The Bangko Sentral ng Pilipinas (BSP) removed the suspension on new digital banking licenses this year, permitting 10 digital banks to function within the nation. This suggests that it will allocate four available positions for both new and existing entities if they fulfill the BSP’s criteria.
This aligns with the central bank’s objective to leverage the capabilities of these banks in creating a beneficial effect on the financial system while taking into account possible hazards.
“Prospective digital bank applicants will be subject to a comprehensive licensing evaluation that will examine their value proposition, business frameworks, and resource capacities,” the BSP stated in a declaration.
It reaffirmed that this adheres to the standard licensing standards, which encompass the evaluation of the banks’ ownership and governance structure, suitability of stakeholders, qualifications and propriety of executives and senior management, capital adequacy, as well as the banks’ strategic and operational plan, including an appropriate system of corporate governance and risk management.
The BSP mentioned in an email that its digitalization initiative encompasses not only conventional banks but also rural banks.
In light of this, the initiative will motivate clients to better serve them by providing online access to services alongside their physical banking activities.
Thanks to BSP’s Rural Bank Strengthening Program (RBSP), alongside the efforts of the rural banks themselves, the rural banking sector in the nation remains robust and stable, stated Rural Bankers Association of the Philippines (RBAP) Executive Director Rafael Francisco D. Amparo in an email.
Introduced in 2022 by the central bank, the RBSP is a systematic initiative designed to enhance the rural banking environment to deliver superior services to rural regions.
Among those anticipated to apply for digital bank licenses are fintech companies that have entered the market through rural banks.
In the past, various rural banks have served as a gateway for foreign fintech companies to establish digitally focused financial institutions.
Among these are Singaporean-based consumer internet firm Sea Ltd. and Streetcorner Group, a collaboration between Indonesia-based fintech entity Akulaku and nonlife insurer Metropolitan Insurance Co., Inc.
Sea, which owns the e-commerce platform Shopee, acquired Banco Laguna, Inc. in 2020 and subsequently launched its digital banking app, SeaBank, in June 2022.
Conversely, Streetcorner Group initiated the digital progress of Rural Bank of Cavite City, Inc. and unveiled OwnBank in June 2022.
“We believe that these rural banks transitioning into digital banks were always intended to be digital banks in the first place,” remarked RBAP’s Mr. Amparo.
He stressed that these banks’ foreign fintech investors acknowledged the suitability of acquiring rural banks as an entry strategy and subsequently enhancing digital capabilities until attaining maturity as a digital bank.
He indicated that digitalization has provided rural bank clients with quick and convenient services while noting that caution should be exercised to manage the vulnerabilities that digitalization may inadvertently create.
BE COMPLIANT
The central bank acknowledges this significance, along with the contributions made by foreign investors to propel growth in the financial system.
Nonetheless, it maintains its stance: rural banks transitioning to digital banks must comply with regulatory stipulations and upgrade their licenses.
“No bank should operate as a digital bank with a rural banking license unless they convert their license to a digital banking license,” the BSP stated in an email.
“Some of these investors have purchased a few rural banks to transform them into digital banking platforms. While new investments are a favorable development, it requires careful evaluation due to potential regulatory and financial risks,” the BSP stated.
“While we do not identify significant risk at this juncture, we want to avoid digital banks being formed via the ‘backdoor,’ or functioning under rural banking regulations,” it added.
“If a rural bank operates like a digital bank, then it must adhere to the necessary capital and other regulatory requirements for a digital bank,” the central bank remarked.
The BSP further emphasized that foreign entities must comprehend the local financial landscape to manage risks effectively.
The new technology, it mentioned, would assist rural banks in becoming more resilient, enhancing operations, and allowing them to provide better financial products and services to their original market through a broader distribution framework.
It is a positive development for rural banks to transition towards digitalization; however, adherence to regulatory requirements should be taken into account.
There are potential risks if they do not satisfy the stipulations set forth by the central bank.
