In August, Singapore saw the launch of its first digital bank in the form of GXS Bank, a joint venture between ride-hailing firm Grab Holdings and telco SingTel. But it’s not alone in the region: Hong Kong and Japan have already seen digital banks being established, while Malaysia and Thailand have rolled out rules for the same. We look at the regulatory state of play in different markets.  

Virtual banks have been touted by some as the banks of the future. These newly minted institutions have started popping up across the region and regulators have been issuing licenses and strengthening regulations for these new institutions.

Yet, across the Asia Pacific, the regulatory environment is uneven. Many new digital banks are still operating under rules originally created for and meant to regulate traditional bricks and mortar institutions.

Asian Legal Business examines the latest regulatory developments around the growth of digital banks in key markets across the region.

SINGAPORE

The first two full virtual banks were recently launched in Singapore.

Trust Bank, one of the new kids on the virtual bank block, is backed by a S$400 million ($284.5 million) investment from its shareholders, which are Standard Chartered Bank as well as grocery retailers FairPrice Group and NTUC Enterprise.

The range of products Trust Bank offers includes a credit card, savings account, and family personal accident insurance. This is combined with Link Rewards, a loyalty programme integrated with the FairPrice Group’s ecosystem.

Trust Bank’s launch happened roughly around the same time as the introduction of GXS Bank.

GXS Bank is the virtual bank venture of telecoms company SingTel and ride-hailing company Grab Holdings. It is targeting the “underbanked” demographic that includes gig economy workers, self-employed entrepreneurs, and early jobbers.

Charles Wong, the Singapore CEO of GXS, estimates this to be two out of every five adults.

“GXS is a homegrown bank on a mission to support the needs of the entrepreneurs, gig economy workers and early-jobbers in our community. To start, we are challenging the notion of what a basic savings account can do to support their goals and dreams,” said Wong.

The virtual bank may have more products coming out soon to help customers reach their financial goals.

“Over the coming months, we will also tackle other obstacles that hinder consumers and small businesses from reaching their goals sooner, such as growing their wealth or accessing credit.”

Both banks have no minimum balance requirements and provide more attractive interest rates than traditional banks that accrue daily.

In Singapore, there are two categories of virtual banks. The Monetary Authority of Singapore (MAS) has awarded licenses to digital full banks and digital wholesale banks.

Digital full banks are allowed to carry out all banking businesses and offer all types of products to customers, just like traditional banks. Trust Bank and GXS Bank hold these licenses and have commenced operations while Singapore tech conglomerate Sea, which also secured a digital full bank license, has yet to unveil its virtual bank.

MAS has made it so that digital full banks operate as a “restricted digital full bank” until it has a minimum paid-up capital of S$1.5 billion, expected within three to five years of business. At this stage, it can progress to being a “digital full bank” and all deposit caps are removed. Prior to this point, the bank would be subject to a deposit cap of S$75,000 per individual or S$50 million in aggregate that is increased progressively. At the starting stage, restricted digital full banks can only solicit deposits from a limited scope of customers, and this limit is also lifted over time.

Digital wholesale banks, on the other hand, can only engage in the proposed business outlined in its application, although they may subsequently seek approval to expand its scope. While it has no restrictions on deposits from businesses, deposits from individuals must be at least S$250,000. They are expected to cater to businesses and non-retail customers only, although MAS may allow offerings to retail customers on an exceptional basis.

The two holders of digital wholesale bank licenses commenced operations in June 2022.

China’s Ant Group launched ANEXT Bank with a focus on micro, small and medium enterprises (SMEs), particularly those with cross-border operations.

A consortium comprising Greenland Financial Holdings, Linklogis Hong Kong, and Beijing Co-operative Equity Investment Fund Management holds the other digital wholesale bank license. They have launched it as Green Link Digital Bank.

Digital full banks are subject to the same regulatory requirements as existing full banks, while digital wholesale banks are subject to the same regulatory requirements as existing wholesale banks. These include requirements relating to technology risks, money laundering and terrorism financing risks, and the conduct of non-financial businesses.

Out of the five licenses issued by the Monetary Authority of Singapore, there remains one tech giant Sea that has yet to commence operations.

MALAYSIA

Just north of Singapore’s borders, the virtual-bank scene have been heating up in Malaysia.

Bank Negara Malaysia (BNM), the central bank, had already received 29 applications for virtual bank licenses by July 2021.

