The Hong Kong Monetary Authority (HKMA) has released a revised “Guideline on Authorization of Virtual Banks” as part of a public consultation. Hong Kong, initially slow to embrace the Fintech revolution, has since increased their innovative velocity in financial services. The HKMA welcomes digital challenger banks and seeks to facilitate the establishment of virtual banks in Hong Kong. The government agency believes that the development of virtual banks will further promote Fintech development in Hong Kong and offer a new kind of customer experience. The HKMA also believes these virtual challenger banks can help promote financial inclusion for both consumers and SMEs.
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. Around the world, traditional banks continue to shutter brick and mortar locations but the process is slow and challenging. Digital challenger banks, on the other hand, are not impeded by legacy tech nor a portfolio of unnecessary real estate. In some countries, such as the United States, Fintech innovation has been impeded due to antiquated regulatory institutions and push back from established financial firms.
The HKMA says virtual banks must present a concrete and credible business plan, and properly managing the risks associated with digital banking, treat customers fairly, and maintain adequate capital commensurate with the nature and scale of operation of the virtual bank.
Some updates include:
- Banks, financial institutions and technology companies may apply to own and operate a virtual bank in Hong Kong.
- 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.
- 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.
- 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.
- 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 will last until 15 March 2018 but companies intending to apply for a virtual banking licence may submit an application to the HKMA now.
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