The Bangko Sentral ng Pilipinas (BSP) lifted the moratorium on recent digital banking licenses this 12 months, allowing 10 digital banks to operate within the country. Which means it should grant 4 available slots for brand new and existing players if it meets the BSP’s requirements.
This aligned with the central bank’s goal to harness the potential of those banks in bringing positive impact to the economic system while remaining considerate to possible risks.
“Recent digital bank applicants might be subjected to a rigorous licensing process that may look into their value proposition, business models, and resources capabilities,” the BSP said in a statement.
It reiterated that this follows the usual licensing criteria which incorporates the assessment of the banks’ ownership and control structure, suitability of shareholders, fitness and propriety of directors and senior management, adequacy of capital, in addition to banks’ strategic and operating plan, including an appropriate system of corporate governance and risk management.
The BSP said in an e-mail that its digitalization agenda includes not only traditional banks but additionally rural banks.
Given this, the agenda will encourage customers to raised serve them by making services accessible online on the back of their brick-and-mortar banking operations.
Because of BSP’s Rural Bank Strengthening Program (RBSP), coupled with the initiatives of rural banks’ themselves, the agricultural banking system within the country stays strong and stable, Rural Bankers Association of the Philippines (RBAP) Executive Director Rafael Francisco D. Amparo said in an e-mail.
Launched in 2022 by the central bank, the RBSP is a structured program which goals to strengthen the agricultural banking landscape to supply higher services to rural areas.
Amongst those expected to use for digital bank licenses are financial technology (fintech) corporations that entered the market through rural banks.
Previously, several rural banks have been used as an entry point for foreign fintech corporations to ascertain digicentric financial institutions.
Amongst these are Singaporean-based consumer web company Sea Ltd. and Streetcorner Group, an association between Indonesia-based fintech company Akulaku and nonlife insurer Metropolitan Insurance Co., Inc.
Sea, which owns the e-commerce platform Shopee, acquired Banco Laguna, Inc. in 2020 and afterward launched its digital banking app SeaBank in June 2022.
Alternatively, Streetcorner Group began the digital transformation of Rural Bank of Cavite City, Inc. and launched OwnBank in June 2022.
“We imagine that these rural banks that transitioned to digital banks were all the time meant to be digital banks in the primary place,” RBAP’s Mr. Amparo said.
He emphasized that these banks’ foreign fintech shareholders recognized the appropriateness of acquiring rural banks as an entry strategy after which developing digital capabilities until reaching maturity as a digital bank.
He said that digitalization provided rural bank clients fast and convenient services to rural bank clients and noted that utmost care must be observed to administer the vulnerabilities that digitalization inadvertently opens.
BE COMPLIANT
The central bank recognizes this value, and the contribution foreign investors usher in to drive growth within the economic system.
Nevertheless, it still stands their ground: rural banks operating as digital banks should comply with regulatory requirements and upgrade their licenses.
“No bank should be operating as a digital bank using a rural banking license unless they convert their license to a digital banking license,” the BSP said in an e-mail.
“A few of these investors have bought a number of rural banks to convert them into digital banking platforms. While recent investment is a positive development, it requires careful assessment resulting from potential regulatory and financial risks,” the BSP said.
“While we don’t see material risk at this point, we don’t want digital banks created via the ‘backdoor,’ or operating under rural banking regulations,” it added.
“If a rural bank is acting like a digital bank, then it should comply with the suitable capital and other regulatory requirements for a digital bank,” the central bank said.
The BSP also emphasized that foreign entities must understand the local financial landscape to administer risks effectively.
The brand new technology, it said, would help rural banks grow to be more resilient, improve operations, and enable them to supply higher financial services and products to their original market through more distribution channels.
It’s a great move that rural banks are shifting towards digitalization, nevertheless, adherence to regulatory compliances must be considered.
There are possible risks in the event that they fail to satisfy the necessities set by the central bank.
Based on the BSP, rural bank turned digital banks will face higher capital and prudential requirements but might be given a transition period to comply and the central bank will closely monitor its progress and ensure timely regulatory interventions.
The BSP said that complying with the upper capital requirements and specific regulations are among the many important measures rural banks should adhere to.
Rural banks-turned-digital banks must maintain a minimum capital of P1 billion, under the BSP Circular No.1154.
Moreover, the BSP will apply targeted supervisory actions to thrift, rural, and cooperative banks converting to digital banks or digitalizing their operations, setting key indicators to evaluate their digital operations.
These measures will include regulatory requirements on capitalization, prudential ratios, and governance.
“Ultimately, these digital banks might be supervised based on their risk profile and activities,” the central bank said.
NEOBANKS
Other than digital banks, one other nontraditional financial entity has been gobbling up rural banks — the neobanks.
Neobanks are a digital-only financial intermediaries that operates through applications and web sites but still offer services and operations just like banks (or on this case, rural banks).
RBAP’s Mr. Amparo earlier said that neobanks are the “way forward” for the agricultural banks.
Netbank (A Rural Bank), Inc., (Netbank), formerly Community Rural Bank of Romblon (Romblon), Inc., is working as a neobank but with rural banking license.
Founded in 2019 by Gus Poston and David Paulo Dela Paz, it was the primary banking-as-a-service platform within the country, which goals to assist other fintech corporations offer financial products.
“[Netbank] doesn’t hold a digital bank license but operates as a completely digital-focused financial institution, categorized as a neobank,” Netbank Executive Director and Head of Branch operations Alexandra Q. De Chavez said in an e-mail.
“The Bank plans to retain its rural banking license, utilizing its existing regulatory compliance and repair offerings through the previously secured EPFS (Electronic Payment and Financial Services) and EMI (Electronic Money Issuer) licenses,” Ms. De Chavez said.
Salmon, also referred to as the Rural Bank of Sta. Rosa Laguna, Inc., is one other neobank operating under a rural bank license.
The neobank was founded by Pavel Fedorov, George Chesakov, and Raffy Montemayor and its services include buy now, pay later credit products, in addition to high-interest rate deposits.
It bought 59.7% of the agricultural bank in 2024.
Salmon’s chairman, Raffy Montemayor, explained that compared with digital bank, Salmon is “a contemporary bank with ATMs, and other forms of physical presence and with customer interactions held offline, online, and every part in between.”
Mr. Montemayor added that Salmon plans to upgrade to a thrift bank license subject to BSP’s approval which can construct its presence within the country through various channels and a capital base greater than what most digital banks have.
“Unlike digital banks, we are going to mix physical branches with best-in-class technology solutions, ensuring access to customers each offline and online,” he said in an e-mail.
‘COOPETITION’
If rural banks will convert to digital banks, then it meant that it might face higher capital and prudential requirements. The BSP said that it should monitor these banks’ progress and ensure timely regulatory interventions.
“Rural banks should assess the financial, technological, and operational resources needed for digitalization,” BSP said.
This includes acquiring tech infrastructure and innovations like cloud-based core banking systems, cybersecurity, and fraud management tools.
The central bank also added that management and staff should construct the technical expertise crucial for successful digital transformation.
“Digitalization creates unique challenges for your entire economic system,” RBAP’s Mr. Amparo said. “We’re confident that the agricultural banking industry and your entire banking industry for that matter can turn these threats into opportunities for cooperation and collaboration.”
For its part, the central bank sees digital banks as key drivers of economic inclusion contributing modern financial solutions.
“With the rise of digital-focused rural banks, the BSP anticipates a ‘coopetition’ dynamic amongst these institutions, benefiting all stakeholders,” the central bank said. — AMPY with KHH