“The Central Bank of Malaysia has announced the approval granted to five successful applicants for the digital bank licences and will herald a change to the banking landscape in Malaysia when these applicants commence operations,” says Sue Wan Wong, a partner in the corporate, commercial and securities practice at Malaysia’s Wong & Partners, a member firm of Baker McKenzie.

All 29 applications were thoroughly assessed pursuant to section 10 (1) of the Financial Services Act 2013 and Islamic Financial Services Act 2013. It required BNM to consider all the factors in Schedule 5 of the Acts and other relevant policy requirements.

The assessment criteria include the character and integrity of applicants, nature and sufficiency of financial resources, soundness and feasibility of business and technology plans, and their ability to meaningfully address financial inclusion gaps.

The applicants are also assessed on their own merits as well as relative to other applications based on each assessment criteria.

There are four levels of assessment carried out before licenses are issued and the reviews are supported by a cross-functional technical team, a review team, and internal independent observers from BNM’s risk and legal departments.

“Digital banks are expected to further advance financial inclusion. By adopting digital technology more widely for everyday transactions, we can significantly increase opportunities for our society to participate in the economy - by overcoming geographical barriers, reducing transaction costs and promoting better financial management,” said Bank Negara Malaysia governor Tan Sri Nor Shamsiah.

“Digital banks can help individuals and businesses gain better access to more personalised solutions backed by data analytics. As businesses move online, digital banking also provides a safer and a more convenient way to transact,” she added.

Wong feels that any incumbents will need to step up through continuous innovation on the front to the back end. This can mean anything from product offering that is priced competitively and offering a seamless customer experience to technology stack that is reliable and current.

“New entrants will need to look beyond ‘freebies’ as a means to draw customers and focus on meeting the needs of the underserved markets through their innovative services and products,” said Wong.

Virtual banks in countries with a big Muslim population like Malaysia will have the chance to delve into Islamic banking, which comes with its own set of rules in areas such as interest.

“As opposed to other markets, a key distinguishing feature and a space to watch in Malaysia would be the offerings and the reach of the two successful applicants for Islamic digital banking licenses,” said Wong.

It is not merely the product suite or the user interface that will be closely watched.

“Any affinity partnerships that they may have when the products are rolled out and the approach to customer acquisition and growing the customer base will be of keen interest,” said Wong.

Two out of the five Malaysian virtual bank licenses are under the Islamic Financial Services Act 2013. The holders are a consortium of AEON Financial Service, AEON Credit Service (M) and MoneyLion; and a consortium led by KAF Investment Bank.

The other three license holders are under the Financial Services Act 2013. They consist of a consortium of Boost Holdings. and RHB Bank; a consortium led by GXS Bank and Kuok Brothers; and a consortium led by Sea and YTL Digital.

After the announcement in April 2022, the license holders will go through a period of operational readiness. BNM will validate the process through an audit before they can commence operations. This entire process could take anywhere from 12 to 24 months.

BNM has said it will go on to work with the financial and fintech industries and relevant stakeholders to continuously enhance access to financial services throughout the country in line with the five strategic thrusts outlined in Malaysia’s Financial Sector Blueprint 2022-2026.

THAILAND, INDONESIA, AND THE PHILIPPINES

There is keen interest in virtual banks by other countries in the region, but the level of development varies.

“The region is fertile ground for virtual banks - a significant number of the population are digital natives, and this includes those in the underserved segments of any APAC country,” says Wong of Wong & Partners.

“The ability of virtual banks to break the strong grip of conventional financial institutions in the APAC region will increase penetration in a broader swathe of the market with product innovation and greater choice for customers. A consolidation of the sector may be necessary in the longer run,” she adds.

But there are different levels of maturity among these relatively new institutions and from one country to the next.

Thailand has only just started building the regulatory environment for its own virtual banks.

In March 2022, the Bank of Thailand published guidelines for a public hearing during the second quarter on a licensing framework for virtual banks and for the sector’s engagement in digital businesses.

The new guidelines will reflect previous recommendations from the central bank aimed at repositioning Southeast Asia’s financial sector to serve a sustainable digital economy, according to the BOT. So far, there have yet to be any developments of note.

It is much the same case in Indonesia where Otoritas Jasa Keuangan, the coun-try’s financial services authority, issued new regulations in August 2021 to introduce its digital bank regulatory frame-work. This permits digital banking to be carried out by way of an establishment of a new virtual bank, or a transformation of an existing conventional bank into a digital bank.

