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The world’s central bank has released a new report on Asia’s thriving virtual banking industry, although it warns that wins such as financial inclusion need to be balanced with consumer data protection.
The integration of technology, finance and services is rapidly changing Asia’s banking landscape, the Bank for International Settlements (BIS) has said.
According to the BIS, bigtech/fintech firms are some of the largest shareholders of virtual banks across Asian markets, while many non-bank financial institutions are also being attracted to this new digital banking environment.
For example, ZhongAn, a Chinese insurer, co-owns Hong Kong’s virtual banking platform ZA Bank. Elsewhere, the investment firm Korea Investment & Securities, founded nearly 50 years ago, has a stake in South Korea’s Kakao Bank, which became the first virtual bank in Asia to go public last summer.
However, incumbent banks are also getting in on the act and taking ownership stakes in virtual bank ventures, which according to the BIS helps them to “leverage technology to revamp legacy IT infrastructure, reduce capital costs and capture new customer segments”.
Notable examples include China’s CITIC 70 percent stake in AiBank, Standard Chartered Bank's 65 percent ownership of Mox and Bank of China’s 44 percent stake in Hong Kong’s Livi Bank.
In fact, 2021 was a record year for fintech investment in the city-state of Singapore. Singaporean fintechs raised a record S$3.1bn in equity funding last year, according to data from BCG FinTech Control Tower.
Meanwhile, Thailand’s central bank said in October last year that digital payments had quadrupled from before the COVID-19 pandemic.
Indonesia also joined the South-East Asian digitalisation trend, announcing plans in autumn last year to roll out a new instant payment service that will enable, among other things, faster digital payments from banking apps.
Many new entrants are leveraging social media platforms and applying advanced data analytics.
This changed landscape has opened up opportunities for institutions to “leapfrog” traditional evolutionary processes and, therefore, advance financial inclusion.
BIS data on usage indicates that the number of regular, active users of digital banking apps is rising.
The largest population of active digital app users is in South Korea, according to the BIS report, which suggests that about 17 percent of the population uses virtual banking apps on a weekly basis, doubling the share of users over three years.
Along side this, the latest data released in January by Korea’s Financial Services Commission (FSC) showed that there are more than 100m registered accounts using open banking in the country, spread across 30m users.
This is equivalent to roughly two-thirds of the adult population, or as noted by the FSC, 105 percent of all the domestic economically active population.
Elsewhere, other jurisdictions are also seeing rapid increases in usage, with growth in Indonesia particularly striking.
One area where digital banks have shown a particular example of financial inclusion is by reaching out to women and younger users — two traditionally underserved groups.
Across the countries that BIS had surveyed, those in the 25–34 and 35–44 age cohorts made up the largest group of users, with women comprising a larger share of users in countries that have an established history of virtual banks.
In Korea, for example, women made up 49 percent of virtual bank app users on average and as many as 57 percent of all users for Kakao Bank in the Apple App Store.
In nearby Japan, where the first digital bank in Asia, Jibun Bank, was launched in 2008, women accounted for more than a third of all virtual bank users, averaging 34 percent across Apple and Google platforms.
Meanwhile, in Indonesia, although men made up a larger share of virtual bank users, the share of female users in the 18–34 age cohorts was nearly equal to that of men, underscoring the strong appeal of digital apps to younger users.
Yet, this virtual banking gold rush also presents regulatory and competition challenges that need to be tackled, the BIS warned.
New technology-driven business models that are being used by banking players exploit the expanding data footprints of consumers and firms to generate information capital and reduce the reliance on collateral when offering loans and other financial services.
Data and entities that manage data, in what the report describes as within "an unbundled banking stack within the regulated banking system", will be at the heart of this transformation.
The growing variety of new entrants to the banking industry that use data collection techniques poses two challenges for regulators and competition authorities.
First, financial regulators need to ensure that regulatory oversight delivers on the inclusion and intermediation-enhancing benefits of digital finance without compromising traditional regulatory goals, namely financial stability, adequate competition, consumer protection and market integrity.
The BIS also warns that there is a pressing need for a system of data governance that allows consumers and businesses to exercise control over their data through the granting and withholding of consent to the use and transfer of their data.
Developing a user-friendly, granular and consent-based data governance system with low transaction costs is a challenge that, when successfully addressed, will promote the development of virtual banking worldwide, the BIS says.
One example of this being undertaken is in Hong Kong, which has an integrated regulatory framework for virtual banks.
The licensing and regulatory regime in the financial hub aims to manage the full spectrum of risks arising from any source, including the ownership structure, without compromising development objectives that often rest on technological innovation. How the framework deals with data is in the early stages of development.
