Recognising the need to foster fintech innovation to achieve financial inclusion goals, regulators in the Philippines are laying the groundwork for digital financial services and digital-first business models, introducing new digital banking licenses, creating a real-time payments system, and establishing a standardized QR code payment network.

This conducive environment is fueling innovation in financial sector with digital startups proliferating, traditional banks investing in their digital offerings, and foreign banks and fintech service providers expanding their presence in the country.

A new report by McKinsey and Company delves into the digital banking opportunity in the Philippines, exploring the key factors driving the trend.

According to the report, digital banking in the Philippines is poised for growth, owing to the convergence of economic, demographic, and technological factors that is driving demand for digital financial services.

The country’s gross domestic product (GDP) is projected to grow at a rate of 6-7% annually, and per capita GDP is expected to increase by approximately 55% in the next eight years. As a result of sustained economic expansion, a significant number of previously underprivileged Filipinos have entered the middle class and now have higher purchasing power.

At the same time, the Philippines has one of the highest population growth rates globally, with the bankable population expected to rise by 30% from 65 million in 2022 to 85 million by 2030. This growth is fueled by a young and tech-savvy consumer base that is driving the demand for innovative financial services.

Amid rising demand for financial services, banking revenue is rising at a compound annual growth rate of 9-10%, and banking revenue pools are set to triple by 2030. However, the country’s banking penetration rate remains at just 56%, a figure that’s remarkably low compared with other emerging markets and which showcases the enormous unmet demand for financial services and growth prospect.

The Philippines has set out the ambitious target of 70% banking penetration by 2030, and to attract foreign players, authorities have relaxed limits on foreign ownership, national hiring quotas, and data localization requirements.

The central bank has also introduced a digital banking framework, granting a license to six entities. So far, these entities have been successful, performing especially well during the COVID-19 pandemic by creating more shareholder value than the entire banking sector,

The McKinsey and Company report shows that between January 2021 and January 2023, the market value of the country’s traditional banks increased by US$2.2 billion, while the total market value of the top three fintech firms rose by US$3 billion.

The Philippines’ fintech sector has risen rapidly over the past years, growing from just 115 fintech companies in 2017 to 212 in December 2020, or an increase of about 46%, a new report by the Philippine Institute for Development Studies says. Most of these fintech companies are involved in payments, lending, e-wallets, remittances and e-commerce.

German market data and statistics platform Statista predicts that the country’s fintech industry will continue to grow from a sustained interest in digital financial services, improved cybersecurity, and widespread financial literacy among its population.

The industry’s largest segment this year will be digital investment, Statista predicts, with a projected total transaction value of US$250.5 million. The digital assets market is expected to witness considerable growth, recording a revenue increase of 32.7% in 2024. Finally, the digital payments market is projected to see its number of users reach 60.53 million by 2027.

While several foreign players have started expanding to the Philippines to tap into the market opportunity, major mobile wallets such as Apple Pay and Google Wallets have yet to launch in the country. In Southeast Asia, Apple Pay is only available in Malaysia and Singapore. Google Wallet, meanwhile, launched in Vietnam, Thailand, Malaysia and Singapore last year.

Featured image credit: Edited from Freepik