V&A Law (2024)

On 2 December 2020, the Bangko Sentral ng Pilipinas (“BSP”) issued BSP Circular No. 1105 series of 2020 (the “Guidelines”), which provides the guidelines in establishing a digital bank in the Philippines and converting existing banks to a digital bank, which met the criteria under the Guidelines. The Guidelines became effective on 23 December 2020.

Under the Guidelines, a digital bank is defined as an entity which “offers financial products and services that are processed end-to-end through a digital platform and/or electronic channels with no physical branch/sub-branch or branch-lite unit offering financial products and services.” The Guidelines also provides the different activities and services which may be performed by a digital bank. The list of activities provided under the Guidelines is not exclusive. The digital bank may secure prior Monetary Board approval to engage in activities not explicitly indicated therein.

A digital bank is required to have a minimum capitalization of One Billion Pesos (PhP 1,000,000,000.00) in contrast to the traditional banking institutions whose capital requirement is staggered dependent on the number of offices.

A digital bank cannot establish branch offices. It can only register/establish one (1) principal/head office to serve as the main contact for stakeholders including the BSP and other regulators. The registered principal/head shall house the offices of management and other support operations and serve as the central hub for receiving and resolving customer complaints.

Similar to the traditional banks, digital banks are subject to nationality and equity restrictions, as follows:

Based on the foregoing, foreign individuals and foreign non-banking corporations are subject to equity restrictions. On the other hand, qualified foreign banks, as defined under the Manual of Regulations for Banks, are not subject to any equity or nationality restriction pursuant to the liberalization of entry of foreign banks in the Philippines under Republic Act No. 7721.

Digital banks are also subject to the prudential requirements set out by the BSP including corporate governance and risk management, particularly on information technology and cyber-security, outsourcing, consumer protection, and anti-money laundering, and combating the financing of terrorism, as provided under existing regulations.

Requirements to establish a Digital Bank

In order to engage in digital banking, the entity must first secure a Certificate of Authority (“COA”) to operate with the BSP. The application process is divided into a three (3)-stage process namely:

• Stage 1 refers to the application for BSP approval to establish a new domestic bank;
• Stage 2 refers to the application for issuance of COA to Register with the Securities and Exchange Commission (“SEC”); and
• Stage 3 refers to the application for the issuance of a COA to operate.

The licensing framework of the BSP encompasses several criteria, namely:

1. Assessment of the transparency of ownership and control structure;
2. Suitability of shareholders, including the ultimate beneficial owners;
3. Fitness and propriety of directors and senior management;
4. Adequacy of capital, including sources of initial capital and ability of shareholders to provide additional financial support; and
5. Strategic and operating plan.

Included as part of Stage 1, the entity applying for a digital bank license is also required to submit the applicable requirements in offering Electronic Payments and Financial Services.

Note that the Monetary Board of the BSP may limit the total number of digital banks taking into account the total number of applications received and the assessment of the overall banking situation.

Conversion of Existing Banks to a Digital Bank

Under the Guidelines, existing banks may apply for conversion to a digital bank by complying with the requirements to establish a digital bank and the submission of an acceptable plan which shall address how the transition to a digital bank shall be managed. The BSP also may require banks that already meet the definition of a digital bank under the Guidelines to convert their existing banking license to a digital banking license.

Banks intending to convert their existing license to a digital bank license are given three (3) years from the date the Monetary Board approves the conversion to meet the minimum capital requirement and implement the transition plan, which includes the divestment and closure of the branch offices of the converting bank.

Upon receipt of notice of approval of conversion, the converting bank shall no longer engage nor renew transactions under authorities not associated with those allowed for a digital bank. The converting bank is also required: 1) to phase-out all inherent powers and activities under special authorities not normally associated with a digital bank; and 2) submit the pertinent amended Articles of Incorporation and By-Laws duly registered with the SEC within six (6) months from date of receipt of notice of approval of its application for conversion.

Notwithstanding the receipt of the notice of approval of conversion, the digital bank shall start operation as a digital bank, after the SEC approves the bank’s amended Articles of Incorporation and By-Laws, and the BSP issues the bank’s COA to operate as a digital bank.

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This article is intended for informational purposes only and should not be construed as legal advice.