By Aaron Michael C. Sy, Reporter

PHILIPPINE digital banks need to focus on specific consumer segments and increase their scale to achieve stable profits, international management consulting firm Arthur D. Little said.

“Ultimately, let’s say we have 10 banks, and they all talk about being convenient, being customer-centric, [having a] high savings rate — I think they all end up looking the same. It’s just that the brand is a bit different. So, you need a slightly different flavor and touch point to be able to access a different pool of customers,” Arthur D. Little Partner Justin Tan said in an online interview with BusinessWorld this month.

The Bangko Sentral ng Pilipinas (BSP) in August approved the lifting of the moratorium on the grant of digital banking licenses, allowing four more digital banks to operate in the country starting next year.

The four additional licenses may come from either new applicants or banks seeking to convert their existing license to a digital one.

There are six licensed digital banks in the Philippines: GoTyme Bank, Tonik Digital Bank, Inc., Maya Bank, Overseas Filipino Bank, UNObank, and UnionDigital Bank.

The latest BSP data showed that Philippine digital banks posted a combined net loss of P4.11 billion at end-June and had P105.37 billion in assets as of end-August.

Mr. Tan said the incoming digital banks will have to find a way to innovate their products or explore untapped consumer segments such as small and medium enterprises (SMEs), rural areas, or the younger demographic.

“If they’re able to do that and they cover a certain niche within the marketplace, potentially, yes, they can be profitable,” he said.

However, the incoming digital banks will mainly struggle with growing their depositor base to help fund loan products as the earlier established online lenders already have a significant market share, Mr. Tan said.

This could lead new players to resort to offering high savings rates to attract customers, he said.

“There’s always a race to scale for a lot of digital banks to at least build up a certain funding level in terms of deposits so that they can then, in turn, lend out to customers. But I think competing purely on price is probably just the first step. You use this as a hook product. I think there’s a difference between building their scale and using these tactics to get to the level versus moving towards profitability,” Mr. Tan said.

Still, digital lenders in the Philippines benefit from having a large untapped market compared to other countries in the region, he added.

“I think one difference potentially between the Philippines and some of these economies is that the proportion of underserved or unserved segment is actually higher, even versus Thailand or Malaysia,” Mr. Tan said. “So, I think maybe for that reason, the regulator has been pushing for some of these digital banking licenses so that the banks can reach out potentially to some of these underserved or unserved segments to be able to proliferate a little bit more basic banking services to them.”

However, these digital banks could struggle to scale up their operations as their parent firms find that getting returns on their initial investments could take longer than initially expected, he said.

“I think what we’ve seen in some other markets where the digital banks have so-called failed to some extent is that their backers or their funders don’t have that kind of patience. For example, if you’re funded by the markers or private equity firms, they want to be profitable within five years. That might not be realistic, so some of them would then have to either be acquired or close out,” Mr. Tan said.

“But for those who have been able to stay the course with a bit more patient capital, they have been able to build a more diversified customer base that is revenue generating.”

Online banks also need to focus on cybersecurity, deepening customer relationships, and building an ecosystem in their quest to be in the black, he said.

“I think the digital banks have to up their game in terms of making sure that that level of security and checks and balance are there. Otherwise, it just takes one or two incidents to basically destroy trust. Unlike traditional banks with physical channels and brand awareness, they don’t have that kind of reservoir of trust to be able to build on.”

Digital banks also have to innovate their product offerings by using data to be able to attract specific market segments, Mr. Tan added.

“I think you can’t compete with traditional banks with the same products with the same propositions. You need to diversify in terms of either the target segments that you want or being more customer-centric in terms of better leveraging data,” he said. “I think that’s important for you to be able to offer more tailored products to them.”

Digital banks could offer micro loans, investments, and micro savings products to lessen risk and increase efficiency and use digital channels to build an ecosystem to boost their market penetration, he said.

Partnering with supermarkets or telecommunication companies could also be beneficial for these banks, he added.

“Like it or not, I think there still needs to be a bit of that touch and feel. So, you can’t just exist in the cloud entirely. Having the ecosystem play, I think, is important,” Mr. Tan said.