Virtual banks, also called neobanks, primarily deliver retail banking services through the internet or other electronic channels instead of physical branches. It is commonly believed that the development of virtual banks will promote financial technology and innovation and offer a new kind of customer experience by helping to promote financial inclusion, since neobanks normally target the retail segment, including the small and medium-sized enterprises.
Even though some people use the term “virtual banking” as a synonym for “digital banking”, there is a difference: Digital banks are often the online-only arm of a bigger player in the banking sector, while neobanks are completely digital, existing independently from traditional banks (even though a neobank may be backed by a traditional bank).
If there was any doubt over the growing importance of virtual banking, the ongoing COVID-19 pandemic, which has confronted the world with an unprecedented challenge, has turbocharged a fintech revolution worldwide in general, and a virtual banking revolution in particular. COVID-19 is changing consumer behavior, quite likely forever, and all the industries need to adapt, including the banking and financial services industry. Digital transformation has quickly become the top priority for countries not wanting to be left behind.
According to the World Bank’s Global Findex Database 2017, globally, 1.7 billion people did not have a bank account, and policymakers struggled to provide affordable, safe and accessible financial services to the unbanked population. “Home to 225 million adults without an account, China has the world’s largest unbanked population, followed by India (190 million), Pakistan (100 million), and Indonesia (95 million),” the report said. “These four economies, together with three others — Nigeria, Mexico, and Bangladesh — are home to nearly half the world’s unbanked population.”
Virtual banks have a huge opportunity to grow in these areas while adding value to the societies by helping them to promote financial inclusion.
Focusing on China, we can see that the situation is not that bad, since we have seen a remarkable improvement: China’s impressive economic growth has hugely reduced poverty in the past 30 to 40 years. In 1981, 2 out of 3 Chinese lived below $1 a day. By 2010, the country had lifted an astonishing 680 million people out of poverty — more than the entire current population of Latin America.
COVID-19 is changing consumer behavior and turbocharging the city’s fintech revolution, forcing its banking and financial services urgently to adapt
Undoubtedly, China’s leadership will drive higher levels of financial inclusion in the country to achieve more inclusive growth and reduce inequality. Most of the unbanked population in China today lives in rural areas where a large portion of people do not have access to basic financial services like financial accounts, in many cases because there are no bank branches in the remote areas where they live. Not having access to a bank branch, though, does not mean that most of these citizens do not have access to a smartphone: It is common to see rural areas where people have a wide access to smartphones but no physical bank branches.
The Hong Kong Monetary Authority believes that virtual banks can help promote financial inclusion as they normally target the retail segment, including SMEs.
Eight virtual banks exist in Hong Kong after launching in 2020. They are a key pillar for the coming smart banking era and a clear example of how digital transformation has become a top priority.
In the past few years, Hong Kong has been developing into a leading fintech hub. Its fintech industry has the potential to develop much faster now by leveraging its involvement with the Guangdong-Hong Kong-Macao Greater Bay Area; and now COVID-19 is changing consumer behavior and turbocharging the city’s fintech revolution, forcing its banking and financial services urgently to adapt.
One of the areas boosting the pace of digital transformation is virtual banking. In March 2019, the HKMA announced the issuance of the very first virtual banking licenses following its publication of the Guideline on Authorization of Virtual Banks in May 2018.
In Hong Kong, virtual banks may not be so important as on the mainland when it comes to promoting financial inclusion, since the number of underbanked people is very low.
The virtual banking scene on the mainland is starting to flourish as well. Major players include WeBank (China’s first privately held digital bank, backed by Tencent, owner of Chinese super-app WeChat) and MyBank (backed by Ant Group, the world’s largest fintech by valuation and affiliate of Alibaba, owner of China’s largest e-commerce platform), and this list will undoubtedly keep growing.
To sum up, even though the mainland’s impressive economic growth has enormously reduced poverty, there is still a large number of unbanked people, mostly in the rural and poorer areas. Virtual banking may become an effective tool when promoting financial inclusion on the mainland, since it will allow people who live in remote areas with no bank branches, but who own a cellphone, to become part of the financial system. In Hong Kong, virtual banking is not so important to foster financial inclusion since the number of unbanked people is very low, but virtual banks are a clear example that the city will remain one of the world’s most important and modern financial centers.
The author works as a fintech adviser and researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics, and worked as a business analyst for a Hong Kong publicly listed company.
The views do not necessarily reflect those of China Daily.