The HK Virtual Bank License

Written by || June 20 2018

The Hong Kong Monetary Authority (HKMA) published revised ‘Guideline on Authorization of Virtual Banks’ on May 30th, 2018, opening the gateway of a new banking type – virtual bank.

The virtual banks will not set up physical branches but will deliver banking services through electronic channels e.g. internet, which does not include licensed banks that provide online services. According to the HKMA, developing virtual banks will encourage the development of financial technology, innovations as well as financial inclusion. The platform will start primarily payment service for retail segment, also will help in retail and SME development. There should be no minimum account balance or low-balance fees.

Over 50 companies from around the world showed their interest in applying for the license. The first batch of application deadline is August 31st 2018. The HKMA deputy chief executive Arthur Yuen Kwok-hang said that it is expected the first virtual banking license would be issued by the end of this year or Q1 2019.

Using technology to control risk is the biggest focus

Application requirements include

  • Applicants can be banks, financial institutions and technology companies with a strong parent behind to provide enough capital, technology support and other related support.
  • Existing substance is a must, rather than just providing an idea of a new popular technology. It is stressed that applicants must have a concrete and credible business plan.
  • A virtual bank will be in the form of a locally-incorporated bank, with an office in HK for interfacing with the HKMA.
  • Applicants should have an exit plan in case the business goes unsuccessful.

Without a doubt, the virtual banks will rely heavily on technology to control risks (including credit, market, and operational). It is highly possible that the HKMA will not share central bank data with virtual banks in the beginning stages. Setting up KYC, AML and sanction utilities will be a big initial focus as will be using technologies e.g. biometric identification, facial recognition, AI machine learning and data analysis to increase the accuracy of identity matching.

The proposal will bring new fresh business models and provide more convenient financing services for HK locals, which had been a gap in the market. Alipay HK launched in May 2017. By the end of March 8th 2018, over 1 million Hong Kong people use the app for daily payment - indicating tremendous demand.

A virtual bank is a customer-focused financial inclusion service provider. With strong emphasis of technology support and risk control, it will hopefully bring a fresh driving force to the banking industry.