VIRTUAL BANKING in emerging markets (EM) is seen to pick up as large unbanked populations and greater adoption of technologies present opportunities for the success of digital banks, S&P Global Ratings said.
In a report titled “The Future Of Banking: Virtual Banks Chase The Dream In Asia-Pacific,” the global debt watcher said the underbanked population in EMs is a key factor in driving the growth of digital banking in the region.
“Primarily a factor in emerging markets, virtual banking facilitates the introduction of simple banking products through accessible means other than branches,” S&P said in the report published Tuesday.
“Emerging market nations in Asia-Pacific are home to vast numbers of ‘underbanked’ customers, which provides opportunities for virtual banks to gain a foothold and scale up their business models,” it added.
In the case of the Philippines, only 22.6% or some 15.8 million Filipino adults maintain formal bank accounts, citing the lack of money and of the need to have an account as the main reasons, according to the latest Financial Inclusion Survey conducted by the Bangko Sentral ng Pilipinas in 2017.
S&P added that current and future trends affecting demographics, urbanization and customer behavior across the region are “supportive” of digital banking.
“A young demographic pool, greater openness toward adopting new and innovative technologies in banking services — especially in China — and increasing consumerism provide tailwinds for the success of virtual banks.”
Dutch financial firm ING Bank N.V. and Malaysian lender CIMB Bank both entered the local retail banking industry earlier this year as all-digital banks, offering saving accounts with high interest rates and without maintaining balance.
In CIMB’s case, S&P said it debuted in the local market as digital-only arm and partnered with 8,000 convenience stores to serve as cash agents.
On the other hand, virtual banking puts forward an opportunity in developed markets to “provide customers with greater banking convenience at a lower cost,” it said.
“From a government standpoint, there is an interest in providing customers with cheaper, more competitive basic banking services in markets that small numbers of large and well-established traditional banks typically dominate,” S&P said.
The credit rater believes that big banks with large and well-established client bases and greater resources can better weather possible competition from digital banks compared with the smaller banks.
However, smaller lenders are expected to partner with technology firms to “rise up the digital learning curve,” it said.
S&P said virtual banking “may not lead to rating or outlook changes” for lenders in Asia-Pacific over the net two years. However, ratings differentiation is “greater” over the long term as digital banking strategies take hold and disrupt the traditional banking segment. — Karl Angelo N. Vidal