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26 Nov 2019

Digital banks or how to compete innovatively? 

Digital banks are a new era in the development of the financial industry. Now this phenomenon is gaining popularity all over the world. A lot of countries provide own legislation about virtual bank regulation. For example, not so long ago Taiwan, Hong Kong, South Korea, Singapore issued the first virtual bank licenses. Malaysia will be opening its door to virtual banks by the first half of 2020. That’s why it’s a hot topic.

What is a digital bank? Why are traditional banks losing their customers more and more?  

The main difference between a traditional bank and a digital one is the lack of branches. Just like traditional banks where customers can deposit, withdraw, and make transactions to others, a digital bank allows you to do the same, except only via electronic and online channels such as your mobile phone or app, without once having to visit a physical branch at all. Digital banks do not spend huge amounts of money on maintaining physical offices around the world, which means they can spend these funds on promoting their services. This makes them competitive even without significant financial resources.

How to establish a virtual bank? What is a virtual bank license? 

What is the government’s opinion on this? Most progressive countries have already recognized the trend and are setting the appropriate legal regulation. A new type of license is introduced - a virtual banking license. However, there are several conditions that companies must meet to obtain it. For a company applying to set up a virtual bank (virtual bank applicant), the fulfillment of the minimum criteria essentially means that it must have an economic substance and cannot simply be a “concept”, taking advantage of the popularity of the new technology. In addition to technology and related risks, a virtual bank must attach equal importance to the management of credit, liquidity and interest rate risks. Virtual banks are subject to the same set of supervisory requirements applicable to conventional banks. Although a virtual bank is not required to have branches, it does require to have a physical office to receive correspondence and to communicate with the government. In addition to the usual requirements, you should prove that your technology risk and data privacy comply with established regulations. It raises the problem of cybersecurity and all issues connected with this. Therefore, we can say that obtaining a virtual banking license is not easier than traditional. It is even harder. However, you should understand that big risks always come with big profits.

Now a lot of traditional banks started to receive a virtual bank license. For example, UniCredit has created an exclusive bank project – Buddybank; Commercial Bank of Dubai – mobile bank СBD NOW, etc. But the concept of a digital bank goes beyond the banking sector. For instance, international company Xiomi obtained Hong Kong virtual bank license. This shows interest in the banking sector in large corporations. Who will create a virtual bank next? Google, Facebook, Amazon?  

What jurisdiction to choose to obtain a virtual banking license?

There is no single answer. It depends on your business activity and the idea of the project. You should understand what is important to you. Prestige, low taxes, flexible government regulations or something else?

Asia market is a very prospective and suitable for new companies because of new regulation and large consumer market. There is a "regulatory competition" there. Every country wants to attract more companies on their market. That’s why they create business-oriented legislation. 

Specialists of our law firm SBSB International law group will help you to choose the appropriate jurisdiction for you. Besides it, we provide such services as: 

  • Legal consultancy and full support concerning setting up a company.
  • Preparation of any manuals, policies, codes of conduct and other documentation as may be required in connection with an application for a virtual bank license;
  • Other legal services as may be required from time to time including but not limited to drafting of contracts and agreements.

That's why don't hesitate to contact us if you don't want to miss the opportunity to establish one of the first digital banks in the world. 

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