According to the BSP, rural banks that evolve into digital banks will face heightened capital and prudential requirements but will be provided with a transition period to comply, and the central bank will closely monitor their progress and ensure timely regulatory interventions.
The BSP stated that complying with the increased capital requirements and specific regulations are among the principal measures rural banks should follow.
Rural banks transitioning to digital banks must maintain a minimum capital of P1 billion, according to the BSP Circular No.1154.
Moreover, the BSP will implement targeted supervisory measures for thrift, rural, and cooperative banks converting to digital banks or digitalizing their operations, establishing key metrics to assess their digital activities.
These measures will encompass regulatory requirements regarding capitalization, prudential ratios, and governance.
“Ultimately, these digital banks will be supervised based on their risk profile and activities,” stated the central bank.
NEOBANKS
In addition to digital banks, another unconventional financial entity has been acquiring rural banks — the neobanks.
Neobanks are digital-only financial intermediaries that function via applications and websites, yet provide services and operations akin to banks (or, in this case, rural banks).
RBAP’s Mr. Amparo previously stated that neobanks represent the “path forward” for rural banks.
Netbank (A Rural Bank), Inc., (Netbank), which was previously called Community Rural Bank of Romblon (Romblon), Inc., is functioning as a neobank while holding a rural banking license.
Established in 2019 by Gus Poston and David Paulo Dela Paz, it became the nation’s first banking-as-a-service platform, designed to assist other fintech firms in providing financial offerings.
“[Netbank] does not possess a digital bank license but functions as a completely digital-centric financial institution, classified as a neobank,” said Netbank Executive Director and Head of Branch operations Alexandra Q. De Chavez in an e-mail.
“The Bank intends to uphold its rural banking license, leveraging its established regulatory compliance and service provisions through the previously acquired EPFS (Electronic Payment and Financial Services) and EMI (Electronic Money Issuer) licenses,” Ms. De Chavez mentioned.
Salmon, officially known as the Rural Bank of Sta. Rosa Laguna, Inc., is another neobank operating under a rural banking license.
This neobank was founded by Pavel Fedorov, George Chesakov, and Raffy Montemayor, and its offerings include buy now, pay later credit products, along with high-yield deposits.
It acquired 59.7% of the rural bank in 2024.
Raffy Montemayor, Salmon’s chairman, pointed out that unlike digital banks, Salmon is “a contemporary bank with ATMs, other forms of physical presence, and customer engagements conducted offline, online, and everything in between.”
Mr. Montemayor further noted that Salmon intends to transition to a thrift bank license, subject to BSP’s authorization, which will enhance its footprint in the country via various avenues and a capital base that exceeds that of most digital banks.
“In contrast to digital banks, we will merge physical branches with top-notch technology solutions, ensuring customer access both offline and online,” he stated in an e-mail.
‘COOPETITION’
Should rural banks transform into digital banks, it implies they will encounter elevated capital and prudential demands. The BSP indicated that it will oversee these banks’ advancement and guarantee timely regulatory interventions.
“Rural banks need to evaluate the financial, technological, and operational resources essential for digital transformation,” stated the BSP.
This encompasses acquiring technological infrastructure and innovations such as cloud-based core banking systems, cybersecurity measures, and fraud prevention tools.
The central bank also emphasized that management and personnel should cultivate the technical skills necessary for effective digital evolution.
“Digitalization presents distinctive challenges for the entire financial ecosystem,” remarked RBAP’s Mr. Amparo. “We are optimistic that the rural banking sector, along with the entire banking industry, can convert these risks into chances for partnership and collaboration.”
For its part, the central bank perceives digital banks as crucial catalysts of financial inclusion that offer innovative financial solutions.
“With the emergence of digital-centric rural banks, the BSP foresees a ‘coopetition’ dynamic amongst these institutions, benefiting all parties involved,” stated the central bank. — AMPY with KHH
