By all indicators, the virtual banking sector in the Philippines is just at its infancy. But it's a nascent sector that is by turns dynamic and promising.
To date, there are only a handful of all-digital banks operating in the country. These include Dutch multinational ING, Malaysia-based CIMB, OFBank of Land Bank of the Philippines, UnionBank, iSave of Maybank Philippines, DiskarTech by RCBC, and local upstart Komo, which is the digital banking arm of Gotianun family-led EastWest Bank.
Several more are scheduled for launch within the next few months and probably next year.
Switching to digital
The truth is that the switch to digital banking by many Filipinos has been building up even prior to the onset of the COVID-19 pandemic. But this switch has no doubt been accelerated by the dizzying turn of events of 2020.
Indeed, the pace at which digital banking has grown in the country over the past few months has partly been an effect of sweeping restrictions in mobility imposed in many areas in the Philippines due to the ongoing health crisis.
Because people are ordered to stay at home, everybody has more or less been compelled to switch to the digital way of doing things. From buying groceries to ordering meals and even doing laundry, everything now is just an app click away.
The same is true for banking. These days, activities like paying bills, opening a savings account, transferring money, applying for personal loans, and investing in various financial instruments can all be done online.
Departure from the traditional
All-digital banks represent a depature from the traditional brick and mortar banking system everybody is used to. Virtual banks are what their name suggests they are: they are virtual, with no physical branch to speak of whatsoever.
One of the key onboarding strategies of virtual banks is their ability to offer deposit accounts that yield high interest earnings ranging from 3 to 4 percent, in contrast to the measly 0.25 percent interest offered by major traditional banks. The capacity to offer this much interest is largely an offshoot of the fact that virtual banks have significantly lesser overhead costs.
The perks and disadvantages of opening an account with a virtual bank will be threshed out in full in a separate article.
Regulating virtual banks
Insofar as regulating virtual banks is concerned, the country is yet to formulate a fixed and comprehensive framework on the subject. Currently, it is the Bangko Sentral ng Pilipinas (BSP) which issues licenses to virtual banks to allow them to operate domestically.
The BSP has repeatedly stated that it is in the processing of finalizing the guidelines to be used in regulating all-digital banks in the Philippines. Based on some of its statements issued to the press, the BSP seems to lean towards streamlining the initial requirements for virtual banks to operate.
This makes sense because BSP has always been an advocate of financial inclusion. See, the Philippines has a huge unbanked population who, as a consequence, are deprived of the opportunity to avail of credit and financial products that will allow them to make their money work for them. Moreover, BSP acknowledges that mobile phone penetration rate in the country is high.
Virtual banks address this gap by allowing ordinary Filipinos to open an account with a bank through their mobile phones without the need to go to a physical branch.
Reconciling differing approaches
In its draft guidelines, BSP categorizes virtual banks into "basic" and "advance" digital banks. Basic digital banks require minimum capitalization of P400 million, and are allowed to offer simple services, such as accepting deposits, granting unsecured loans, bill payments, and money transfers.
Meanwhile, advance digital banks require a higher capitalization of P900 million. Their suite of services include those that basic digital banks are allowed to offer, as well as the ability to grant secured loans and issue credit cards, among others.
The House of Representatives has a different idea in mind. House Bill No. 5913, which seeks to regulate virtual banks, requires higher capitalization for all-digital banks at P20 billion to be raised in four years. The Bill likewise seeks to limit the number of virtual bank players coming in at only five banks per year over the next five years.
The Bill takes on a more conservative position by making sure that only liquid banks with enough capital to withstand any future market disruption are allowed to operate. This guarantees confidence in the virtual banking sector and allows for more people to feel that their hard-earned money is safe and secure regardless of the situation.
The limitation on the number of virtual banks allowed to operate per year is also a way to make sure that the sector does not become oversaturated while seeing to it that virtual banks remain competitive.
It is necessary that these various approaches and viewpoints in regulating virtual banks be reconciled so that the final framework as well as the enabling statute governing their regulation is responsive and well thought-out.
After all, with all-digital banks gradually making headway in the collective lives of Filipinos, there simply isn't any room for half-baked policies.