Digital Bank Licensing in the Philippines: BSP Circulars 1105 and 1154

Digital banking in the Philippines is governed by two Bangko Sentral ng Pilipinas (BSP) issuances. Circular No. 1105 (2020) created "digital banks" as a distinct bank classification and set the rules for their establishment. Circular No. 1154 (2022) clarified the prudential requirements applicable to digital banks and amended the documentary and licensing requirements for establishing banks. Together, they define who may operate as a digital bank, how much capital is required, and what a license applicant must submit.

What is a digital bank under BSP Circular 1105?

Circular No. 1105 defines a digital bank as one that "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."

This distinguishes digital banks from other bank categories that merely offer digital products. The BSP's policy statement in Circular No. 1105 explains the rationale: the BSP recognizes the role of digital platforms in driving greater efficiency in the delivery of financial products and services and in expanding reach into the unserved and underserved market segments, and it endeavors to promote an enabling regulatory environment that allows responsible innovation to flourish while promoting cyber resilience.

A digital bank must maintain a principal/head office in the Philippines to serve as the main point of contact for stakeholders, including the BSP and other regulators. That head office houses management and support operations and may serve as the central hub for receiving and resolving customer complaints. Digital banks may nonetheless offer products and services through cash agents and other qualified service providers under existing regulations.

What powers does a digital bank have?

Under the MORB provisions amended by Circular No. 1105, a digital bank may perform any or all of the following services:

• Grant loans, whether secured or unsecured;
• Accept savings and time deposits, including basic deposit accounts;
• Accept foreign currency deposits as defined under R.A. No. 6426, as amended;
• Invest in readily marketable bonds and other debt securities, commercial papers and accounts receivable, drafts, bills of exchange, acceptances or notes arising out of commercial transactions;
• Act as correspondent for other financial institutions;
• Act as collection agent for non-government entities;
• Issue electronic money products, subject to the guidelines on electronic money prescribed by the BSP under the MORB;
• Issue credit cards;
• Buy and sell foreign exchange; and
• Present, market, sell and service microinsurance products, subject to the guidelines on microinsurance prescribed by the BSP under the MORB.

With prior Monetary Board approval and subject to such guidelines as may be established by it, digital banks may perform other activities beyond this enumeration.

How much capital must a digital bank have?

P1.0 billion. Circular No. 1105 states that the minimum capitalization of digital banks shall be P1.0 billion. Circular No. 1154, amending the MORB provision on Minimum Required Capital, confirms this figure and requires that it be complied with at all times.

Circular No. 1154 also addresses thrift banks, rural banks, and cooperative banks that primarily offer financial products and services processed end-to-end through a digital platform under an Advanced Electronic Payments and Financial Services (EPFS) license. These banks must likewise maintain a minimum capital of P1.0 billion and are given five (5) years from the effectivity of the Circular to meet the new requirement, with a capital build-up program to be submitted to the BSP within six (6) months from effectivity.

Can an existing bank convert into a digital bank?

Yes. Under the transitory provision of Circular No. 1105, existing banks may apply for conversion to a digital bank, and the BSP may require banks that already meet the definition of a digital bank to convert their existing banking license.

Converting banks are given three (3) years from approval of the Monetary Board to meet the minimum capital requirement and implement the transition plan, including divestment or closure of branches, sub-branches, or branch-lite units. Circular No. 1154 restates this three-year period and adds that the transitory provision on capital build-up does not apply to committed capital infusion of new investors arising from acquisition, purchase or sale, transfer of the converting bank's shares of stock, or similar arrangements, where the required minimum capital must be infused before the issuance of the Certificate of Authority to Register with the SEC.

Upon receipt of notice of approval of conversion, the bank may no longer engage in or renew transactions under authorities not associated with those allowed for a digital bank. Within six (6) months from receipt of the notice, it must phase out inherent powers and activities under special authorities not normally associated with a digital bank and submit amended Articles of Incorporation and By-Laws duly registered with the SEC. Operations as a digital bank begin only after SEC approval of the amended Articles and By-Laws, compliance with all conditions of approval, and issuance by the BSP of a Certificate of Authority to Operate.

What are the licensing requirements for a new digital bank?

The application process under Appendix 33 of the MORB, as amended by Circular No. 1105 and Circular No. 1154, proceeds in stages.

Stage I: Application for BSP approval to establish a new bank. The application is signed by a representative authorized by the incorporators or subscribers and submitted to the appropriate supervising department of the BSP. Required documents include biographical data and clearances for incorporators, subscribers, proposed directors and principal officers; evidence of financial capacity; a comprehensive corporate plan; a feasibility study with projected financial statements; and a certification executed by each subscriber that the amount committed to pay the proposed paid-up capitalization was not derived from borrowings, unlawful activity, or any money laundering activity.

