Virtual Banking - Financial Reality

Merchant Services Business Owner

Publication Date: June 17, 2019

Author: Nandan Sheth


Recent regulatory developments in Hong Kong are swiftly moving virtual banks from concept to incipient reality. While completely new virtual banks may be getting much of the current attention, the basic principles and technology are also attracting interest from traditional banks seeking an efficient way to digitise their existing offerings. Suresh Chandrasekaran, VP, Global Financial Solutions at First Data, checks out the drivers, priorities and opportunities for virtual banking in Asia and how choosing the right technology, delivery method and provider is critical to success.

In May 2018, the Hong Kong Monetary Authority (HKMA) published guidelines for the authorisation of virtual banks1.

While clearly a major step for Hong Kong, this move also resonates with other regulators and governments in Asia looking to increase levels of financial inclusion, whilst also reducing the size of their cash economies and improving financial transparency. It is estimated that more than one billion people in Asia still have no access to formal financial services, so the magnitude of this change represents a major opportunity2. Virtual banks represent a logical next step for regulators on this journey, which started from conventional banking and progressed to permitting non-financial institutions such as telecoms, insurance and even smart phone companies to offer consumer financial products, such as lending, to their end users. The next step came in concepts such as Hong Kong’s eMoney licences that allow pre-paid cards and limited deposit facilities to be provided (but not lending)



Virtual banks (and their implicit digitisation) are the latest iteration in this progression of financial enfranchisement. They have much to offer in this regard, because they do not have the cost overheads of traditional banking infrastructure, such as branch networks. As such, it is possible for them to operate profitably while servicing the high volume of relatively low value accounts likely to result from those currently financially excluded. 

This model also fits well with the digital nature of the marketplace in Asia, which has grown at a ferocious pace in the past five years, largely driven by Chinese payment entities, such as WeChat Pay and Alipay, and Asian banks such as DBS Bank. At the same time, the lean cost model and high automation/ innovation of virtual banking is also appealing to established bricks and mortar banks. Some of these are looking to start virtual bank businesses, to augment and incrementally transform their existing business, while others are trying to transform their legacy business wholesale using virtual banking technology


But what form must that technology take? Financial enfranchisement represents a major opportunity for virtual banks, but the competitive nature of the marketplace (since May 2018 when the HKMA published its virtual banks guidelines, has already attracted ~30 applications) and the relatively low margins per customer make speed and scale imperative. Building a new virtual bank technology stack from scratch in-house would simply take too long to be competitive, to say nothing of cost and ongoing maintenance/enhancement. For proof of this need for speed in a digital marketplace, one need look no further than China, where in just a few years payment companies such as WeChat Pay and Alipay have gone from zero to ~1.7 billion active users.

Therefore, the overwhelming technological need in virtual banking is for a turnkey solution that is highly scalable, natively API based/supported and also extensible in terms of product offering. In other words, an out of the box payments ecosystem that includes functionality such as electronic wallets, cards (credit, debit and pre-paid), loans, current accounts, small deposits etc. Due to their target client base, virtual banks do not usually need more traditional core bank system features, such as asset management, large/ structured deposits or corporate banking. However, if they do (or they are an existing traditional bank looking to transform legacy systems) then if the provider of a virtual banking solution can deliver integration between that and legacy bank systems, the client benefits from the best of both worlds. Furthermore, they do so without incurring the expense, risk and effort of conducting integration in-house. 

A key technological requirement for virtual bank platforms is comprehensive mobile functionality. Virtual banking is not just about broadening the customer base vertically into those currently unbanked, it is also about servicing “digital natives” (millennials and subsequent generations) who are a fast growing and profitable customer segment. Fortunately both groups are increasingly well served by Asia’s mobile networks. Asia’s 4G penetration is expected to surpass 50% of connections by 2019 and will then dominate to 2025, while 5G is expected to cover 37% of the Asian population by 20255 . The higher bandwidth of these 4G/5G networks is well-suited to supporting more sophisticated mobile applications than just SMS-based banking. These more advanced applications can deliver a more consumer friendly interface, as well providing a choice of bank interaction, such as app or card. 


While these technological needs are paramount, there are similarly critical criteria for how they are delivered. One obvious point is that virtual banks cannot afford the costs and inefficiency of solution fragmentation, so picking and mixing individual functionality from multiple suppliers is not an option. Instead, they need a provider that can deliver all the solutions they need from cards to mobile to loans to wallets in a single service. Much faster to implement and no interoperability concerns. 

This is exemplified by the concept of a “virtual bank in a box”, which integrates a turnkey solution, a core banking solution and a consumer facing interface. By using an API based approach, this quickly delivers an attractive interactive solution for end users, while minimising the effort, cost, and risk for the bank.

Similarly holistic needs apply to payment channels. Again, negotiating individual acquiring/issuing relationships from scratch will take up precious time and not necessarily guarantee the best commercial terms anyway. By contrast, if the technology solution provider already has these relationships in place, then implementation becomes almost plug and play as part of a turnkey solution.

A related consideration is how well a provider can combine scale economy, regulatory compliance and cloud technology. A virtual bank solution provider that can consolidate processing volume into a few high capacity data centres around the globe achieves scale cost economies that it can share with its clients. However, this runs counter to recent regulatory trends, where countries are becoming more insistent that their citizens’ financial data should only be held and processed in-country. Complying with these requirements would inevitably appear to increase costs, but if the solution provider is able to leverage cloud technology appropriately, then this need not be the case. In this scenario, the provider uses a suitable third party cloud provider (or perhaps the virtual bank’s own cloud) within the appropriate country to host the data, thereby achieving compliance but also retaining scale economy cost savings. 


Recent developments in Hong Kong underline the importance that regulators and governments in Asia more generally are attaching to greater financial inclusion6 . Virtual banking as a concept is almost perfectly aligned to help deliver on these various inclusion initiatives. The logical strategy for virtual banks looking to seize this opportunity is to lead with consumer finance (e.g., retail finance and personal loans) coupled with simple deposit products (e.g., savings, checking, and CDs), which would also drive success in the conventional consumer market in addition to the financial inclusion demographic. 

However, virtual banks’ ability to execute this strategy effectively will depend heavily upon their choice of solution provider. Picking a provider that can address the needs outlined above will give them the best possible chance of quickly capturing a client base of critical mass, as well as the ability to service it profitably and efficiently, both now and in the future.


Virtual Bank in a Box

Leverage our experience of working closely with digital banks around the world and our existing partnerships to offer comprehensive retail banking solutions (including consumer finance and deposits) to deliver quick time-to-market solutions.

Digital banking technology expertise

Together with our partners, First Data delivers an end-to-end technology platform that is cloudarchitected and API-accessible, facilitating integration across the technology stack and third parties. Our state-of-the-art data centres in China and India offer economies of scale, which translates into greater cost savings for our clients.

Regulatory-compliant solutions

We have a strong understanding of the banking sector’s needs, as well as the regulator’s expectations in these areas. Our solutions are fully compliant to PCI mandates and local compliance and legislation, including data privacy regulations.