Digital Banking Management – An External Perspective

The rise of digital banking is becoming a global trend and poses many challenges to the legal framework and regulatory operations of many countries. The practical management of these operations in mainland China, Taiwan, and Hong Kong may provide valuable insights for Vietnam in the process of building its legal framework in the future.


Daring experiments

The comprehensive financial strategy and the relentless development of financial technology in recent years have not only changed the business models of traditional banks but also created new trends for the banking industry. Among them, internet-only banks – a new generation of banks without physical branches and all financial services are conducted online or through mobile channels.

Since 2014, China has granted pilot licenses to four internet-only banks, including: (i) WeBank by Tencent; (ii) MYbank by Alibaba; (iii) AiBank by Baidu; and (iv) Citic. Among them, WeBank was the first internet-only bank to start its trial operation on January 18, 2015. With a registered capital of 3 billion RMB, its main business scope is providing deposits below 200,000 RMB and loans below 5 billion RMB.

Backed by Tencent – the technology giant owning QQ and WeChat, WeBank has combined finance and technology to make a significant breakthrough in attracting customers, providing financial services, and managing risks entirely through online channels. By leveraging big data extracted from the enormous amount of information resources on various Tencent platforms, WeBank is able to utilize information such as operating time, login behavior, virtual asset management, payment frequency, shopping habits, and social media behavior… to develop an extremely efficient and sophisticated personal credit rating system. This merging of data and financial technology not only opens up a new era for the banking industry but also raises questions about privacy and personal information security.

By leveraging big data extracted from the enormous amount of information resources on various Tencent platforms, WeBank is able to utilize information such as operating time, login behavior, virtual asset management, payment frequency, shopping habits, and social media behavior… to develop an extremely efficient and sophisticated personal credit rating system.

However, at the time these internet-only banks were licensed to operate, there was still no official legal concept for this model in China’s Commercial Banking Law of 1995, as amended in 2003 and 2015. Instead, China introduced controlled sandbox mechanisms with the motto “license first, regulate later”.

In Taiwan, the Law on Experimentation for Financial Technology Innovation and Development was passed as early as December 2017. Accordingly, the internet-only bank model also received attention from all levels. By April 2018, the Financial Supervisory Commission of the Republic of China (FSC) announced policies allowing the establishment of internet-only banks to support the banking system in catching up with the digital trend, as well as encouraging financial innovation and enhancing comprehensive finance to meet the needs of young consumers.

One year later, this commission licensed three internet-only banks, including: (i) LINE Financial Taiwan, operated by the Japanese LINE Group; (ii) Next Commercial Bank, operated by the Taiwanese telecom Chunghwa; and (iii) Rakuten International Commercial Bank, operated by Japanese e-commerce company Rakuten Inc. and Taiwanese IBF Financial Holdings. Among these giants, the LINE Group is also the technology conglomerate behind the most widely used chat and social media app in Taiwan, similar to WeChat in China.

In Hong Kong, the establishment and operation of internet-only banks fall under the management of the Hong Kong Monetary Authority (HKMA). At the same time as Taiwan, the first internet-only bank license in Hong Kong was also issued in 2018. As of now, eight internet-only banks have been licensed based on the legal framework established by the HKMA’s Guideline on the Authorization of Virtual Banks, Section 16 (10) of the Banking Ordinance issued in May 2018.

Gradually shaping the licensing and management framework

Unlike the digitization activities of existing banking services provided by licensed traditional banks, internet-only banks are independent legal entities operating based on digital technology platforms. Therefore, licensing and management are seen as a challenge. Currently, Taiwan and Hong Kong have essentially shaped the legal framework for regulating these issues.

Regarding the establishment license, the regulatory agency will focus on assessing various conditions including capital, scope of operations, ownership structure, supervisory standards…

Firstly, the founding subject must meet the statutory capital requirements. In Taiwan, the statutory capital amount is 10 billion NTD, equivalent to the statutory capital requirement for establishing a regular commercial bank. In Hong Kong, this figure is 300 million Hong Kong dollars.

Secondly, in terms of ownership structure: Taiwan requires at least one shareholder to be a bank or a financial company, and the minimum ownership percentage that this shareholder holds must reach 40%. On the other hand, Hong Kong requires a minimum of 50% ownership by a reputable bank or other reputable financial institution in the community with appropriate experience. In the case of a bank participating in a 50-50 joint venture with a non-banking organization, the bank must have the right to appoint the chairman of the internet-only bank, and the chairman must hold the deciding vote. Additionally, the parent bank (or financial institution) must commit to providing additional capital and/or liquidity support when needed. At the same time, the parent bank (or financial institution) is also expected to play an active role in supervising the business operations and work of the internet-only bank by participating in the board of directors.

Thirdly, Taiwan requires that the major shareholder of the internet-only bank must have the ability to ensure integrity and compliance, as well as the ability to meet the professional requirements of the person in charge of the bank, have effective financial and business capability. In addition, this shareholder needs to have specific abilities to develop business strategies, forms of cooperation with other financial institutions, business plans, investment structures… for the internet-only bank. In the case where a major shareholder comes from a non-financial industry (such as financial technology, e-commerce, or other professional fields), they must demonstrate a successful business model. Conversely, in Hong Kong, there are no specific requirements for major shareholders.

Fourthly, requirements for standard systems and supervision: In Taiwan, internet-only banks are supervised according to the same standards applied to regular banks, which include compliance frameworks, customer data protection, internal audit, anti-money laundering, counter-terrorism financing, information security, corporate governance… Similarly, Hong Kong stipulates that internet-only banks must meet the minimum establishment criteria and comply with the supervisory requirements similar to those for regular commercial banks as specified in the ordinances of the HKMA. In addition, applicants for internet-only bank establishment licenses must have a detailed business plan outlining their planned business operations and proposals for continuous compliance with the criteria. To facilitate inspection and investigation by the HKMA, internet-only banks must also keep complete records, accounts, and transaction records in Hong Kong.

Fifthly, regulations regarding physical presence: In addition to the main office and customer service center to meet direct customer needs, internet-only banks in Taiwan are not allowed to establish physical branches. In Hong Kong, internet-only banks are required to maintain physical presence through an office in Hong Kong. In case they want to establish branches or maintain operational offices locally, internet-only banks must obtain approval from the HKMA and meet the conditions imposed by law.

In terms of management, the FSC of Taiwan has announced plans to strengthen the supervision of various aspects of internet-only bank operations, including risk management, credit risk, operational risk, reputation risk, corporate governance, market competition behavior, and consumer protection. Similarly, the HKMA emphasizes the duty to ensure safety, information security, risk management, business planning, and clarification of terms and conditions with customers of internet-only banks.

Nguyen Ngoc Phuong Hong – Luu Minh Sang (University of Economics – Law, VNU-HCMC)

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