The Philippines has actually been earlier than some of its ASEAN peers in moving forward with virtual banks.

In December 2020, the Philippines’ central bank Bangko Sentral ng Pilipinas (BSP) issued its guidelines for the inclusion of ‘digital banks’ as a distinct classification of banks and to map out its corresponding licensing framework in its existing Manual of Regulations for Banks.

Much like Indonesia, the Philippines allows for the establishment of a new digital bank or the conversion of an existing bank to a digital bank. But as of September 2021, BSP stated it would stop accepting applications for digital banking licenses for three years. The number of digital banking licenses issued will be capped at just seven, to allow the government to monitor the digital banking industry.

HONG KONG

When it comes to virtual banks, Hong Kong has been an early mover. The SAR has arguably blazed the trail for these institutions when it started issuing the first batch of licences in March 2019 to online lending platform WeLab and joint ventures involving Bank of China (Hong Kong), Standard Chartered Bank and mainland Chinese insurer ZhongAn Online.

Virtual banks had collectively onboarded a total of 1.25 million customers with deposits totalling HK$24 billion ($3.06 billion) by the end of 2021, according to the Hong Kong government’s second money laundering and terrorist financing risk assessment report.

“Since launching the initiative in 2018, the Hong Kong Monetary Authority (HKMA) has approved eight virtual banks, which are subject to the same regulatory regime for authorisation and ongoing supervision as a traditional bank,” says Karen Man, a partner in Baker McKenzie’s financial services group.

“Reflecting the initial aim that virtual banks should be a catalyst for financial inclusion along with promoting fintech and innovation in Hong Kong, the differentiating factor is that a virtual bank’s services are primarily offered to retail and SMEs through the internet or other electronic channels rather than physical branches.”

Man feels virtual banks need to differentiate themselves from traditional banks, despite being subject to the same rules and regulatory environment.

“As new entrants to the market, virtual banks have needed to adopt innovative approaches to attract and main-tain their customer base, including by relying on the level regulatory playing field which enables them to seek the same authorisations as traditional banks to offer bundled investment-related services in addition to the usual deposit taking and payment services,” says Man.

Recently, Hong Kong’s ZA Bank launched its investment fund service. This makes it the first virtual player in the area to provide an integrated personal financial platform that covers banking, investment, and insurance.

ZA Bank’s customers can build their fund portfolios based on personal financial goals and transactions are automatically settled from savings accounts. This allows for the purchase and sale of funds with relative ease.

“Various surveys indicate that the general public is very interested in the banking services provided by virtual banks. However, it may take more time to know the details of such services and understand their new features as well as the relevant terms and conditions,” stated Arthur Yuen, the deputy chief executive of the Hong Kong Monetary Authority (HKMA), in a note.

“As the product design of the above recently launched personal credit products are relatively innovative, bank customers may not feel very familiarised with such products. The HKMA, therefore, requires virtual banks to enhance the related disclosures to customers,” he added.

An HKMA circular issued in September 2020 requires banks, whether conventional or virtual, to provide customers with a ‘double reminder’ when retail customers and small and medium-sized enterprises apply for unsecured loans and credit card products on digital platforms.

Even before they launched, the HKMA has also put in place a number of regulatory requirements on virtual banks regarding technology risk management and data processing, and requires virtual banks to obtain verification of their compliance by an independent third party.

“In the past few months, much work had been done on internal testing and preparations, as well as contingency plans for potential operational risks on the part of the virtual banks. While the groundwork has been meticulous, it may be unavoidable that some teething issues arise,” said Yuen in 2019.

“After all, a virtual bank is a brand-new institution operating in a brand new way amid the ever-changing challenges of the real world. Should any unexpected issues arise, the virtual bank concerned should of course address them quickly and properly. At the same time, we also hope the public can demonstrate understanding.”

While innovation is the key to the success of virtual banks, the regulatory environment needs to match the pace to provide a balance.

“Virtual banks have had to consider novel product /service combinations, marketing approaches and incentives as they seek to build their customer base. One of the key lessons has been that balancing the focus on innovation whilst also continuing to ensure compliance with the existing regulatory regime requires a considerably more nuanced approach with increased regulatory consultation to determine potential solutions than may otherwise be the case for a more traditional banking service model and product combination,” says Man.

“The HKMA, and where applicable, the separate securities regulator the Hong Kong Securities and Futures Commission continue to facilitate this dialogue and enable innovation as virtual banks continue to strive for greater financial inclusion.”