Can virtual banks accelerate initiatives

toward cashless and smart nations?

In 2014, Singapore launched its Smart City initiative, and one of the

tenets was to establish a cashless nation — the ideal being that people

and businesses can simply go about with their transactions without

physical cash ever having to change hands.

Efforts toward “cashless nation” accelerated in 2018 when

technologies like near-field communication, QR-code scanning, and

tap-to-pay started to become popular.

Cashless transactions are not exactly a new technology — the

precursor of course had been credit cards and debit cards. However,

today, technology is enabling innovations in finance that go beyond

banking — decentralized finance, peer to peer transactions, near

instantaneous cross-border payments, and the like.

Innovations in finance
An offshoot of the digital nation initiatives are innovations in finance

— particularly with fintech startups. These platforms are providing

financial services that go beyond traditional banking.

Credit- and debit-card transactions have become a norm in developed

economies, with high card penetration rates. The incumbent

popularity of cards have made it inconvenient for users to switch

paradigms when it comes to making digital payments.

However, users in emerging economies — such as those in Southeast

Asia, Africa, and Latin America — offer an encouraging opportunity

for fintech platforms. It is in these countries where mobile payments

and other digital modes of transacting have become primarily popular.

In China, for example, Alipay and WeChat are popular means of

transacting. Such mobile services are providing a means to serve the

underbanked and unbanked.

Another example is the concept of virtual banking, which are

essentially banks that do not have the traditional branch

infrastructure. Also known as a “direct bank”, these institutions offer

services remotely through online banking and mobile transactions. By

doing away with physical infrastructure, there is significant reduction

in overhead costs. An offshoot of this is the potential to extend

financial services beyond borders— something that will take time for

traditional banks to establish.

Speaking about banking infrastructure, Amar Shah, Director at

Namana Investments (HK) Ltd. and former Managing Director at

Morgan Stanley HK, highlights the advantages: “Most of the

traditional banks have clunky infrastructure. This is not just in tech,

but also physical infrastructure — they have branches, and they

require office space. With virtual banks, we should start to see more

efficient lending models. Hopefully this leads to more micro-finance

and micro-lending. This will be key in propelling the rest of the

business community toward better efficiency.”

To illustrate a use case for virtual banking, we can point to the Greater

Bay Area initiative, which brings together 11 cities across China, Hong

Kong and Macau, into a hub for finance, business, culture, education,

and industry in general. The region has a population of almost 70

million across approximately 55,000 square kilometers — significantly

larger than other major tech hubs across the world, like Silicon Valley.

Integrating regulatory and compliance services

One challenge that needs to be addressed here is how to integrate

regulatory and compliance services into virtual banking, given the

differences in financial jurisdiction across the GBA’s different

locations.
“One of the biggest concerns faced by banks is

compliance.”

“One of the biggest concerns faced by banks is compliance,” says Shah.

“Post 2007 financial crisis, there had been a lot of checks and

regulations put in place, and big financial institutions had to beef up

their compliance departments. As for the KYC process, there has been

a lot of manual processes involved, and data stored in centralized

servers.”

Integrating the Know-Your-Customer or KYC process into financial

services is already an established need. But with such a big geographic

area and diverse economic and financial systems, there is a need for

efficiency in this matter. There is also the need to overcome another

challenge, which is data privacy amidst the rise of privacy frameworks

such as the European GDPR and California’s latest CCPA.

In China, the closest regulatory framework that protects privacy are

the Cybersecurity Law and the Personal Information Security

Specification, which regulates the collection, storage, use, sharing,

transfer, and disclosure of personal information. In particular, it

provides guidance on compliance with relation to processing such

information.

“With e-KYC, verification is reduced to a few

hours.”

Hans Lombardo, Co-Founder and Chief Marketing Officer at

KYC-as-a-service company Blockpass, weighs in on how decentralized

KYC can significantly make compliance easier for businesses that have

operations that cross borders.

“With e-KYC, verification is reduced to a few hours. This means you

can open a virtual bank account much faster, as compared to a

traditional bank, in which KYC would take a week for individuals or up

to a month for corporate accounts.”

Such a decentralized approach also provides for better data control

ownership for users — no central institution actually owns or stores

the identity data. Users only share their data to financial institutions

on an as-need basis. This approach also addresses the question of data

sovereignty — something that may be a concern for users, businesses,

or regulators in certain jurisdiction.

“Instead of allowing companies in the US for example to store data on

their users, a decentralized platform lets users keep their data on their

devices and only share what they want to share on a case-to-case basis.

With an on-chain verification procedure, a user can still remain

anonymous, but can be verified using KYC,” Lombardo adds.

This goes beyond individual banking activities. KYC can also be an

integral component of due diligence for businesses that are into

investing and fundraising. Shah cites how decentralized crowdfunding

can benefit from such an approach.

“At the height of the popularity of crowdfunding, we did not have

control over who was raising money or the companies behind them.

Now, you have another layer of filtering — someone to do the KYC on

investors.”

Trends in virtual banking

One interesting trend in the virtual banking industry is in how some

virtual banks have traditional banking institutions backing them. Of

Hong Kong’s eight institutions granted virtual banking licenses in

2019, four are backed by traditional banks or non-bank financial

institutions.
Essentially, banks that already have the infrastructure are applying for

virtual banking licenses in order to more quickly expand their

operations beyond their traditional scope and coverage. A diverse

region such as the Greater Bay Area will be a good testbed that can

determine the success of such a decentralized approach. This can then

perhaps be duplicated in other diverse regions, such as Southeast Asia

for instance.

There is still room for growth in the virtual banking sector. In Hong

Kong, a survey by KPMG expects virtual banking customers to be in

the tens of thousands by the end of 2020 — the first year after the HK

Monetary Authority started granting virtual banking licenses in 2019.

However, this will only account for 2–3 percent of deposits.

To conclude, what’s sure at this point is that virtual banks “will be a

major driver of change and improve competition in the sector, forcing

traditional banks to innovate and improve their service offering,” as

KPMG’s The Future of Banking 2019 report puts it. “This will all be for

the benefit of the customer, who stand to be the real winners.”

Featured in this story

Elevate interviews experts in technology to gain their insights, with the

goal of sharing knowledge with the community. Please get in touch

with us to contribute, engage our experts, or become part of our

network.

Hans Lombardo is a successful entrepreneur and enthusiastic

proponent of blockchain technologies. He is a co-founder of

Blockpass, a self-sovereign identity system and KYC-as-a-service

provider. He is also a co-founder of Chain of Things, a Hong

Kong-based startup integrating blockchain & IoT devices. In 2012, he

sold his previous company, a data collection and analytics research

firm focused on mainland Chinese high-technology industries. He is

an Internet industry veteran with regional management experience.

During the Internet boom, Hans managed the internet.com Venture

Capital Fund in Asia, investing in a number of Internet startups in

Greater China. As a tech journalist in the late 1990s, he interviewed

Jack Ma, Jerry Yang, Vinton Cerf and Richard Li Tzar Kai. Hans

earned a Ph.D. degree from the University of Hong Kong in 1997 and a

Sir Edward Youde Memorial Fellowship in 1995–1996.

Amar Shah is Director at Namana Investments (HK) Ltd. and former

Managing Director at Morgan Stanley HK. A global business leader,

consistently delivering results, he is an expert in building strong,

resilient and engaged teams that repeatedly provide effective solutions

to complex problems. Shah is a leader with a reputation for integrity

who transforms business performance by building global strategies,

operating models, culture and governance.

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