This blog will focus on Virtual Banks, to distinguish them from other online fintechs like peer-to-peer lenders, micro investment apps, money management apps, etc which are covered under different ‘banking’ licences. The distinction is that virtual banks are actual banks with the requisite licence.
Most banks around the world have gone digital to some degree. From simply checking a balance to getting cash at an ATM to managing complex payments, consumers have grown accustomed to choosing between going to the local branch or banking on their home phone, cell phone, or computer online.
But virtual banks are a newer form of banking disrupting and threatening the existent of traditional banks (those with physical branches offering face to face physical interactions). While virtual bank may also be known as cyberbanking, e-banking, home banking or online banking, but its major characteristic differentiating from some ambiguous interpretations of the above, is that it ‘exists’ ONLY and FULLY ONLINE- and the innovation, inclusion, and customer choice it brings—is becoming prominent around the world. Hong Kong, South Korea, the United States, and United Kingdom have already opened the door to virtual banking. And some major Singapore banks are also gaining virtual banking experience, with DBS’ digibank in India, and UOB’s TMRW in Thailand. It’s more than just a difference in technology though, as these virtual banks are also positioning themselves as ‘disruptors’ – both in terms of the kinds of features they’re offering and the way they engage with their customers.
Consumers expect virtual banks’ savings in facilities and staff to directly translate to receiving higher interest rates on savings and paying lower rates on loans. However, some consumers might miss the emotional comfort of visiting a local branch office, renting a safety deposit box, seeking a banker’s advice, or working with residents who support the local economy and local events.
Virtual banks typically utilise digital online transfers or cheque mailing for deposits and other money transactions and partnering with some traditional banking network and/or international ATMs for withdrawals. With many already accustom to digital banking, the further towards the virtual bank is expected to be straight-forward. The lure towards using them comes not just from higher deposit interest rates (as it saves heaps of overheads as compared to traditional banks), below are more advantages:
International payments without the fees
Because of the more efficient way in which virtual banks operate, they don’t need to charge the same fees as traditional banks when customers make or receive international payments. For example, a freelancer based in the UK can receive payments from clients in the US and Asia through a virtual banking platform without being charged the level of fees charged by traditional banks. In many cases, they pay no fee at all.
Hassle-free financial transactions
Virtual banking platforms have been developed with modern businesses in minds, simplifying the payments process to make it easy and secure for small businesses to operate in international markets.
For example, payment cards issued by virtual banks can be used without a charge wherever the cardholder is in the world, with flat ATM fees, and the ability to withdraw cash in the local currency. This convenience also extends to the ability to check and top up the card balance using a mobile app.
Instant global payments
Rather than using expensive international wires, virtual banks accept payment directly from users’ clients. This means you can instantly send money to any country in the world. Accounts are virtually global, meaning you need only a single account to collect, hold and send payments in multiple currencies and channels.
A more flexible way of banking
Thanks to not having physical branches, virtual banks are set up to deal with customer needs and issues in a way that suits people best. Customer service is available 24/7, and balances and transactions are designed to be made online or using a mobile device, rather than being forced to fit these newer ways of doing things. This makes banking faster and more efficient, allowing customers to have real control of their finances.
Helping smaller businesses do things on their own terms
Startups and smaller businesses often don’t have their needs met by traditional banks; business services tend to be better suited to larger organisations with more established needs who are dealing with larger sums of money. Virtual banking provides other types of businesses with the means to operate effectively and efficiently, with lower overheads and with the ability to work in a more global way, rather than limiting the scope of the business and the talent pool they have access to.Get yo
As to the disadvantages or cons of Virtual Banking, below are a few, mostly mirroring those with digital online banking concerns
- Slower deposits: Because there is no physical branch at which to make a deposit, adding money to an account can be delayed sometimes if a check has to be mailed. Advances in technology though are easing these delays, since most direct banks now allow remote deposits of checks through mobile phones. Cash, of course, still can present challenges unless the virtual bank partners with a network of banks or credit unions to allow members’ deposits.
- Website outages: Though increasingly uncommon, websites do go down at times, whether for planned maintenance or an unplanned glitch. If that happens, there is no physical place to go as a backup.
