapore, Southeast Asia’s advantage is a large unbanked population which is also very digitally savvy. Digital banking in the sense of digitally delivered banking services already has a strong uptake in the region. Philippines stands out among these places because surveys carried out by different entities have revealed that Philippines had, until recently, the lowest digital-banking penetration among all the Southeast Asian countries. So what do neobanks in the Philippines need to do to succeed? Have the new entrants and the incumbents got the fundamentals right? How will the digital banking landscape in the Philippines look like in the next five to ten years?

Traditional banks have an early mover advantage in Philippines digital banking

Many traditional banks in the Philippines, both domestic and overseas, have made a smooth transition to digital banking, giving them an early mover advantage. Bangkok-based CIMB has established itself as one of the top digital banks in the Philippines over a short period of time. CIMB signed up over a million Filipinos to its all-digital mobile banking platform in its first 10 months of operation. This also established CIMB Bank Philippines as the fastest-growing all-digital bank in the Asean region.

The CIMB app utilises advanced facial recognition technology that allows a customer to open a bank account digitally under 10 minutes. Now, customers can carry out any banking transactions through their smartphone at any time. What CIMB brought to the table in digital banking in the Philippines seems to be differentiated technology-based customer experience. CIMB has partnered with Jumio, a leading US-based identity verification company that provides card and ID scanning and validation products for mobile and web transactions. Jumio’s AI-driven digital identity verification solutions help CIMB Bank PH’s mobile app integrate Jumio’s identity verification technology, leveraging informed AI, machine learning, certified liveness detection and face-based biometrics to provide a safe, secure, and fast digital onboarding experience that typically takes less than five minutes.

Other overseas banks such as Malaysia’s MayBank and ING have also established digital banking units in the Philippines. MayBank launched the first digital-only savings account facility in the Philippines in 2018, as a part of its Maybank M.O.V.E (Mobile Optimised Virtual Experiences) programme. The product, which is called iSave, allows customers to open a digital savings account through the MayBank2U PH app.

Similarly, Amsterdam headquartered ING, which has been operating in the Philippines as a wholesale bank for more than two decades, also launched a digital banking platform in the Philippines last year. The platform, which went online in June 1, 2019, offers an interest rate of 2.5 percent per annum, about 10 times higher than the rates typically offered by other savings products in the market. ING also became the first bank to be authorised by the Bangko Sentral ng Pilipinas (BSP) to allow end-to-end electronic on boarding of the customers through the mobile phone, by using the latest in facial recognition technology. Other notable players in the digital banking landscape in the Philippines include UnionBank, which opened the Philippines’ first fully digital banking branch called The Ark. It enables customers to perform bank transactions using touchscreen devices.

The first neobanks to use technology as the lynch pin

Philippines is preparing for the introduction of its first set of neobanks or digital-only banks. Even though these digital-only banks are much smaller in size and do not have legacy data, their product offerings often prove to be different from those of the traditional banks and they often rely on technology to compete with the traditional banks.

Earlier this year, Singapore-based digital-only bank Tonik announced that it has acquired an operational licence from the Bangko Sentral ng Pilipinas (BSP), in order to offer financial services in the Philippines. The bank is expected to go online this year and it will focus on retail deposits and consumer loans. In the month of February 2020, Tonik raised around $6 million in a funding round that saw participation from the likes of venture capital firm Insignia Ventures Partners and Credence Partners. Reportedly, the Philippines currently has a $140 billion retail deposit market, and also a $100 billion unsecured consumer lending opportunity. This provides a sizeable opportunity for digital banks such as Tonik. In the coming years, the probability of new neobanks or digital-only banks causing major digital disruption in the Philippines banking sector is quite high.

Besides Tonik, Rizal Commercial Banking Corporation (RCBC) is also planning to set up a wholly owned rural bank that will engage in digital banking in the Philippines. Also, state-owned Overseas Filipino Bank — a subsidiary of the Land Bank of the Philippines is planning to become a fully digital bank in the Philippines. The bank is awaiting a licence from the central bank. According to its spokesperson Cecilia C. Borromeo, the digital bank will go online in June 2020.

What value proposition do Philippines digital banks offer?

The ability to integrate technology to provide seamless banking services to customers that are accessible from the comfort of their home and at any time is what makes digital banks in the Philippines stand out from the rest of the banks. For example, CIMB is leveraging Jumio’s 3D mapping technology to overcome the issue of identity theft, which is still the largest fraud practiced as it is very hard to prove that an ID document captured through a camera is 100 percent genuine.

