McKinsey report highlights urgent need for Philippine banks to embrace digital transformation or face market share erosion

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Philippine banks face the threat of losing market share to digital financial service providers if they fail to adapt, according to global management consulting firm McKinsey & Co. In an article titled “On the Verge of a Digital Banking Revolution in the Philippines,” McKinsey experts Guillaume de Gantès, Hernan Gerson, and Kristine Romano underscore the underserved potential customer base and lack of investment in digital offerings by large traditional banks in the country.

The report reveals that Philippine banks have allocated less than 10 percent of their revenues to information technology, lagging behind the average of around 15 percent in the Asia Pacific region. Moreover, the digital channels of Philippine banks contribute only five to 15 percent of their revenues, significantly below the 25 percent average for their counterparts in Asian emerging markets. McKinsey warns that incumbent banks, left unprotected from innovative competitors, must adapt swiftly to avoid a permanent loss of market share, as the traditional banking sector has already proven vulnerable to digital innovation.

Interestingly, digital financial service providers in the Philippines have performed exceptionally well during the COVID-19 pandemic, outpacing the entire banking sector in terms of creating shareholder value. Data indicates that between January 2021 and January 2023, the market value of the top three fintech firms in the Philippines increased by $3 billion, surpassing the $2.2 billion growth of the country’s traditional banks. The authors of the article further highlight that over the past two years, the combined market value of the three largest fintechs and digital banks in the Philippines exceeded that of all traditional banks combined.

According to McKinsey’s analysis, established Philippine banks have been slow to embrace the transformative aspects of digital finance. Their efforts have primarily focused on developing mobile apps for existing customers and digitizing legacy processes. However, the mounting pressure from fintech firms is now driving innovation within the traditional banking sector. For instance, Ayala-led Bank of the Philippine Islands (BPI) recently launched the Vybe e-wallet on its mobile app, offering services comparable to GCash and Maya. Similarly, Aboitiz-led Union Bank of the Philippines has introduced fully digital financial services for underbanked consumers through its UnionDigital Bank proposition.

While competition in the digital financial services sector is intensifying, the authors note that dominant players have yet to emerge outside the mobile payments subsector. While six digital banks have recently launched operations in the Philippines, none of them are currently lending at scale. The report highlights that dynamic fintech firms, such as GCash and Maya, which initially focused on payments, have expanded their services to include lending, investment, insurance, and marketplace platforms.

The authors emphasize that the way foreign firms and existing Filipino conglomerates choose to enter the fintech sector will have a significant impact on their growth and competitiveness. McKinsey points out that universal banking licenses are available to fully foreign-owned banks that meet certain criteria, including being established, reputable, financially sound, and willing to share banking technology. Additionally, both domestic and foreign banks no longer require separate licenses and are subject to the same minimum capital requirement of $55 million to obtain a universal banking license. Furthermore, the Bangko Sentral ng Pilipinas (BSP) has introduced a digital banking license in 2020 that allows for full foreign ownership, with a lower capital requirement of $19 million if the bank maintains a principal or headquarters in the Philippines.

Despite the risks, the vast greenfield market for digital finance in the Philippines presents highly attractive opportunities for expansion. McKinsey asserts that a keen awareness of the challenges facing fintech service providers will offer a critical advantage in this evolving landscape. With banking revenue expected to triple by 2030 and a low banking penetration rate of just 56 percent in the country, the need for financial services remains high. The BSP aims to raise the number of banked Filipino adults to 70 percent and shift 50 percent of total retail transactions to electronic channels by 2023 as part of its Digital Payments Transformation Roadmap.