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Local banks may need to step up their game in terms of digital capacity to compete with their online rivals, according to S&P Global Ratings.
In a report Thursday, the New York-based credit rating agency said digital banks could “redefine the Philippine banking industry” based on a young demographic, a large untapped market, low costs and regulatory flexibility.
These demographics, he added, favor digital gamers, as just over half of the adult population, aged 15 and over, owns a smartphone and has access to the Internet.
S&P also believes that digital banks would compete for the mass market if they provided better and cheaper products and services.
Such banks also have cost advantages over their traditional counterparts. Their lower operating costs also give them room to offer higher deposit rates, which can trigger competition on deposit prices.
For example, the credit evaluator cited annual returns of 3-4 percent on the deposit offering from CIMB and ING Bank Manila, which have no minimum balance requirements. This contrasts with the regular savings rate of 0.1 to 0.25 percent for deposits in pesos in traditional banks.
Because of these factors, S&P said “established banks may have to take aggressive steps to keep their online rivals at bay.”
“Established banks will step up their digital efforts, particularly as Covid-19 (coronavirus disease 2019) [pandemic] the popularity of electronic transactions has increased, ”he added.
The debt watcher said the large banks it currently rated should retain their market share for the next three to five years, backed by their strong brand recognition and long-lasting customer relationships.
This is because digital banks would likely need three to five years to be profitable as they scale into markets largely ignored by large lenders.
However, S&P noted that the market share of digital banks will remain small, even if they can venture into specialized financing, as they also need to earn consumer trust, which traditional banks have long secured.
“In our opinion, it will be a challenge for digital players to eliminate the entrenched market positions of major banks, given their strong franchise and brand equity, especially in Metro Manila,” he said.
In terms of cost advantages, the credit watchdog said incumbents have to manage sizable overhead costs, a less agile culture and legacy systems that inhibit change. If they don’t step up, he added, “digital banks can gain significant market share while being less capitalized than universal and commercial banks.”
The report comes after Bangko Sentral ng Pilipinas published draft guidelines that classify a digital bank as basic or advanced.
According to the draft obtained by journalists in July, a digital bank will be incorporated in the Philippines with a minimum capital requirement of P400 million for the basic and P900 million for the advance.
A basic digital bank can perform any or all of the following services with retail and / or micro, small and medium-sized enterprises (MSMEs) clients: accept savings deposits, including basic deposit accounts; accept term deposits; accept deposits in foreign currency; grant unsecured loans; collect and pay the account of others; provide remittance and bill payment services; and issue electronic money products.
An advance can perform any or all of the following services with retail clients, MSMEs and large companies or other corporate clients: activities allowed for basic digital banks; grant guaranteed loans; and issuing credit cards and other activities as permitted by the BSP Monetary Policy-making Board.
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