Samir Subberwal
Throughout mid-2019 there were a number of announcements from Asia-Pacific banking regulators that they would be granting licences to virtual banks. The Monetary Authority of Singapore (MAS), Hong Kong Monetary Authority (HKMA) and Taiwan’s Financial Supervisory Commission issued their first virtual banking licences, and Malaysia has announced plans to follow suit. However, they were not the first movers in the region: China, Japan and Australia have all previously awarded licences to banks with wholly virtual operations.
Asia’s move towards virtual banking is not surprising. The digitisation of finance in the region has moved at a pace not seen in other parts of the world. Chinese consumers have long been accustomed to completing transactions with just their mobile phones, and other countries are keen to follow this lead.
As soon as the regulators announced they were open to applications, the virtual banks were ready to move: this new breed of banks believes in striking early. However, the process of granting the licences has been lengthy. The HKMA revised its rules for virtual banks in May 2018, and had received 33 applications for licences by August of that year. The regulator subsequently granted licences to eight of them in May 2019.
Indeed, licensing virtual banks is becoming an international trend. “Singapore follows the UK’s Financial Conduct Authority [FCA] regulation and was quick to move after the FCA released its own guidelines around initiatives to promote innovation, such as the regulatory sandbox,” says Rishi Stocker, head of partnerships at UK virtual bank Revolut.
“The advantage of creating a digital bank is having the latest technology with no legacy,” says Robert Bell, CEO at Australia-based digital bank 86400. “The new banks emerging across Asia are able to offer services and experiences that are different to what the incumbents can do.”
Old players or new?
These new banks might at first appear to be fintech start-ups, but a closer look often reveals connections to established banking networks. For example, Hong Kong’s Ant Bank is part of China’s Ant Financial group, while Ping An OneConnect bank is an offshoot of Ping An Bank. In Singapore, the provisionally named SC Bank is majority backed by Standard Chartered, something Greg Watson, head of Asia-Pacific sales at regulatory technology provider Fenergo, describes as “a protection move”.
Explaining the investment, Samir Subberwal, regional head of retail banking for Greater China and north Asia at Standard Chartered, says the bank has a role as an equity partner, but the new insutution is a separate entity with its own licence. Accounts will be held within the new bank, not Standard Chartered.
“The new bank will have a different brand and will go live in the new year. There will be some subtle links to Standard Chartered but it will not be marketed as being part of the bank,” says Mr Subberwal.
International players with experience in other markets are also eyeing the prospect of expanding into Asia-Pacific. Revolut, already established in the UK, has announced plans to expand into Singapore and Japan.
Meeting compliance
Real-world experience in the banking space may prove essential for virtual banks in one key area: compliance. Meeting compliance targets can be a expensive and labour-intensive process for fintech start-ups. If they fall short of their compliance responsibilities it could be harmful for the whole industry.
“The regulators giving out digital licences have to be very careful regarding which banks they are granted to, and how their compliance is monitored,” says Mr Watson. “It does not take much for there to be reputational damage not only to the banks, but also the regulators.”
While the rules should be strict, regulators also do not want to create insurmountable hurdles for market entrants, at least to begin with. “To apply for a licence, the paid-in capital requirements start from $15m in Singapore, but this is increasing to $1.5bn. We believe the amount will not be too much of a deterrent for established players to enter the market at present,” says Tamma Febrian, associate director for Asia-Pacific banks at Fitch Ratings.
Even if the virtual banks are emerging at around the same time, their experiences will vary depending on the countries where they operate. Each regulator is taking its own approach to making sure these new banks meet specific requirements.
The regulators are also deciding on the number and types of banks they want to meet the requirements of their markets. In Taiwan only three virtual banks have been allowed by the regulator. MAS meanwhile has granted three licences to banks focused on serving small and medium-sized businesses.
The regulators are also wary of giving these new players any preferential treatment. Eugene Tarzimanov, vice-president and senior credit officer for financial institutions group at Moody’s Investors Service, says the requirements for the virtual banks are broadly the same as for conventional banks to ensure the new entrants are not given a competitive advantage.
A HKMA spokesperson explained the authority’s requirements to The Banker, stressing that the banks do not have to meet a threshold of user numbers or business volume. But they do have other rules to follow. “The licensing criteria, which include requirements on adequate financial resources such as capital adequacy and liquidity, will continue,” the spokesperson says. “Failure to meet the criteria by existing banks would be grounds for revocation of authorisation.”
What the customer wants
Even as the licences are being granted, doubts remain over whether there is sufficient space in the market to make all of these new institutions viable. In highly developed markets such as Singapore and Hong Kong, are virtual banks really necessary? Hong Kong has 30 locally incorporated licensed banks, including the new virtual players, and 150 foreign bank branches.
The virtual banks may find their appeal lies in offering cheaper lending, given that they do not have the overheads that come with bricks-and-mortar premises. Their automated processes could make basic banking faster and more efficient. However, Mr Watson cautions that they must strike a delicate balance between ensuring they meet regulatory requirements while maintaining the streamlined onboarding process customers expect from web-based services.
“In developed markets in Asia, virtual banking mainly seeks to service the overbanked,” says Gavin Gunning, senior director at S&P Global Ratings. “There is a desire in each of these markets to offer customers more convenient banking services at a lower cost in the current highly competitive banking environment. These factors set the scene for continuing growth and innovation via virtual banking.”
A receptive audience
Mr Gunning adds that the more complex or bespoke banking services are still more likely to be undertaken by the traditional banks.
There is evidence the virtual banks will find a customer base, because the response has been positive in other mature markets in Asia-Pacific. Mr Tarzimanov points out that customers in South Korea have responded well to innovative banking platforms and higher rates on deposits.
“South Korea’s two virtual banks – Kakao Bank and K Bank – have captured about 0.6% of market share in domestic loans after about 18 months of operation and have brought modest pricing competition,” says Mr Tarzimanov. “Moreover, Kakao Bank’s customer base exceeded 10 million in two years of operations, out of a total population of 51 million.”
The success of the virtual banks will likely depend on offering customers something the incumbents cannot. It remains to be seen whether every bank granted a licence is able to gain sufficient market share for the long term, or if only a select few can capture customers’ imaginations.