Applicants for a digital banking license must submit additional requirements. A competent independent third-party IT expert must perform a detailed review and assessment of the supporting IT systems and infrastructure vis-à-vis the digital banking business model, covering the design, security controls, scalability, and resilience capability of the IT infrastructure, network, application, database, security systems, AML/CFT measures, and other applicable technologies. A copy of the assessment and technical reports is submitted as part of the application. The applicant must also submit the applicable requirements for offering Electronic Payments and Financial Services (EPFS) as enumerated under the MORB's requirements for the grant of authority to offer EPFS and its accompanying appendix, including the list and nature of material outsourcing arrangements.

Applications are processed on a first-come, first-served basis, provided all required documents and information are complete. Incomplete applications are returned and considered closed, without prejudice to the submission of a new application. The applicant makes a presentation to the BSP's Financial Supervision Sector covering ownership structure, corporate plan and feasibility study results, governance structure, capitalization, risk management and internal control system, consumer assistance mechanism, and AML/CFT measures.

Stage II: Certificate of Authority to Register with the SEC. Within thirty (30) calendar days from receipt of the Monetary Board's approval, organizers submit the proposed Articles of Incorporation, By-Laws, and treasurer's sworn statement; deposit the initial paid-up capital with an appropriate bank; pay the applicable license fee; and submit proof of inward remittance of capital for foreign subscribers. Filing with the SEC follows within sixty (60) calendar days after issuance of the Certificate of Authority to Register.

Stage III: Certificate of Authority to Operate. Within one (1) year from receipt of the Monetary Board's approval, organizers must complete the bank premises, recruit officers and employees, attend BSP and Anti-Money Laundering Council Secretariat briefings, and submit the documentary requirements for the Certificate of Authority to Operate at least thirty (30) calendar days before the scheduled start of operations.

What prudential and governance rules apply?

Circular No. 1154 makes clear that digital banks are subject to the same prudential standards as universal and commercial banks in many areas. Among others:

• Digital banks are classified as complex banks under the MORB definition of terms, though a digital bank may apply with the BSP for reclassification as a simple or non-complex bank to avail of the reduced minimum requirement on the constitution of board committees.
• At least one member of the board of directors must have a minimum of three (3) years of experience and technical knowledge in operating a business in the field of technology or e-commerce. At least one senior management officer must have the same.
• Digital banks must create a separate risk management function and appoint a Chief Risk Officer to head it.
• The IT profile of digital banks is classified as "Complex."
• The head of the internal audit function of a digital bank must be a Certified Public Accountant or Certified Internal Auditor with at least five (5) years of relevant audit experience, and must also be a Certified Information Systems Auditor.
• The Basel III risk-based capital, leverage ratio, liquidity coverage ratio, and net stable funding ratio frameworks apply to digital banks.

On advertising, Circular No. 1154 provides that only a bank that is granted a digital bank license shall market itself as a digital bank. Other bank classifications are prohibited from representing themselves as digital banks in marketing communications and platforms, including digital media, websites, or mobile applications. Any bank may, however, market itself as offering "digital banking products or services" or other equivalent terms, provided it has secured the requisite BSP license on electronic payment and financial services for these digital banking products or services.

Notably, the application window for new digital bank licenses, including conversion of an existing bank's license to a digital bank license, was closed starting 31 August 2021 pursuant to Memorandum No. M-2021-046 dated 19 August 2021, and that moratorium remains effective. It also covers applications for the establishment of other types of banks that will primarily offer financial products and services processed end-to-end through a digital platform or electronic channel.

Frequently asked questions

How much capital does a digital bank need in the Philippines? The minimum capitalization of a digital bank is P1.0 billion, which must be complied with at all times. Existing banks converting to a digital bank are given three (3) years from Monetary Board approval to meet this requirement.

Can a foreign entity own a digital bank in the Philippines? Yes, subject to limits. Under the MORB provisions amended by Circular No. 1105, a qualified foreign bank may own up to 100% of the voting stock of a digital bank, while a foreign individual or foreign non-bank corporation may each own or control up to 40% of the voting stock of a digital bank.

Is the BSP still accepting new digital bank license applications? The application window for new digital bank licenses was closed starting 31 August 2021 under Memorandum No. M-2021-046, and the moratorium remains effective as confirmed in Circular No. 1154.

Practical takeaways

• Digital banks are a distinct bank classification created by BSP Circular No. 1105, defined by end-to-end digital processing with no physical branch, sub-branch, or branch-lite unit offering financial products and services.
• The minimum capitalization is P1.0 billion, and it must be maintained at all times.
• A digital bank license applicant must submit an independent third-party IT assessment, EPFS requirements, and a feasibility study, among other documents.
• Converting banks get three (3) years from Monetary Board approval to meet the capital requirement and implement the transition plan.
• Only a bank with a digital bank license may market itself as a digital bank; the license application window remains closed under the existing moratorium.

Primary sources

The rules discussed above are drawn from the following issuances, embedded here in full for your reference.

Prudential Requirements Applicable to Digital Banks, and Amendments to Relevant Provisions of the Manual of Regulations for Banks and Non-Bank Financial Institutions and Manual of Regulations on Foreign Exchange TransactionsOpen in Law LibraryDownload PDF

Guidelines on the Establishment of Digital BanksOpen in Law LibraryDownload PDF

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.