Frederic Ho, who serves as the vice president at Jumio Asia Pacific told International Finance “Jumio integrated the world’s first iBeta Level 1 and Level 2 certified anti-spoofing technology into its online identity verification suite to capture and process the user’s face images taken from any 2D smartphone camera or webcam. These liveness detection algorithms must observe so many concurrent human traits that no spoof can recreate them all at once. This enables banks to better ensure that users are who they claim to be when new accounts are created and keep cybercriminals at bay.”

Frederic Ho said successful digital banks are delivering a differentiated onboarding process — often delivered through smartphone-based apps, as in the case of CIMB. Since they’re 100 percent digital, they put a much greater emphasis on the customer experience and build every online screen with the consumer in mind. This helps the digital banks steal market share from the incumbents.

To launch its digital-only bank in the Philippines, Tonik has partnered with Finastra, a London-based financial technology company. Anand Subbaraman, General Manager, Digital and Retail Banking Products at Finastra told International Finance, “Finastra’s Fusion Essence Cloud meets strict cybersecurity compliance standards and regulations across markets. Tonik’s solution is also deployed out of the Microsoft Azure Southeast Asia Region (Singapore data centre), which is a highly-trusted platform allowing for both low latency and data residency as well as a high degree of security. Tonik’s rollout of the platform will enable it to bring the benefits of innovative and secure digital banking to customers in the Philippines.”

Finastra’s technology is expected to help Tonik launch its retail deposit and customer loans services in the Philippines with a high degree of agility and efficiency. After launch, Tonik will also be able to use the solution’s in-built analytics capabilities to better understand customers’ digital banking needs and introduce new products that will help customers better, based on that data.

Anand Subbaraman revealed that in time, the bank will also have access to further innovation through Finastra’s signature solution. These combined capabilities will help power Tonik create differentiated products that create value for consumers in the market.

Varun Mittal the Emerging Markets Fintech Leader at EY believes that the unique value propositions of digital banks are convenience, flexibility and trust. If a digital-only bank in the Philippines can offer these to the customers, it is very unlikely that they won’t be successful in the country.

Predominance of cash: A habit to change for digital banks

A Mckinsey survey revealed that although smartphone and Internet penetration in the Philippines is similar when compared to other developing Southeast Asian countries, only a small section of the Filipinos had made the transition to digital banking. According to a study carried out by Asian Banker Research, 17 percent of Filipinos still prefer walking into a branch for a task as trivial as checking their account balances. This reluctance of Filipinos to use digital banking could be due to the lack of a compelling digital user experience that would encourage them to stop visiting branches to even carry out important financial transactions.
Andrew Gilder, who is an Assurance Partner at Ernst and Young, based in Singapore, and an also EY Asia-Pacific Banking and Capital Markets Sector Leader, believes it has something to do with the country’s geography. He told International Finance, “Historically, the physical geography of the Philippines (being an archipelago made up of more than 7,500 islands) has hampered not only the expansion of traditional banking, but also mobile and internet network coverage. The Philippines has one of the lowest levels of financial inclusion in the Asean region, with 70 percent of its adult population still unbanked.”

One of the major reasons why a customer decides to put his money into the bank is it offers security. An average man in the Philippines puts money into the traditional banks because it provides security and results in trust over a period of time. Even though people across the globe are embracing the idea of a digital bank, many in the Philippines still prefer a bank in brick and mortar form.

Andrew Gilder of EY told International Finance, “Financial inclusion must precede digitisation. For example, to make an electronic payment, there must be both an originating and destination account. While banks have been creating digital propositions, they are having a hard time converting consumers and merchants to the new products. Even now, with internet and social media use soaring in metropolitan areas like Manila, many customers still prefer face-to-face transactions and paying with physical cash.”

The new entrants will face competition from traditional banks that enter the digital banking scene. While digital banks are relatively new and integrate technology to offer better products and services, traditional banks have existed for a longer period of time. Over this period, these banks have built a brand, have increased their customer base substantially and accumulated huge amount of data about the banking system. These banks also have better capital compared to neobanks who enter the market in search of funds to run their business. Also, other reasons for the slower uptake up of digital banking include unclear profit models and a lack of compelling digital banking propositions.

What will determine the success of digital banks?

