MCKINSEY REPORT: On the verge of a digital banking revolution in the Philippines

As regulators encourage new players to enter the digital financial services sector, firms that take the initiative can gain an early advantage in one of the world’s largest greenfield markets.

The Philippines is one of the fastest-growing economies in Southeast Asia, yet the banking penetration rate ranks among the lowest in the region at 56% vs 96% in Thailand and 88% in Malaysia. But change is coming, according to McKinsey’s latest report:

On the verge of a digital banking revolution in the Philippines.

There is mounting unmet demand for banking in the country. Regulators are creating conditions to help address the underbanked customers while fostering competition. Yet, who will serve the customers and address their needs is still to be defined. McKinsey sees abundant opportunities, and interested players will need to act fast.

In terms of unmet demand, the report co-authors note the following market observations:

  • The unbalanced distribution of loans in the Philippines, in which corporations receive 76 percent of all loans whereas mass consumers and SME face binding credit constraints, makes retail lending especially prone to disruption
  • Tackling the challenge of the Philippines unbanked is hindered by the public’s perception of the banking system. Forty-five percent of unbanked Filipinos still believe there are statutory balance requirements and hence their hesitation in opening a bank account, and another 40% say their main reason for not opening a bank account is that they lack adequate documentation.
  • A combination of weak information infrastructure and limited risk appetite has discouraged existing domestic banks from courting new market segments, and tapping into the unique features of the Philippine economy (i.e. $30.5 billion in remittances).

At the same time, local regulators are displaying their determination to improve financial inclusion. BSP recently lowered the requirements to open bank accounts, introduced and issued 6 new digital banking licenses, created a real-time payment system, and established a standardized QR network. The reforms also seem to target foreign entrants as authorities relax limits on foreign ownership, national hiring quotas, and data localization requirements.

Given the rapid growth of the country, the increase in financial inclusion, new players, and unmet demand, emerging trends find that banking revenue will grow at a compound annual rate of about 10 percent. A key driving force behind the revenue growth will be the retail segment and overall lending.

Domestic payments services such as GCash and Maya are already expanding beyond payments. Incumbent banks are already investing in their digital propositions and new digital banks are starting to operate. Still, there is no clear digital banking winner, and we see abundant opportunities for new entrants to cement their positions.

As competition intensifies in the Philippines with no dominant players as of yet, what challenges do incumbent banks face, and what are the opportunities to be seized? How can foreign companies and enterprises leverage this and potentially expand into a new market like the Philippines?