- Lack of relationship: Some transactions are easier when conducted face-to-face and more complicated issues can benefit from a personal interaction that is lacking in virtual banking.
My view is none of the above is a show-stopper given that many people are now familiar with and using considerable online banking services. Hence, virtual banking seems to be the ongoing trend and I predict that it’s popularity would set to grow, especially with the latest coronavirus saga and people have to practice social distancing and working from home.
As examples of the current situation, below are the status quo of virtual banking in Hong Kong (total 8 licences granted) and Australia:
Hong Kong Monetary Authority issued the licences in Spring 2019, and the first one to launch there is ZA Bank (around mid-March 2020). The bank, an offshoot of China’s ZhongAn Online P&C Insurance, gained one of Hong Kong’s eight virtual banking licences alongside firms including Ant Financial (Alibaba/ AliExpress, TaoBao, TMall….- Jack Ma’s), Tencent (WeChat, QQ, JD…- Pony Ma’s), Industrial & Commercial Bank of China Ltd. and Xiaomi Corp., and and Standard Chartered (a long established traditional bank in HK). ZA is offering lending and deposit accounts with an annual interest rate of 1% (a figure much higher than the traditional rate offered by banks like HSBC in HKSAR), and said to be up to 6% for three-month Hong Kong dollar deposits capped at HK$200,000 (S$34,700). Though many observers doubt the new virtual banks will be able to maintain such rates, the offer is a warning of upcoming competition for the city’s US$410 billion (S$552.8 billion) local currency time deposit business.
Tencent (under Infinium), on the other hand, has teamed up with ICBC’s local unit and Hong Kong Exchanges and Clearing Ltd. Ant and Xiaomi have also got permits via local entities. Infinium looks to offer a full-service virtual banking experience, particularly highlighting small-value deposit services to those who don’t have access to a conventional banking system. Infinium will also not require any minimum account balance, or low-balance fees for both the public and SMEs.
At this stage, apart from that Jack Ma’s virtual bank is owned by Ant Financial, registered in HK via Alipay HK Holdings, not much information is available. However; the name does imply that its offerings will gear towards SMEs. In a tweet celebrating the license, Ant Financial indicated that they will be borking on promoting the development of inclusive finance.
SC Digital – Standard Chartered with PCCW Limited, HKT and Ctrip Hong Kong. As a virtual bank, SC Digital will offer the ability to open accounts and apply for financial services on-the-go, but beyond that SC Digital expressed intentions towards a suite of retail financial services and products. With HKT and Ctrip in tow, that probably translates to telecom-related offerings, and travel services in the mix. For SC Digital’s strategy, it seems like they intend to create an ecosystem around its virtual bank to encourage stickiness amongst virtual bank customers. The lifestyle offering here is obvious, but it will of course remain to be seen if Hong Kongers are swayed.
Xiaomi (Insight Fintech- Mi (90%) teaming with AMTD Group) has also started testing its virtual bank Airstar in Hong Kong.
Other players (licence granted) include-
- Livi VB – a joint venture between Bank of China (Hong Kong), JD Digits, and Jardines
- WeLab – reported being very well funded, (to 10 May 2020, it has raised $US 425 Million in funds). It is backed by big names like Sequoia, Alibaba, ING Bank and IFC.
- Ping An One Connect- a unit of Mainland China’s insurance giant PingAn. OneConnect in particular is a fintech SaaS provider of solutions geared towards SME financial institutions. The solutions are based on technologies like artificial intelligence, blockchain, cloud platforms and biometrics identification—which will likely be incorporated into the upcoming virtual banking offering.
It is interesting also to see that the China online giants (the two Ma’s – Jack and Pony) have multiple interests- i.e. in more than one venture or participating in more than one licence. Both have substantial virtual bank operating experience in Mainland China – via Tencent’s MyBank, Alibaba’s WeBank, which was founded in 2014 and known for being China’s first Internet bank, WeBank has already offered loans to more than 100 million people, many of whom would have been ineligible for credit at conventional banks. The loans are reported to be made available within minutes! This was said to be made possible via “The application of AI has made it possible for ordinary people and microbusinesses to gain access to banks,”
In Australia, such virtual digital banks are often referred as neobanks too. the major distinction between neobanks and other fintechs is down to the products they can offer and the licences they hold. Neobanks can only call themselves a ‘neobank’ if they are an actual bank with the requisite licence, whereas other fintechs like peer-to-peer lenders, micro investment apps, money management apps and other payment providers can’t.
