Slow but steady gains: The saga of Filipino fintech in 2020

Manila by nightPhoto:Sumarie Slabber

The Filipino fintech scene is poised for steady growth in 2020.

By Preetam Kaushik

Spurred by the relentless advances in digital technology, fintech has achieved spectacular growth across the world in the last few years. The Asia-Pacific, and particularly the ASEAN region, has emerged as a hotspot for innovation in this exciting new field.

Representing one-sixth of the entire regional population, the Philippines is an alluring market for Southeast Asian fintech firms. But instead of impressive growth and rapid advancement, Filipino fintech story has been of slow but steady traction.

Filipino fintech has had some memorable 2019 and early 2020 moments

The last 12 months have seen fintech startups in the country take some significant strides. 2019 kicked off with the news that Coins.ph, a homegrown mobile wallet, had been acquired by regional unicorn Go-Jek for S$100 million (US$72 million).

In September 2019, Manila-based payments processing startup PayMongo became the first Filipino startup to get seed funding from Y-Combinator, the US-based incubator.

January 2020 was a watershed moment in Philippine fintech, with the launch of Tonik, the market’s first-ever digital bank. The Singapore-based startup was issued the country’s first digital-banking license from the Bangko Sentral ng Pilipinas (BSP). Its issuing was a clear indicator of institutional support from the country’s central financial regulator.

The fintech fundamentals are strong (for the most part)

The BSP has ambitious plans to increase the national adoption of online payments by 30% in 2020. But to fulfil this vision of a cashless Filipino economy, the country needs a mature fintech landscape.

The untapped potential of digital payments in the Philippines

There are several favourable factors that point to an imminent uptick in the adoption of cashless payments. For starters, the Filipino population is very young, with an average age of just 25.7 years. They are also among the most digitally active in the world, spending around 10 hours a day online.

This young, tech-savvy population is also doing more and more of their economic activities online. In 2019, the Filipino e-commerce market grew to over US$1 billion in size, with a CAGR of 10%. 

The number of online shoppers in the Philippines

Combine those metrics with low levels of banking penetration—just 23% in 2018 according to BSP figures—and you have a cocktail for explosive growth in alternative payments and credit models.

Online payments, consumer lending, SME credit, and foreign remittances are the key growth areas for Southeast Asian fintech players, and the Philippines is fertile ground.

There is a dearth of funding in the Filipino startup scene

PayMongo received a total seed funding of S$3.77 million (US$ 2.7 million) as part of its Y-Combinator deal. According to Crunchbase, Filipino startups have secured a combined US$400 million in funding. But that is just a fraction of the US$5 billion hauled in by fintech startups across the entire Asia-Pacific region.

It is not as if the fintech landscape in the country is devoid of any noticeable activity. In 2019, a report from Startup Genome ranked Manila as one of the most fintech-friendly cities in the world.

However, Manila is a teeming modern metropolis with an urban population of 1.7 million. It does not represent the entire country, especially in terms of development, infrastructure, communications, and accessibility. Herein lies one of the key hurdles slowing down fintech growth in the country.

Digital infrastructure, though improved, continues to be a major funding bottleneck

Apart from Manila and a few major urban centres, the rest of the Philippines is scattered across an archipelago of over 7,000 islands. Much of the country is undeveloped or underdeveloped, with limited access and communications networks.

This is a key characteristic it shares with its ASEAN neighbour: Indonesia. The pair rank well below their Southeast Asian counterparts in global internet speed rankings, both in broadband and mobile speeds.

But things are changing. Average connection speeds have almost tripled, from 7.9 Mbits in 2016 to nearly 20 Mbits in 2019. The country also became the first ASEAN nation to launch 5G services last year. While that is largely a symbolic gesture, given the relative lack of 5G-enabled devices in the market, the country’s 5G capabilities could give the country a regional head start as the next generation of communication technology becomes ubiquitous in the next few years.

There is ample cause for cautious optimism in Filipino fintech

Trumpeting about the coming of an “inflection point” in Filipino fintech has become something of an annual ritual. While that inflection point has failed to materialize so far, there is enough change on the ground to be optimistic.

The Philippine economy is growing in step with the rest of Southeast Asia and the government is keen to leverage fintech technology to aid financial inclusion, cashless payments, and e-commerce growth.

The Innovative Startup Act, signed into law by President Rodrigo Duterte in 2019, makes it easier for Filipino entrepreneurs and foreign “startup enablers” (investors and VCs) to convert their ideas into working businesses—a clear sign that the government is willing to provide legislative support for fledgeling startups.

The BSP has employed a flexible sandbox-style “Test and Learn” approach to regulating startups that work in traditionally conservative realms of finance and banking, with some degree of success. The transformative potential of fintech in the Philippines will continue to bring positive changes to the digital payment and lending sectors. Though it may still be several years away from explosive growth, and ongoing global uncertainties around the US-China trade war and the impact of the Covid-19 virus infection are doing nothing to hasten the digital finance revolution, slow and steady development is actually a very good prognosis.