Strategy Note /

Philippines: Superior access to technology makes it ripe for fintech disruption

  • The Philippines has high mobile phone penetration, good internet access and an active tech manufacturing sector

  • Coupled with low financial inclusion, this generates an attractive environment for fintechs

  • The country ranks second on our fintech attractiveness index. We expect more big-ticket funding deals this year

Philippines: Superior access to technology makes it ripe for fintech disruption
Rahul Shah
Rahul Shah

Head of Financials Equity Research

Rabail Adwani
Rohit Kumar
Tellimer Research
15 March 2022
Published byTellimer Research

The Philippines has superior access to technology versus most emerging market peers, with high mobile phone penetration (155% of the population versus 122% in EM) and internet access (82% of the population against 76% in EM). In addition, high-tech exports account for 64% of the manufactured exports, which is well above the 11% emerging markets median.

In contrast, bank account penetration in the Philippines is half of that of the emerging markets and access to ATMs and credit cards is also more limited. These metrics highlight the poor rate of financial inclusion in the Philippines. Allied to the nation's strong technical skill base, the environment seems ripe for fintech disruption.

Key financial and technological sophistication metrics

Below, we take a detailed look at the key characteristics of the local fintech ecosystem and the fintech opportunity in the Philippines.

The Philippines’ fintech ecosystem is skewed towards payments and lending

Payments and Lending fintechs together account for two-thirds of the Philippines fintechs ecosystem. Lending is the largest segment, contributing 38% of total fintechs compared to the 24% level typical of emerging markets peers. Payments is the second biggest sector with a 30% share versus 25% for EM peers. The Investech and Insurtech segments, on the other hand, have lower representation than elsewhere, although this could change in the future as fintechs diversify from their current areas of operations, and as we see consolidation in the more developed segments.

The Philippines fintech ecosystem

The Philippines’ fintech funding is breaking records but is concentrated on a few big-ticket deals

Fintech funding in the Philippines in the first half of 2021 of US$342mn was more than double the previous year (US$137mn), on account of two large late-stage transactions; GCash (US$175mn) and Voyager Innovations (US$167mn).

Although full-year 2021 numbers are not yet available, we have seen a similar trend of big-ticket deals in H2 2021, with Mynt’s US$300mn funding round making it the country’s lone fintech unicorn. Meanwhile, in February 2022, digital banking operator Tonik raised US$131mn in Series B, making for a good start to the year and suggesting the more positive big-ticket deal flow trends could continue into the remainder of the year.

Fintech funding activity in the Philippines

The payments sector is growing rapidly

There is a noticeable shift in consumer behaviour taking place, from agent-based transactions towards conducting payments via electronic money. Digital payments services, like mobile wallets, provide consumers with a convenient, affordable and secure settlement process. The number of active e-money accounts almost doubled in 2020 to 34.7mn, compared to 17.9mn in 2019 and a meagre 2.2mn in 2017. In addition, the value of digital payments transactions rose 62% in 2020 to PHP2.4tn, helped by Covid-related behavioural changes, while the 3-year CAGR (2017-20) stands at 36%. We expect this positive trajectory to have continued into 2021 and the current year.

The Philippines' electronic money statistics

Financial growth metrics are in line with EM but customer acquisition lags

Our comprehensive proprietary survey of 215 unlisted fintechs across 14 emerging markets (including 14 from the Philippines) suggests that financial metrics like revenues and operating profits for Filipino fintechs are growing broadly in line with other emerging markets. Although user growth is slower than elsewhere, average revenue per user is better.

However, we think the situation could change in the future. The Philippines has low financial inclusion and digital financial services penetration is still not strong. Therefore, with the right products and marketing activities from industry players, growth in their userbase could accelerate. As we have seen elsewhere, this could also mean that ARPUs and operating margins decline from current levels, but as these metrics could subsequently be improved (via better cross-selling and scale economies), such a scenario would likely be viewed by investors as a net positive for the sector. The improved capital inflows into certain industry players (as highlighted above) could be the catalyst for increased take-up of fintech services.

Fintech growth in the Philippines and emerging markets

Fintechs should gain the most market share in insurance, payments and lending products

We asked 900 consumers in 14 emerging markets about which types of providers were meeting their current financial services needs for different products, and which provider types they expect to use in three years. We used this data to estimate current and likely shifts in share of wallet for different types of firms.

Currently, fintechs in the Philippines have a 27% market share of the overall financial service industry, which is less than 31% for EMs. Moving forward, Philippines fintechs are expected to gain market share of around 9% points (above the average EM increase of 6%). This increase comes almost exclusively from exposure to financially-excluded customers. Note that these responses are unweighted; we think formal financial institutions would have a much higher share if our survey were value-weighted.

Financial service provider market shares in the Philippines

Over the next three years, fintechs are expected to gain market share in all 11 products which we surveyed from consumers, but the most notable gains are expected in general insurance, credit/debit card payments, and personal/vehicle loans. Currently, general insurance has the lowest market share of all products. On the other hand, market share for mutual/equity investment is expected to remain broadly flat. This suggests that there is an unmet growth opportunity in this area – only c1.3% of Filipinos invest in the stock market against the median of 2.4% in other EMs. Meanwhile, 4.0% of the Philippines population owns cryptocurrency, indicating there is a population with sufficient risk appetite and financial capacity.

Expected 3-year change in fintech market share for the Philippines

Related reading:

The ultimate guide to Philippines fintech