Virtual banks to be licenced in Hong Kong..

Apparently Hong Kong authorities are thinking about opening virtual banks for a while. The first guideline was released in 2000 to be  updated in 2012 and is coming into action now.

What we see is that the concept is hardly new but the HKMA has made changes in the new guidelines based on banking developments.

First what is a virtual bank?

The Guideline on Authorization of Virtual Banks sets out the principles which the HKMA will take into account in deciding whether to authorize virtual banks to conduct banking business in Hong Kong.  As defined in the revised guideline, a “virtual bank” refers to a bank which delivers retail banking services primarily, if not entirely, through the internet or other forms of electronic channels instead of physical branches.

The HKMA considers that the basic principles contained in the guideline issued in 2000 remain applicable.  These include those relating to the requirement on a virtual bank to present a concrete and credible business plan, the importance of properly managing the risks associated with virtual banking, the requirement to treat customers fairly, and the need to maintain adequate capital commensurate with the nature and scale of operation of the virtual bank.

Some updates or refinements are nonetheless necessary having regard to the present day circumstances.  These include: 

  (i)

Banks, financial institutions and technology companies may apply to own and operate a virtual bank in Hong Kong. 

  (ii)

Virtual banks should play an active role in promoting financial inclusion in delivering their banking services.  While virtual banks do not maintain physical branches, they may set up customer service centres.  Virtual banks should take care of the needs of their target customers, be they individuals or SMEs.  They should not impose any minimum account balance requirement or low-balance fees on their customers.

  (iii)

Since virtual banks will engage primarily in retail businesses, they should operate in the form of a locally-incorporated bank. This is in line with the arrangement for banks engaged in retail businesses.

  (iv)

Virtual banks will be subject to the same set of supervisory principles and key requirements applicable to conventional banks, although some of the requirements will need to be appropriately adapted to suit the business models of virtual banks.

  (v)

As virtual banking is a new business model in Hong Kong, virtual banks should provide an exit plan at the time of application, so that they can unwind their businesses in an orderly manner should it become necessary.

The public consultation commences today and will last until 15 March 2018.  The HKMA will take into account the comments received during the consultation and issue a revised guideline in May 2018.

Companies intending to apply for a virtual banking licence may submit an application to the HKMA now.  While the revised guideline is still under consultation, the HKMA encourages applicants to review the revised guideline and make preparations for submitting an application.

I also read in the guidelines how financial inclusion has been included as a new objective for these v-banks:

The MA welcomes the establishment of virtual banks in Hong Kong. The development of virtual banks will promote the application of financial technology and innovation in Hong Kong and offer a new kind of customer experience. In addition, virtual banks can help promote financial inclusion as they normally target the retail segment, including the small and medium-sized enterprises (SMEs). [New principle]

This is in line with how financial inclusion has become such a buzzword across the world.

In the earlier draft, the VBs were allowed to set up branches but not in the new one:

A virtual bank applicant, if authorized, must maintain a physical presence in Hong Kong, which will be its principal place of business here. This is necessary to provide a point of contact with the bank in Hong Kong for both customers and the MA. For example, such an office will enable customers to make enquiries or complaints in person and allow the bank to verify the identity of its customers where necessary. [Existing principle, with minor modifications]

Virtual banks are not expected to establish physical branches. They may nevertheless maintain one or more local offices provided that the notification requirement under section 45A of the Ordinance is complied with. To facilitate examination and inspection by the MA pursuant to section 55 of the Ordinance, virtual banks must keep a full set of their books, accounts and records of transactions in Hong Kong. [Existing principle, with significant modifications]

There is also a provision for making an exit plan, in line with lessons from recent financial crisis:

As virtual banking is a new business model in Hong Kong, the MA will require a virtual bank applicant to provide an exit plan in case its business model turns out to be unsuccessful. The purpose of the exit plan is to ensure that a virtual bank, should it become necessary, can unwind its business operations, in an orderly manner without causing disruption to the customers and the financial system.

I am also not sure how will VBs differentiate themselves from PBs (physical banks). What will VBs bring to the table that PBs cannot do? PBs themselves are moving and talking so much about going digital and virtual…

More here

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