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The Bank of Thailand (BOT) has announced that it is now accepting public feedback on its proposed rules for the opening of virtual banks, a key part of its wider digital economy strategy.
Last week, the BOT invited members of the public to respond to its new consultation paper on the opening of branchless commercial banks, also known as virtual banks.
Respondents have until February 12, 2023 to submit their feedback, which can be done via email or via the BOT website.
If adopted, the BOT believes its new guidelines will help to stimulate the growth of virtual banks that can offer financial services at more competitive prices than that of traditional banks.
With lower expenses in areas such as building and staffing costs, the BOT expects that virtual banks will find a healthy product-market fit among both retail customers and small and medium-sized enterprises (SMEs).
According to the central bank, although both of these customer groups have a high level of digital literacy, their use of certain financial services remains low, due to cost barriers and issues such as lack of credit history.
BOT recommendations
Under the BOT’s proposed guidelines, virtual banks should be allowed to operate a full commercial banking business, based on a specific virtual bank licence.
In the initial rollout of virtual banking, the BOT will issue provisional licences to up to three applicants, who will then undergo a three to five-year transition period before a full licence is granted.
The BOT said it plans to open applications for virtual bank licences in Q1 this year, with the first successful licences being awarded in 2024, ahead of the banks opening their virtual doors in 2025.
Unlike in the UK and Australia, where an unlimited number of companies can be issued digital banking licences, the BOT said it will stagger the number of licences it issues over time.
This is the model used in South Korea, Singapore and Malaysia, where digital banking licences are issued periodically in groups, as covered by VIXIO last year.
To apply for a licence, virtual banks in Thailand must have paid-up capital of at least 5bn baht ($150m) before opening, and must increase their paid-up capital to at least 10bn baht ($300m) before exiting the transition period.
This requirement aims to demonstrate that the virtual bank can continue to expand its operations and ensure capital adequacy, while being able to absorb expected losses in its early stages.
After obtaining a licence, virtual banks would have to comply with many of the same rules as traditional banks, including having to remit money to the Financial Institutions Development Fund (FIDF) and the Deposit Protection Agency (DPA).
As noted by the BOT, this will ensure that virtual bank deposits are afforded the same protections as traditional bank deposits.
The BOT will also supervise virtual banks in areas such as governance best practices and risk management.
This includes requirements for virtual banks to demonstrate IT systems resilience, efficiency serving customers via digital channels, and appropriate outsourcing procedures for inputs such as technology and data.
Data, infrastructure and interoperability
Alongside open competition, the BOT also intends for open data and open infrastructure to be among the guiding principles of its virtual banking framework.
In its consultation paper, the BOT said its guidelines intend to “drive the necessary digital infrastructure” and develop “centralised standards” that can interoperate with related agencies.
For example, the BOT expects virtual banks to provide an infrastructure that can verify digital ID, for both individuals and businesses, and be connected to other similar platforms.
The goal of interoperability aligns with that of Thailand’s National Digital ID (NDID) infrastructure, the Department of Business Development and the Electronic Transactions Development Agency (ETDA).
Ultimately, the BOT is aiming for both individuals and businesses to be able to open bank accounts virtually, and to engage in other more technical procedures such as multi-party or multi-product digital signatures for use in lending or debt restructuring.
Similarly, the BOT aims for data that is currently “scattered” across different agencies and data holders to be made accessible for virtual banking purposes.
For example, credit analysis based on behavioural data and debt serviceability will enable SMEs and borrowers with little credit history to gain access to new financial products using risk-based pricing.
According to the BOT, Thailand has an urgent need for low-cost, easily-accessible digital financial services that can unlock the potential of the country’s SMEs.
According to the Puey Ungphakorn Institute of Economic Research, more than 60 percent of Thai SMEs do not have credit with commercial banks or specialised financial institutions (SFIs), and difficulties accessing credit mean that SMEs often need to post additional collateral or guarantees, or seek alternative financing through non-bank financial institutions (NBFIs) or joint ventures.
