By Beting Laygo Dolor, Contributing Editor

The Philippine banking industry is about to enter a new phase after the Bangko Sentral ng Pilipinas (BSP) announced last week that purely digital banks will be allowed to operate in the country.

The BSP’s Monetary Board (MB) officially recognized “digital banks” as a new category in banking. This is in line with the Board’s Digital Payments Transformation Roadmap that seeks to streamline financial technology in the Philippines.

The new banks will, however, have to follow the same level of prudent controls and risk mitigation measures as their physical counterparts.

According to BSP Gov. Benjamin Diokno, “Digital banks will play an important role in the digital financial ecosystem. We see these banks as additional partners in further promoting market efficiencies and expanding access of Filipinos to a broad range of financial services, bringing us closer to the realization of our target of at least 50 percent of total retail payment transactions (shifting) to digital, and 70 percent of adult Filipinos (having) transaction accounts by year 2023.”

By definition, a digital bank is a bank that offers products and services that are processed end-to-end via a digital platform and/or electronic channel with no physical branches.

Such a bank exists only in cyberspace.

Although digital banks will not have a physical presence like conventional banks, they are still exposed to the same financial risks with potential heightened exposure to cybersecurity and money laundering risks, said the BSP.

Because of the shared risks, the BSP said that “digital banks would be subject to the same prudential requirements applicable to other types of banks with recalibration to be commensurate to their business model and risk profile.”

Under the BSP’s new framework, digital banks are supposed to maintain a principal place of business in the country despite the absence of branches. This physical headquarters should house the offices of and other support operations and serve as the main hub for the handling of customer concerns, as well as act as the point of contact for stakeholders, including the central bank and other government regulators.

The new digital banks are also allowed to hire cash agents and other qualified service providers subject to existing regulations to complement the innovative delivery of financial services.

In anticipation of the arrival of local as well as foreign players, the BSP is now crafting the regulatory framework for digital banks. The MB has the option to regulate the entry of new players in the market.

The BSP governor sits at the helm of the MB, the country’s highest monetary policy-making body.

According to Diokno, the MB is set to limit the number of new players since almost all the country’s commercial banks are expected to join the fray, as well as global banks which may want to establish a presence in the country.

He said the new digital banks should have “strong value proposition, sufficient financial strength, technical expertise of management and effective risk management.”

Interest in setting up digital banks is expected to be strong in light of the coronavirus pandemic which forced consumers to switch to digital banking, whenever possible. Filipino consumers took to digital banking with little resistance.

Foreign players, however, are likely to adopt a wait-and-see attitude to see how the market reacts to banks with no physical presence.

Also, foreign banks will want to see if there is a market for their  services in the Philippines. During the time of the late President Cory Aquino, the old Central Bank was reorganized and the banking industry was liberalized, resulting in foreign banks setting up local operations.

That experiment proved to be a failure with all the foreign banks that came in eventually disposing of their assets and leaving the country. They could not compete with the local banks which were seen as better equipped to handle the funds of consumers.