By Zhiwen Jiao

This article was published as an op-ed in the Manila Bulletin on July 1, 2021.

Before COVID, digital finance in the Philippines was seen as “nice to have.” It is now a “must have.” As a result, digital finance providers in the country are benefitting from more promising market prospects, in an environment where demand for financial services has been amplified by the population’s low penetration of financial services.

The pandemic has been a watershed not just for the Philippine financial industry, but also globally, with mobility restrictions creating a surge in demand for contactless financial services that traditional banking alone was unable to fulfil. This situation has prompted a pivot to digital finance. Existing providers are expanding their digital offerings in response to an increase in awareness and adoption of such services by customers, and more proactive promotion of the services by the government. These changes will profoundly reshape and usher in a new era for the Philippine financial industry.

Well before the pandemic began, the Philippines was already playing host to a rapidly growing fintech industry, with the number of such companies increasing to some 200 last year from just 30 in 2016. The spectrum of financial services expanded from the usual digital payments and wallets, and lending and remittances, to other fintech verticals, such as credit scoring, alternative financing, crowd funding, investment, insurtech and crypto currencies. Meanwhile, players in the fintech industry have become more diverse, comprising not only the early leaders in the sector (telecommunication companies), but also foreign fintech firms and increasingly domestic start-ups.

Several fundamental changes will likely emerge in the Philippine financial sector, as the industry’s digital transformation process gains momentum.

Specifically, the adoption of fintech will lead to more targeted services being offered by traditional banks as they improve customer experience. These banks will not only need to upgrade their IT systems, but also restructure their operational procedures. Banks and fintech companies will compete in segments that they specialize in, and in which they have a comparative advantage. In time, the relationship between fintech companies and traditional banks will likely evolve from one of competition to collaboration to better capture the market. Different competitive advantages along the value chain of financial services can provide huge opportunities for banks and fintech companies to collaborate to offer better services to customers.

The ability to make sense of a large amount of data will also revolutionize the industry. As the example in other countries suggests, a few tech companies can quickly grow into dominant fintech players in the market; collecting and processing much more data from a larger user base compared with traditional banks. This information advantage — through artificial intelligence or machine learning technologies — can reshape the market; allowing dominant fintech companies to gain a competitive advantage over traditional companies and banks. How such data can be used will depend to a large extent on government policies.

Financial regulators will start to face new challenges that could change the operational landscape. As financial service providers broaden their scope of business and continue to innovate on their services, the demarcation between types of financial companies will become increasingly indistinguishable. Robust legal and regulatory policy frameworks will need to focus on business function rather than type of institutions. Meanwhile, differentiated regulatory policies are necessary to encourage innovations. Such policies are equally important in avoiding regulatory arbitrage. And, a new regulatory body may be needed to oversee the radical changes in the financial industry.

To effectively guard against financial risk, regulators will need to have the capacity and capability to identify, monitor and resolve risks in the digital transformation process in a timely manner. In digital finance, the very nature of financial risks may not change much, but could take on different forms and transmission characteristics. For example, crowd-funding frauds may not be systemically important, but can have major social impact. And, while the amount of money involved may not be large, such frauds can potentially involve many people. Because the industry is rapidly evolving, some risks cannot be identified beforehand. Consequently, it is critically important for financial regulators to closely engage with the industry and continuously upgrade their knowledge and understanding of evolving and new technologies.

The COVID-19 pandemic has undoubtedly quickened the financial digitalization trend in the Philippines. Such changes are likely to continue and even speed up when the pandemic is over. Efforts made in improving the policy frameworks and infrastructures will mitigate risks, and the growing awareness of the public to digital financial services will significantly improve market readiness for the mass deployment of fintech applications. Embracing the rapid digital transformation process will help drive financial inclusiveness, improve user experience, and deliver benefits — such as convenience and efficiency — to everyone in the country.