Digital banks can give the ailing economy a boost, as these allow financing to be more accessible to borrowers seeking to rebuild business or plug budget leaks.

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With the great shift to digital amid lockdown restrictions, even the financial service providers are prompted to accelerate online banking product developments to meet the growing demand among clients, including providing loans.

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CredoLab Pte. Ltd. founder and CEO Peter Barcak said in an e-mail interview with the BusinessMirror that digital banks or the so-called neobanks can indeed improve access to loans. The new normal, he said, has made it clear that traditional bank offerings were needed to be digitally transformed.

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“With the rise of neobanks, users can do all these [banking transactions] and more from the safety of their own homes through a smartphone or laptop,” Barcak said.

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“Neobanks have also built processes that cut down on wait times and friction, vastly improving customer experience and influencing faster credit decisions through state-of-the-art technology,” he added.

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Digital loan application means that borrowers can secure financing anytime and anywhere, RCBC Chief Economist Michael L. Ricafort said, and this promotes financial inclusion, especially for clients in rural and far-flung areas.

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It effectively minimizes the need for person-to-person transactions amid social-distancing measures and health protocols, he noted.

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Ricafort, however, stressed that digital initiatives “have already been in place even before the Covid-19 pandemic, not only locally, but also worldwide, as part of efforts to reduce cost-to-income ratio of banks and other financial institutions.” Digital banking was given more emphasis this time due to the changing needs, he explained.

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While digital banks allow transactions to be accomplished online, ING Bank Manila Economist Nicholas Antonio T. Mapa argued that some parts of the loan processing may need to be done face to face.

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“I do believe that in the end, submission of documents and signing of important paperwork may need to still be carried out in person, but at least the bulk of the transaction can be carried out virtually,” he said.

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Evaluating credit worthiness

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Before getting loan approval, financial institutions look over the borrower’s credit history, which may not always be available.

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Digital banks, Barcak said, can provide loans to the underbanked and underserved segment despite having minimal or nonexisting credit score.

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The neobanks can do this by incorporating alternative credit scoring technology, which uses smartphone metadata to determine creditworthiness, Barcak explained.

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“Such an approach is genuine and difficult to fabricate, and would give more Filipinos access to loans to better their businesses and lives,” he added.

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This might also be ideal for the Philippines given its high mobile penetration, Barcak pointed out.

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Ricafort said knowing the credit information of borrowers allows the banks to reduce and better manage the lending risks involved.

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Lower fees

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Given that digital banks have different business models, they may be able to package their loan products with lower rates, Barcak said.

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“Without physical branches, neobanks also offer transparent and lower fees compared to traditional banks,” he explained.

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With this, the CredoLab official said small business owners, students and young adults are given more opportunities to secure financing.

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However, Mapa said digital banks may not be able to offer a more affordable lending rate all the time.

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“Although there would be no clear-cut delineation in pricing, digital banks may find a way to offer more attractive rates than brick-and-mortar branches, but…this is not always the case,” he explained.

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Currently, the overnight reverse purchase facility stands at 2 percent after the Bangko Sentral ng Pilipinas (BSP) cut the policy rates by a total of 200 basis points last year.

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Financing recovery

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For Alvin Joseph Arogo, vice president and head of research at Philippine National Bank (PNB), extending credit—especially to micro, small and medium enterprises (MSMEs)—in an economic crisis is vital for recovery.

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“During an economic crisis, access to credit is very important for companies as this would help businesses adjust to the changing environment,” he told this newspaper.

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Securing additional financing may also ensure that MSMEs continue operating and avoid laying off employees during this crisis, Ricafort said.

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Arogo noted that financing MSMEs would help ease the current situation because they account for a significant portion of the economy.

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Citing the United Nations Development Program, the PNB economist said MSMEs provide 63 percent of the local employment and comprise about 40 percent of the country’s gross domestic product.

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Mapa, meanwhile, said that “financing at a time of crisis can help businesses and households survive the crisis as most cash flows have been frozen with the economic recession.”

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Digital banking in PHL

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In November last year, the Central Bank approved the classification of digital banks as a new bank category, separate and distinct from existing categories.

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The BSP defined it as a bank that offers financial products and services that are processed end-to-end via a digital channel and has no physical branches.

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“We see these banks as additional partners in further promoting market efficiencies and expanding access of Filipinos to a broad range of financial services,” BSP Governor Benjamin E. Diokno said in an earlier statement.

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The Central Bank is eyeing to shift at least 50 percent of the total retail payment transactions to digital and make 70 percent of adult Filipinos financially included by 2023.

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In the Philippines, the known all-digital banks include CIMB Bank Philippines and ING Bank Philippines.

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CIMB reported that digital personal loan applications grew by 160 percent last year as loan disbursements improved by sixfold, thanks to its all-digital loan application process. ING, meanwhile, is preparing its loan products, which are eyed to be launched this year.

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Last year, East West Banking Corp. also introduced a fully digital banking arm, Komo, operating under its rural banking subsidiary.

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Tonik Financial Pte Ltd., meanwhile, is set to introduce its new mobile banking platform by the first quarter of this year. The neobank received its license from BSP in December 2019.

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Shift to digital

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Traditional banks have been keen on their digital transformation amid the changing banking needs of the clients. Several financial institutions have launched mobile digital platforms, allowing their clients to accomplish banking transactions at home.

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Among these big conventional banks, however, only Union Bank of the Philippines has expressed interest in potentially opening a digital banking subsidiary so far, apart from EastWest.

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“There have been discussions among management about this [digital bank], but nothing substantial to disclose yet so far,” UnionBank said in a recent interview with the BusinessMirror.

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“The plan is for it to be a digital mass market bank for financial inclusion and extend financial services to ecosystems that are largely untapped by the banks today—providing them access to digital channels, online payments, remittances, e-commerce, access to digital lending, etc., that would typically be costly for a regular bank,” it added.

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Should it pursue the plan, the Aboitiz-led bank said it has the capital to back up the venture.

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For Bank of the Philippine Islands, its outgoing president Cezar P. Consing told this newspaper that the bank is prioritizing to enhance its current digital offering.

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“At the present time our focus is on the continued digitalization of the bank, as opposed to the setting up of a stand-alone digital bank,” he said.

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BDO Unibank Inc. shared the same sentiment.

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Changing the game

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Overall, Barcak said that digital banks can make securing loans simpler and more efficient.

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“In the long run, neobanks can also increase competition across the industry, challenging traditional banks to accelerate their digital transformation plans,” he said.

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Leveraging technology, Barcak said, can ultimately provide better loan options and customer experience.

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The ING economist agreed that digital banks have prompted the traditional banks to step up their game.

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“I think the presence of digital banks has pushed the traditional players to adapt to the technological times, which will help broaden its scope and reach with access improved via virtual applications,” he said.  “The incentive for brick-and-mortar banks was apparent as they moved to shift towards online platforms, at least partially.

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Article originally published in Business Mirror.