WHILE local financial consumers have historically been relatively aloof from the traditional banking system, it looks like financial technology (fintech) is winning them over on convenience and increased reliance on digital means due to the pandemic.

Earlier this year, Moody’s Investors Service released an in-depth analysis on the Philippine banking system, claiming that fintech companies in the country have the ability to overtake incumbent banks in retail services.

Moody’s said fintech companies in the Philippines are “poised to grow rapidly” while conventional banks “remain slow in digital services.”

The credit watcher said because the Philippines has been wary of banks in general—with 70 percent of adults lacking access to formal banking services—fintech companies win these unbanked population over as traditional banks are keen on retaining their current business model.

According to the Bangko Sentral ng Pilipinas’ (BSP) Financial Inclusion Survey in its Financial Inclusion Dashboard as of the third quarter of 2020, 12.2 percent of respondents have bank accounts, while 8 percent have electronic-money/wallet accounts.

During the pandemic, however, e-money accounts have gained popularity, while bank accounts remained broadly stable. From 2019 to 2020, the survey indicated that respondents with bank accounts grew by 0.7 percent, while respondents with e-money accounts grew by 6.7 percent.

Moody’s is not alone in this assessment. Also earlier this year, Fitch Solutions—the research arm of the Fitch Group—said the Philippines’s regulatory and demographic environments are broadly favorable for fintech adoption, with the country’s large, scattered population providing a sizable market on which to leverage mobile banking.

“At Fitch Solutions, we believe the fintech market in the Philippines is weighted slightly to the upside. Mobile operators are often key enablers of fintech solutions, and banking services offered by Globe and PLDT have quickly capitalized on the country’s large unbanked population and the shift in customer behavior accelerated by the pandemic—benefiting from a first-mover advantage,” Fitch Solutions said.

Both these international research bodies said the country’s regulatory environment has been playing a big part in the proliferation of fintech in the country.

Over the last year, the Bangko Sentral ng Pilipinas has announced key digital initiatives, regulations and rules for fintech and digitization of financial services in the country.

Digital roadmap

In October last year, the BSP unveiled its Digital Payments Transformation Roadmap 2020 to 2023, a blueprint of targets to increase the adoption of digital financial services in three years.

Two months later, the BSP also announced its guidelines on the establishment of digital banks in the country and recognized these neobank—or banks that do not have branches and only operate online—as a new banking classification in the country.

Since then, six banks have been given regulatory approval to operate in the country. The BSP has since closed the application for more digital banks in the country for three years for close monitoring.

BSP Governor Benjamin Diokno said based on their profiles, the approved digital banks intend to serve Filipino migrant workers, the underserved, unbanked and the mass market, but are open to venture into investments, insurance and payment services, to broaden their reach.

In April this year, the BSP also proposed an e-money protection fund protection, which aims to protect users in the event that fintech companies experience liquidity issues.

The BSP also announced the guidelines for the adoption of the Open Finance Framework, a blueprint that aims to facilitate the move of the local digital payments landscape toward an open finance ecosystem.

According to Diokno, an open finance ecosystem fosters data-sharing scheme with consent-driven data portability, interoperability and collaborative partnerships among incumbent financial institutions and new third-party players who adhere to the same standards of data security and privacy.

“With access to consumer data, banks and third-party providers could tailor a broader array of financial products, such as banking products and services, investments, pensions and insurance,” Diokno said.

The rise of fintech, however, does not come without its challenges. Diokno said data privacy concerns, money laundering and electronic fraud are among the issues that can undermine confidence in this arena.

Moody’s Analytics, meanwhile, said an impediment to the adoption of electronic money in the country is the absence of insurance for it, while deposit insurance for bank accounts protects customers’ funds in the event of a liquidity crisis.

Fitch Solutions, on the other hand, said the relatively undeveloped digital infrastructure nationwide and the limited Internet access in the country restricts the full potential of fintech in tech in the country.

Despite these, the BSP encourages more fintech innovations in the country, especially while Filipinos seem to be embracing the shift.

Last month, Diokno directly addressed the fintech industry in a speaking engagement and urged them to seize the window of opportunity of Filipino consumers’ increased takeup of electronic transactions due to the pandemic.

“Strike while the iron is hot. Tap into your innovation DNA to create worthwhile solutions. The conditions are ripe and the time to act is now,” Diokno said.

Image courtesy of Dreamstime.com

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