Fitch Ratings has tagged the Philippines as having one of the “largest market potential” among major Southeast Asian markets for aspiring digital-only banks, as it has a huge unbanked population.

In a report on Thursday, the New York-based credit rating agency said banking competition would intensify in the region as virtual banks enter the market, with regulators beginning to accept applications or studying digital-bank frameworks.

Six regional markets — Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam — have become key financial-technology (fintech) investment destinations for many investors in the past few years, it noted.

“Fitch continues to believe that Indonesia and the Philippines have the largest market potential among the six major [Southeast Asian] markets for many aspiring digital-only lenders in the longer term,” the credit rater said.

Citing data from Fintech Global, a London-based market research firm, Fitch said the region attracted about $4.1 billion in fintech investments in 2019, a nearly eightfold increase from $540 million in 2016.

“In most of these markets, financial inclusion — or a lack thereof — is a driving factor for investors’ optimism,” it said, adding that about 50 percent of the region’s population of more than 580 million was unbanked.

The debt watcher believes “the Philippines and Indonesia have the largest market potential” because of “their large unbanked segment and low household leverage.”

In the Philippines, the number of unbanked Filipino adults is estimated at 51.2 million out of a total adult population of 72 million in 2019, according to a Bangko Sentral ng Pilipinas (BSP) survey.

Fitch also said the central bank’s draft guidelines for digital banks indicated that Philippine monetary authorities were “also planning to impose a similar business viability requirement and we expect neighboring countries’ regulators to also adopt a similar approach in regulating digital-only banks.”

According to the draft obtained by reporters in July, the BSP classifies a digital bank as either basic or advance.

A basic digital bank may perform any or all of the following services with retail customers and/or micro, small and medium enterprises (MSMEs): accept savings deposits, including basic deposit accounts; accept time deposits; accept foreign currency deposits; grant unsecured loans; collect and pay for the account of others; provide remittance and bills-payment services; and issue electronic money products.

An advance one may perform any or all of the following services with retail customers, MSMEs and large enterprises or other corporate clients: allowable activities for basic digital banks; grant secured loans; and issue credit cards and other activities as may be allowed by the BSP’s policymaking Monetary Board.

A digital bank shall be incorporated in the Philippines with a minimum capital requirement of P400 million for basic and P900 million for advance.

Fitch warned, however, that “the pandemic-induced economic crisis…is likely to affect digital banks’ target segments more significantly, given their generally weaker borrowers’ profile.”