Why 2019 will be a big year for fintech in the Philippines

Photo Credit: TheDigitalWay/Pixabay

Some of the biggest names in the Asian VC scene are flocking to the Philippines. After years of lacklustre growth, the Filipino fintech sector is undergoing a renaissance.

By Preetam Kaushik

In January 2019, the Indonesian startup giant Go-Jek acquired a majority stake in the Philippine fintech company Coins.ph. The US$72 million deal was one of the biggest in Go-Jek’s history, and a sign of its interest in the emerging Filipino digital market.

Go-Jek is not alone in its pursuit of the Philippines’ fintech market. The Indonesian unicorn is actually a straggler, having been beaten by the likes of Grab (Singapore) and Oriente (Hong Kong) who already have a robust presence in the Filipino digital payments market.

Local startups have received interest from international investors in recent years. Chinese giant Alibaba invested in Mynt, a fintech venture floated by Globe Telecom, the largest telecom operator in the country. Voyager, the fintech arm of Globe Telecom’s rival, PLDT, raised over US$175 million of funding in a round dominated by the Chinese MNC Tencent.  

The Philippines has lagged behind its neighbours in the digital startup race

In terms of gross domestic product (GDP), the country is ranked fifth in the region, just behind Malaysia and Singapore. At around 107 million, its population size is second only to Indonesia. By most common economic and demographic metrics, the Philippines is a major player in Southeast Asia.

But in the startup race, the nation has made underwhelming progress. While its neighbours have nurtured high-tech unicorns, we are yet to see a similar startup emerge from the archipelago.

The country also received only a fraction of funding in comparison to other ASEAN nations in 2018. Of the US$3.16 billion that flowed into the coffers of Southeast Asian startups in the first eight months of 2018, only around US$50 million arrived in the Philippines as VC funding.

Source: EY

By most accounts, inadequate infrastructure is to blame. Abysmal internet connectivity hampers the growth of most local startups. A combination of geography, government policies, domestic monopolies and corruption have left the country with one of the worst internet services in Asia.

Some of the challenges have no readymade solutions. For instance, with an archipelago of over 7,000 islands, getting wired broadband access across the country is a gargantuan task. Breaking the current duopoly in the telecom sector could stem the rot and usher in better connectivity, but the government has had limited success on that front.

Progress, however slow, has been made in areas like wireless networks and 4G connectivity, and more and more Filipinos have access to high-speed internet with each passing month and year.  

It a fertile ground for fintech startups

The entire ASEAN region is seen as one of the global hotspots for fintech innovation. High mobile penetration, a chronic shortage of traditional banking services, and a positive regulatory environment have all contributed to the rise of Southeast Asia as a hub for fintech startups.

In many ways, the Philippines is the perfect microcosm of the region as a whole. Its economic growth has kept pace with the rest of the region, remaining strong at an annual rate of 6.9% in 2018. And like the rest of Southeast Asia, small and medium businesses (SMEs) form the bulwark of the economy, contributing 63% of the national employment. The increased prosperity in recent decades has created a young, rapidly-expanding urban middle class.

The banking sector in the Philippines has historically failed to provide adequate coverage to the population. In 2017, only 11.5% of the population had a bank account, leaving 53 million Filipino adults without access to any kind of formal financial institution. In the business sector, less than 20% of SMEs have access to bank credit.

A predominantly cash-based economy (99% of all transactions in 2015), high internet penetration (63% in 2018), and a massive demographic of mobile users (two-thirds of the population), the Philippines is perfectly suited for innovative fintech startups and solutions.

The government has had a positive impact as well

The national banking authority, the Bangko Sentral ng Pilipinas (BSP), has played a considerable part in promoting fintech in recent years, with a regulatory sandbox approach called “Test & Learn.”

It has also pioneered a central regulatory framework for electronic payments in the Philippines, called the National Retail Payment System (NRPS). The central bank also liberalised ‘know your customer’ norms and issued various other reforms to promote banking access to the general population.

Why 2019 is shaping up to be the “year of fintech”

Since 2010, around 133 startups have forayed into the Filipino fintech scene. As we enter 2019, the domestic fintech market is maturing, with diversity spread across four verticals: digital payments, consumer lending, SME finance, and remittances. 

For the Philippines, it was never a question of “if the fintech revolution would ever gather pace,” but rather, “when?” All the factors required were already in place, much like the rest of Southeast Asia.

Infrastructural bottlenecks in the past may have stifled growth, but with increasing access to wireless 3G and 4G networks among consumers, that is no longer the case. Numerous local startups have flourished, aided by domestic capital and partnerships with bigger startups from neighbouring countries like Indonesia and Singapore.

The flurry of high-profile investments and the arrival of international VCs and regional unicorns are proof that the Filipino fintech sector is approaching maturity.

The sector rests on solid foundations with a positive and supportive regulatory authority. With vast swathes of the population still poised to enter the digital sphere, the potential for growth is immense. Some challenges remain, like the lack of digital education, the moribund state of the traditional banking industry, and the slow pace of infrastructure development. But none of this is severe enough to pose an existential threat to the Filipino fintech sector. There is far too much room for growth, and sustained demand to keep things fast-paced. It is clear the fintech sector in the Philippines is in the early throes of a new golden age.