ZhongAn Bank was approved to enter the sandbox trial operation in Hong Kong / Picture source network

The Hong Kong Fintech Regulatory Sandbox (Sandbox) was launched by the Hong Kong Monetary Authority in September 2016. The Monetary Authority allows banks and their partners to invite a limited number of customers to participate in the trial of fintech projects without fully complying with the regulatory requirements of the Monetary Authority, with the aim of reducing the cost of launching new products and speeding up the launch.

According to the statistics of the Hong Kong Monetary Authority, by the end of October 2019, a total of 92 new technology products had been put into trial operation in the sandbox.

During the trial operation period in the sandbox, ZhongAn Virtual Bank is temporarily closed to the public.Instead, 2,000 participants will be selected from the ZA Fam membership program as well as friends and relatives of ZA employees.These users can experience multiple online banking services such as account opening, deposit, and transfer.

ZhongAn Bank was able to take the lead in the trial operation in the sandbox this time because it has passed stress tests in various aspects such as talents, product process, back-end system and risk control during the preparation period, and has prepared for technological risk prevention.

Nevertheless, the Hong Kong Monetary Authority believes that virtual banks, as a brand-new banking institution, may encounter various unpredictable emergencies in the initial stage of operation, and banks need to handle these situations carefully.

At the same time, the Hong Kong Monetary Authority will supervise the technological risks and data processing of virtual banks.Only when ZhongAn Bank passes a series of regulatory requirements and proves its robustness and continuous management capabilities to regulators and the market, will it have the opportunity to officially operate.

Ruan Guoheng, vice president of the Hong Kong Monetary Authority, said: "We will observe the operation of virtual banks after their opening, user response, market acceptance and their impact on the banking system, and carefully consider the future development direction."

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The advantages and challenges of pure network mode coexist

According to the definition of the Hong Kong Monetary Authority,A virtual bank is a bank that provides retail banking services primarily through the Internet or other forms of electronic delivery channels rather than physical branches.Virtual banks are online retail banks, mainly targeting individuals and SME customers.

The biggest difference between virtual banks and traditional physical banks is that they do not have physical outlets and implement an online business model. This may also be achieved by mainland Internet banks such as WeBank.But compared with virtual banks, Internet banks lack an important function: remote account opening.

At the same time, Internet banks in the mainland are not qualified to absorb deposits with large deposit certificates, which will affect their ability to issue loans and thus affect their profits.

The online business model of virtual banks can improve the convenience and inclusiveness of financial services. Operating costs can also be reduced by not setting up physical outlets, so that users will also be charged lower handling and service fees. From this point of view, virtual banks can improve business efficiency and user experience.

In addition, most virtual banks are backed by the background of finance, technology, and industry, and have the advantages of financial technology.image description

Financial Technology Promoting Banking Industry Reform / Picture Source Network

Finally, one of the goals of virtual banks is to lower the barriers to entry for financial services. Compared with traditional banks, virtual banks can attract more retail customers and SMEs, and issue microfinance products.

However, the above business innovations also imply risks and challenges. First of all, to achieve remote account opening, it means that each virtual banking institution must develop the latest technology that can guarantee security, otherwise it will lead to security risks such as privacy issues. On the other hand, for the loan business, the risks to retail and SME customers are also higher.

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Regulatory innovation boosts financial inclusion

Under the current situation that Hong Kong's traditional financial service market has become saturated, the Hong Kong Monetary Authority believes that virtual banks will bring new imagination to Hong Kong's financial industry and further promote inclusive finance.

As early as May 2000, the Hong Kong Monetary Authority issued the "Virtual Bank Recognition" guidelines, indicating that the same prudential standards as traditional banks are applicable and relevant regulations are met.The Authority has no objection to the establishment of virtual banks in Hong Kong.

In September 2017, the Monetary Authority announced a series of measures, including the launch of a fast payment system, the 2.0 version of the fintech regulatory sandbox, and the introduction of virtual banks.The Hong Kong Monetary Authority stated that it welcomes the introduction of virtual banks into Hong Kong, with the aim of seizing the opportunities brought about by the combination of banking and technology, and promoting Hong Kong into a new era of smart banking.

Since then, the Hong Kong Monetary Authority has revised the "Virtual Bank Recognition" guidelines in 2018. Under the latest regulations, banks, financial institutions and technology companies can apply to hold and operate virtual banks in Hong Kong.

At the same time, considering that virtual banks are a new operating model, the Hong Kong Monetary Authority stipulates that virtual banks must submit an exit plan when applying to ensure that they can be carried out in an orderly manner when the business is terminated.

After the issuance of the "Virtual Bank Recognition" guidelines, many companies and institutions have applied for virtual bank licenses, and the Hong Kong Monetary Authority is very cautious in reviewing them.Applicants need to have an ideal business model, technology platform and financial strength to obtain a license. This also explains how the current eight licensed companies have won with their comprehensive background.

Hong Kong launched a virtual bank with the primary purpose of promoting financial inclusion. In the revised guidelines on "Authorization of Virtual Banks", the HKMA requires virtual banks to play an active role in promoting financial inclusion. It has always been difficult for ordinary citizens and small and medium-sized enterprises to obtain loans from Hong Kong banks. Virtual banks will introduce more inclusive financial services to improve user experience and make up for the shortcomings of traditional banking services.

In addition, as a global financial center, Hong Kong has lagged behind Beijing, Shanghai, Hangzhou and other cities in the wave of financial technology development in recent years. Financial technology is extremely important in the future transformation of the banking industry. Therefore, in the new financial ecological environment, Hong Kong's banking and technology industries need to work hard to promote financial technology innovation.Virtual banks are an important part of perfecting Hong Kong's financial chain.

Norman Chan, Chief Executive of the Hong Kong Monetary Authority, said: "The introduction of virtual banks is a key move for Hong Kong to enter a new era of smart banking, and it is also a milestone in enhancing Hong Kong's advantages as an international financial center. In addition to promoting the development and innovation of Hong Kong's financial technology, virtual banks can also Bring a better experience to customers and promote financial inclusion."

In the process of fintech progress, the Hong Kong Monetary Authority needs to guide companies to find a balance between risks and returns to ensure the stability of Hong Kong's financial market, but it will not be an obstacle to the free development of fintech.

From a broader perspective, the development of virtual banks in Hong Kong is also of great significance in the construction of the Guangdong-Hong Kong-Macao Greater Bay Area.epilogue

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Financial companies and technology companies have joined the field of virtual banking, and the Hong Kong Monetary Authority also welcomes and supports virtual banks.

However, the development model, security level, and profitability of virtual banks have not been formally tested by the market. Hong Kong's financial market is highly competitive, and it is not easy for virtual banks to find their own positioning and value in a market where traditional banks have an advantage. As the first virtual bank to "enter the examination room", it is still too early to draw conclusions about what kind of answers ZhongAn Bank will hand over.

On the other hand, if a virtual bank can develop a successful online business model, it can also use its experience to promote traditional banks to embrace the era of big data and accelerate technological transformation.

In the future, the businesses of traditional banks, Internet banks and virtual banks will inevitably overlap and compete.Therefore, how to develop differentiated services and complement each other's advantages is an issue that the banking industry must consider.