Virtual Banking - The Future of Banking
What is a Virtual Bank?
According to Hong Kong Monetary Authority (HKMA), a “virtual bank” is defined as a bank which primarily delivers retail banking services through the internet or other forms of electronic channels instead of physical branches.
One should not mix up Virtual Banking with Internet Banking or commonly known as e-Banking. Internet Banking refers to the provision of banking services and products via internet by a Bank. The Bank will still offer its services via its physical branches.
The main distinction is that a Virtual Bank has no physical branches - its products and services are all offered via the internet, phone or any other mediums apart from physical branches.
In recent times, especially in Mainland China, and Hong Kong, a number of virtual banks are set up with the blessings of the authorities. Along with HKMA, China Banking Regulatory Commission (CBRC) has been an active supporter of Virtual Banking in Mainland China. In 2015, WeBank (微众银行) which is backed by Tencent holdings and MyBank (网商银行) which is backed by Ant Financial of Alibaba Group were started in Mainland China.
Similarly, Korea’s Financial Services Commission followed suit. In 2016, it granted licenses to KaKao Bank which is backed by Korea Investment Holding Company and K Bank which is backed by a consortium including Alibaba Group.
In May 2019, WeLab, Ant SME Services (Hong Kong) Limited, Infinium Limited, Insight Fintech HK Limited and Ping An OneConnect Company Limited became the latest players to be granted a Virtual Bank license from HKMA. The previous licensees are Livi VB Limited, SC Digital Solutions Limited and Zhong An Virtual Finance Limited.
Virtual Banking - The Future of Banking?
Are Virtual Banks new creations by tech companies?
According to researchers from the Federal Reserve Bank of San Francisco’s Country Analysis Unit - no. They highlighted that in 1990s, Japan Net Bank was created as an online bank. The online bank was targeting consumers who were looking for easy banking solutions for their online shopping. Now, Japan Net Bank is majority owned by Yahoo and is still in operation.
Elsewhere in Canada, Manulife Bank was created in the 1990s, after losing its physical branches. Similar to JNB, Manulife Bank provided banking services through advisors, banking consultants, call centre personnel, interactive voice response and web banking. It has no physical branches. Manulife still operates today, and it is highly rated by major credit agencies, with latest S&P ratings at investment grades.
It is without a doubt that the recent developments in internet technology, prevalence of smart phones and changing consumer behavior gave rise to the wave of virtual banks being set up and are highly accepted by the masses. AliPay and Wechat are highly successful examples of non traditional consumer banking players who have created challenges and threats to the traditional banking players.
In summary, if we were to follow on the longevity and proven business models of Manulife Bank and Japan Net Bank, the new Virtual Banks in Mainland China and Hong Kong have the potential to be highly successful and eventually becoming main players in the Banking and Financial sector.
Challenges for Virtual Banks
It appears that for Virtual Banks to succeed, they have to be cost effective - savings from the absence of physical branches need to be translated into operating efficiencies. Already, K Bank and Kakao Bank have reported losses and these should be warning signs for new Virtual Banks to avoid.
Therefore, it will be quite a balancing act for Virtual Banks to maintain their client’s expectations of inclusive banking with non-prohibitive fees and charges; and to manage the costs of maintaining quality services and ensuring the mandatory risk management practices are in place.
Even without the frills, clients need to be thrilled and regulators requirements need to be fulfilled.