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China's fintechs see rural bank gateway to Philippine e-payments

Central bank head Diokno says he welcomes new entrants

MANILA -- Chinese investors are looking to snap up rural banks in the Philippines as a low-cost way to enter the country's growing e-payments market.

Armando B. Bonifacio, president of the Rural Bankers Association of the Philippines, confirmed that several Chinese financial technology companies had already expressed interest, especially in those banks with an electronic money issuer license from the Philippine central bank.

"Some tech companies are very much willing to invest in rural banks,'' Bonifacio told the Nikkei Asian Review.

Bangko Sentral ng Pilipinas rules state that EMI applicants must have at least 100 million pesos ($5.2 million) in capital to receive a license. "You can do away with that by acquiring a financial institution, which in most cases are more affordable, especially rural banks," Bonifacio said.

The move to open up the Philippines' financial payments system to Chinese fintech companies highlights how President Rodrigo Duterte's diplomatic pivot to Beijing is transforming the country's economy. Chinese tech giants Tencent and Alibaba have already established a presence in the Philippines' online payments sector.

At least one rural bank with an EMI license confirmed that it has been in talks with potential foreign investors, including Chinese fintech companies, for more than two weeks. "They sent out teasers, but it's too premature to announce anything," a source at the bank said.

The central bank has so far granted e-money licenses to 31 lenders, including four rural banks: Cebuana Lhuillier Rural Bank, CARD Bank, Dungganon Bank and Binangonan Rural Bank.

Under the country's liberalized banking laws, foreign companies are allowed full ownership of Philippine financial institutions.

"The entry of foreign investors in banks would contribute to the promotion of a healthy competition in the banking industry, resulting in greater market penetration and more efficient delivery of financial products and services," said Benjamin Diokno, the central bank governor.

Diokno said any foreign investors, including Chinese nationals, would undergo a thorough assessment to ensure they have the financial capability to run a bank and to comply with the country's anti-money-laundering rules.

Last year China's Tencent Holdings joined U.S. private equity firm KKR and the International Finance Corp., an arm of the World Bank, in taking a 50% stake in Philippine financial technology startup Voyager Innovations and its online payments app PayMaya.

And in 2017, Alibaba Group Holding affiliate Ant Financial Services took a 45% stake in Globe Fintech Innovations, also known as Mynt, the company behind GCash, PayMaya's main rival.

Another reason for Chinese investors to eye Philippine rural banks is that it would allow the new entrants to immediately start taking deposits and offering other banking products -- with potential acquisition targets not limited to rural banks with EMI licenses.

"There's a very thin demarcation line between fintechs and banks," said Lito Villanueva, chairman of local industry group Fintech Alliance. "The reason why they want to invest in getting a banking license is for them to go full blast," he said, adding that fintechs on their own cannot take deposits.

There are more than 450 rural banks in the Philippines, with combined assets of over250 billion pesos, or 1.4% percent of the banking system’s total assets. Some are tiny, with as little as 5 million pesos in assets. Rural banks are subject to lower minimum capitalization requirements than those in urban areas.

Still, China's bet on the Philippine e-payments market carries risks. While it was one of the first countries in the world to launch mobile-payment services, only around 23% of Filipinos have accounts with financial institutions, and over 90% of payments are still made in cash, despite the central bank's aim to raise electronic payments to 20% of all transactions by next year.

Cashless transactions grew just 0.8% to 481 billion pesos ($9.04 billion) in 2017, around 1% of all transactions, according to the central bank. A 2017 central bank survey showed that 46% of online payment account holders are reluctant to use e-payments, and that 58% of them are fearful of hacks and data theft.

Another potential hurdle is that although Sino-Philippine ties have improved dramatically under Duterte, distrust of Beijing still runs deep, with only 32% of Filipinos saying they trust China, according to a Social Weather Stations poll in April.

Tamma Febrian of Fitch Ratings said that in addition to being able to offer lending and deposit-taking services via the acquired bank, overseas investors could also benefit from rural banks' presence in the local market, which they would otherwise have to build from scratch.

"Rural banks are also attractive from a returns perspective Rural banks' average return on assets of 1.6% in 2018 was higher than that of universal or commercial banks, at 1.1%, supported by their higher margins," Febrian said.

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