Moody’s Investors Service said financial technology (fintech) startups in the Philippines have the potential to overtake banks in retail services.

“Fintech companies and a new breed of digital-only banks threaten to gain on conventional banks in key areas of their retail business, such as depository services, credit cards, remittances and unsecured lending, with products that are more accessible and easier to use,” according to its new report released on Thursday.

The credit rating agency said mobile wallet penetration has already overtaken that of bank accounts, as fintech companies use digital payments to gain a foothold in the Philippine financial system.

The market for mobile wallets rose dramatically last year, it underscored. The number of active electronic money wallets in the Philippines increased by 61 percent in the first nine months of 2020 compared to the same time in 2019.

“Competitiveness in the retail segment is critical for Philippine banks given retail deposits make up a significant part of banks’ funding, and fees from services such as remittances account for a substantial share of their non-interest income,” Moody’s added.

It said that remittances to the Philippines totaled $29.9 billion last year, accounting for 8.3 percent of the domestic output and generating $1.4 billion in fees for banks and money transfer companies each year.

More importantly, given the size of the untapped market in the country, the retail segment offers tremendous growth potential for Philippine banks, the credit rater also remarked.

However, because only a tiny percentage of the population uses banking services, the Philippines represents a significant untapped market for fintech companies, with over 70 percent of people without access to banking and financial services.

“Although increasing financial inclusion and access of financial services for the unbanked population will increase the potential

pool of customers for banks, mobile wallets offered by fintech companies tend to have better functions and features, resulting in stronger customer loyalty and higher retention rates,” it added.