Australian neobank has to have what’s known as an Australian Deposit-Taking Institution (ADI) licence which is issued by the Australian Prudential Regulation Authority (APRA). This means that they either have to:
- Go through the process of becoming an ADI themselves
- Operate under an existing ADI’s licence
“In order to be authorised as an ADI a business will need to meet a whole heap of prudential requirements dictated by APRA, with the key factor among these being a capital adequacy requirement.” “This means that for every dollar held in deposits an ADI will have to hold a certain amount of capital in reserve. That’s so depositors, and the government, can be confident that depositors are going to get their money back should they want to withdraw it.”. Also, once a business has authorisation to operate as an ADI it can offer deposit accounts and hold money on behalf of customers, including transaction accounts, savings accounts, term deposits and mortgage offset accounts among many more.
One of the major benefits of holding your money with an ADI is that it is guaranteed (well, a large portion for most people will be) under the Australian Government’s Guarantee Scheme for Large Deposits and Wholesale Funding. In essence, the scheme covers funds in a whole range of deposit accounts up to $250,000 per person, per ADI. That means that if the ADI which you’ve got your savings in goes bust, your funds will be covered up to that figure by the government. And this applies to all ADIs – from the big four banks and credit unions to (you guessed it) neobanks.
At this stage, the Australian players that can actually be considered neobanks are
- 86 400 – 86 400 received their full ADI status in July 2019
- Judo Bank – Judo Bank received their full ADI status in April 2019
- Volt Bank – Volt Bank received their full ADI status in January 2019
- Xinja – Xinja received their full ADI status in September 2019
- Up Bank – As a subsidiary of Bendigo and Adelaide Bank, Up Bank are covered by Bendigo and Adelaide Bank’s ADI licence
Credits and Sources
Virtual banking is disrupting Asia’s financial services. (2020). Retrieved 17 May 2020, from https://www.ibm.com/thought-leadership/institute-business-value/report/asia-virtual-banking
5 reasons why virtual banking is better than traditional banking. (2018). Retrieved 17 May 2020, from https://blog.epayments.com/5-reasons-why-virtual-banking-is-better-than-traditional-banking/
Hamilton, A. (2020). Hong Kong’s first virtual bank opens its digital doors. Retrieved 17 May 2020, from https://www.fintechfutures.com/2020/03/hong-kongs-first-virtual-bank-opens-its-digital-doors/
Bloomberg – Are you a robot?. (2020). Retrieved 17 May 2020, from https://www.bloomberg.com/news/articles/2019-05-09/ant-financial-tencent-join-hong-kong-virtual-banking-race
Hong Kong’s first virtual bank offers 6% rate for select depositors. (2020). Retrieved 17 May 2020, from https://www.straitstimes.com/business/banking/hks-first-virtual-bank-offers-6-rate-for-select-depositors
Xiaomi has started testing its virtual bank Airstar in Hong Kong · TechNode. (2020). Retrieved 17 May 2020, from https://technode.com/2020/04/01/xiaomi-has-started-testing-its-virtual-bank-airstar-in-hong-kong/
Kong, F. (2019). Meet Hong Kong’s 8 New Virtual Banks – Fintech Hong Kong. Retrieved 17 May 2020, from https://fintechnews.hk/8951/virtual-banking/hkma-virtual-bank-license-sc-digital-livi-zhongan-za/
Kong, F. (2019). How China’s Virtual Banks Are Offering Loans to Micro-Businesses Within Minutes – Fintech Hong Kong. Retrieved 17 May 2020, from https://fintechnews.hk/9925/virtual-banking/virtual-banking-china-ai-big-data-microbusiness/
Neobanks and digital banks licences explained. (2020). Retrieved 17 May 2020, from https://mozo.com.au/neobanks/guides/neobanks-and-digital-banks-licences-explained