The very fact that a majority of the Filipinos are unbanked provides a huge opportunity for the digital banks. For them to prosper in the country, it needs the full-fledged support of the government. What the government in the Philippines needs to do is create an ecosystem for the digital banks to function seamlessly and not burden them with regulations and bureaucracies. The success of a digital bank depends a lot on external factors. For example, a digital-only bank would need favourable conditions for it to carry out banking practices such as KYC and credit scoring digitally. Such banks must have the freedom to pull customer data from social media or their utility bills in order to carry out their banking functions digitally.

Also, according to an EY research, improving financial inclusion across Asia-Pacific offers potential $5 billion uplift in personal banking revenues and a $83 billion potential uplift in MSME banking revenues. Andrew Gilder said, “For neobanks that can combine compelling, attractively-priced customer propositions with efficient and relatively low-cost operating models, the Philippines’ large unbanked population provides a significant growth opportunity.”

He also believes the growth of a successful digital banking sector requires a continued commitment to providing a regulatory environment that supports financial services innovation and encourages the development of a vibrant start-up community. He said, “To ensure long term success, neobanks must focus on offering highly relevant and simple financial solutions that meet the specific needs of their customers, at an affordable cost. Among other things, this calls for the innovative use of new data sources (such as social media profiles) to provide greater behavioural analysis.”

With regard to developing user’s trust in digital banks in the Philippines, Frederic Ho told International Finance, “Trust needs to be at the heart of financial services, and banks like CIMB need to ensure that they are protecting their ecosystems and guarding against online fraud and account takeovers. This starts at the account opening stage and is where identity verification technologies have the potential to enable digital banks in the Philippines to break the trust barrier.
Trust is a two-way street. Banks need to trust that new remote users are who they claim to be so they don’t inadvertently onboard bad actors, and consumers need to trust that the banks will protect their assets and personal information.”

Many banks are starting to increasingly use biometric-based authentication to protect accounts, especially for high-risk transactions such as wire transfers or password resets. By requiring some form of biometric authentication, banks can be more certain that the person authorising the transaction is who they claim to be. The use of such technologies can help digital banks bring in the trust factor in digital banks in the Philippines.

Varun Mittal, the EY Global Emerging Markets FinTech Leader believes for a digital bank to succeed anywhere, there are a couple of building blocks. If a bank only wants to serve a customer digitally, then they need digital know-your-customer (KYC) and the ability to do digital credit scoring. The building blocks are identity, service, and logistics to be able to deliver the banking needs. These factors need to be fulfilled for a digital bank to successful. Another important element to consider is a supportive ecosystem, where the different regulatory agencies in the country are supportive toward digital banking as well.

Also, since digital-only banks don’t have physical branches, their cost structure is fundamentally different, Mittal adds. This often means they can offer higher interest rates, lower fees, cashbacks and other rewards and often place a greater emphasis on mobile and online banking. How the Philippines digital banks get these factors together will determine their success.

Super apps and telcos might join Philippines digital banking fray

According to the Mckinsey survey, many financial services customers in the Philippines are researching banking products online. About 40 percent of survey respondents said they had been introduced to credit-card offers online and had also evaluated them online. This indicates a shift in approach and also an opportunity for new entrants. With their disruptive technologies, there is plenty of scope in the digital banking landscape for banks to carve a space for themselves. In the next five to 10 years, we will see many more digital banks entering the Philippines market, and also many traditional banks operating in Philippines go digital.

Andrew Gilder told International Finance, “Over the next ten years, we expect to see reasonable growth in digital banking in the Philippines. This will be driven by a range of factors such as: improved technology infrastructure and continued uptake of mobile devices; commendable economic expansion and rising living standards; a young and increasingly urbanised, digital native population; and supportive regulatory and policy frameworks aimed at encouraging new market entrants and accelerating financial inclusion.

We have already seen the regulator give the green light for three entities with digital banking operations, with more likely to come. The Philippines’ maturing fintech sector, particularly in the payments and alternative lending space, will further boost inclusivity by facilitating easier access to basic banking services.”
Anand Subbaraman of Finastra told International Finance that with the market riding the wave of digital disruption in various industries such as food delivery, ride hailing, e-commerce, this is a timely market opportunity for digital banks to enter the market, leveraging on a generation of bank customers who are expecting the same hyper-personalisation and seamless digital experience they’ve enjoyed in the other industries.

Looking ahead, Varun Mittal of EY expects many super apps to enter the Philippines’ digital banking market, particularly the super apps that have been dominating globally. There could be an opportunity for some of the telcos to get into that space as well. Of course, some of the existing banks may create their own digital banking arms to target different segments of consumers.

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