The creation and growth of virtual banks are redefining the banking ecosystem. These banks are disrupting the fundamental idea conceived of a traditional bank.
APAC's virtual banking landscape
Twimbit defines a virtual bank as one that primarily operates without physical branches through the internet using electronic delivery channels (smartphones, tablets, laptops, etc.). Retail banking services such as account opening, deposits, loans, fund transfer, and investments are delivered online only using digital channels.
Moreover, virtual banks are not digital branches of incumbent banks, and not necessarily established by them. Non-banking service providers such as telecom, technology, and fintech companies are eager to establish virtual banks.
‘Virtual’ bank is the most used term in various geographies. It is also called as a ‘digital-only’ or ‘digital’ or ‘challenger’ or ‘neo’ bank. Twimbit chooses to use “virtual” bank as the term for this report.
Virtual over traditional banks: Key characteristics and difference
Fundamentally, virtual banks differ from traditional banks in their operations through the digital-only value proposition. Virtual banks primarily target internet-savvy millennials due to their constant use of the internet and vast exposure to fast-moving technologies. To realize the full potential, virtual banks are harnessing technological innovations and developing agile, lean business models. The products and services are built on disruptive technologies (e.g., AI-assisted chatbots, cloud platforms), changing the way individuals and companies can access, use, and benefit from banking services.
The biggest opportunity for the virtual banks is to leverage their omnipresence, ease of access, low-cost services (the result of reduced overhead costs) to serve the unbanked population of the region. As statistics indicate, over 2 billion population of the APAC region have no access to banking services. The small-medium enterprises is another large segment that is attracting the attention of the virtual banks.
Figure 1:Virtual banks exhibit new age characteristics
Figure 2: Virtual banks are changing the traditional ways of banking
*Preliminary license: In certain APAC regions, the regulatory authorities issue a preliminary license to begin operations as a virtual bank, and grant a final approval or license post assessing the viability of the bank after a specific cadence.
The emergence of virtual banks
The growing popularity of virtual banks is not restricted to established banks branching-out with digital-only presence; it has led to non-banking services providers building virtual banks (e.g., Alibaba’s MyBank and Xiaomi - AMTD group’s Airstar Bank).
The emergence of virtual banks has given an opportunity to various technology, telecom, fintech giants to address a market opportunity that was once considered a no-entry for non-banking players. Further, many consortia are attracting venture capital (VC) funding from global VC firms, such as Tiger Global, Sequoia Capital, Ribbit Capital, Social Capital, etc.
Existing banks are now being pressured to ramp up and take a more digital-focused approach to compete. They are also looking at seizing this opportunity to enter new markets as pure-play virtual banks. Some of them are also launching their version of digital banks under entirely new brands to help communicate the energy and excitement of a start-up but leveraging their decades of experience as a trustworthy financial services company.
These trends validate the huge potential virtual banks hold in achieving the paradigm shift in digital-only banking among the unbanked and underserved population.
A majority of consortia formed to build virtual banks are usually a collaboration between technology, telecommunication, and traditional banks. The consortia aim to leverage the technical know-how of a technology giant, the wide network reach of a telecom giant and the credibility and regulatory expertise of a traditional bank. This can transform the way banking products and services are delivered to the population through virtual banking.
An example to further highlight this proposition is the alliance between Grab (a transportation hailing app) and Singtel, to leverage their current reach of customer data and network to bid for a virtual banking license.
However, the full operability and scalability of virtual banks have been delayed due to the slow-paced movement in the region’s regulatory environment. While in various APAC countries, such as Hongkong, South Korea, and Australia full virtual banking license is granted, there are other countries, who are either evaluating or partially granting the license to operate as virtual banks. In cases, where full operating virtual banking license is not granted, virtual banks hold alternative licenses (e.g., Australia’s partial ADI) or work with licensed partners to offer their services (e.g., India, Indonesia).