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Bangkok Post - Determining the future of virtual banking
Determining the future of virtual banking
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Determining the future of virtual banking

EXPLAINER: The Thai central bank answers frequently asked questions about its new licensing process

The Bank of Thailand hopes virtual banks can serve underserved and unserved segments of the population, along with small businesses.
The Bank of Thailand hopes virtual banks can serve underserved and unserved segments of the population, along with small businesses.

The Bank of Thailand has issued a consultation paper for the virtual bank licensing framework as part of its hearings into the creation of virtual banks as new financial service providers. Below are details about virtual banks listed in the paper and frequently asked questions.


Q: What is a virtual bank and how is it different from traditional commercial banks that have mobile/internet banking services?

A virtual bank is a commercial bank without a physical branch, and mainly provides a full range of services via digital channels.

Licence applicants must possess expertise in technology, digital services and data analytics. Mobile/internet banking is just one service channel from traditional banks.

Q: Who are the target customers?

Virtual banks can serve all customer segments, with a focus on the underserved and unserved segments, retail borrowers, and small and medium-sized enterprises (SMEs).

For the unserved and underserved segments, virtual banks can use alternative data and technology to evaluate their risks when lending to them.

Q: What are the Bank of Thailand's expectations for the licensing, and what will be the benefits to the public and businesses?

The central bank expects the banks to offer a full range of services that match the specific demands of retail borrowers and SMEs, including the underserved and unserved segments.

In China virtual banks leverage alternative data and artificial intelligence in their lending process, enabling them to provide micro-credit to a large number of low-income earners and SMEs who had previously been denied loans by traditional banks.

Some virtual banks in South Korea offer 26-week savings account products where customers can determine their amount of savings. The customers are awarded virtual gifts when they achieve their savings targets.

The Bank of Thailand expects a high-quality experience for virtual bank customers. For example, some virtual banks in South Africa let people open accounts in five minutes, using fingerprint scanning technology.

The regulator is hopeful the licensing will encourage competition in the financial sector, leading to the development of new innovative services and products. Some commercial banks in Hong Kong cancelled a specific fee in order to compete with virtual banks.

The central bank does not want virtual banks to use irresponsible lending strategies. They should not keep offering loans until borrowers fall into huge amounts of debt.

Moreover, they must not give preferential treatment to related parties or abuse a dominant market position.

Q: Will virtual banks disrupt traditional banks or even replace them?

In foreign countries, virtual banks have not had a significant impact on existing banks' financial performance, but have led to intensifying competition through the offering of new services. Thai virtual banks are expected to spark competition in the financial sector.


Q: Why is the central bank limiting the number of virtual bank licences to three in the initial phase, and will it grant additional licences in the future?

The central bank plans to initially propose up to three names of qualified applicants to the Finance Ministry. Three was deemed an appropriate number to generate competition and to enable effective supervision.

In the future, additional licences may be granted if it is determined that having more players would serve the central bank's objectives in developing the virtual banking industry.

Q: What organisations are eligible to operate virtual banks?

The central bank invited financial institutions (banks and non-banks) as well as non-financial firms to apply for the licences.

They must have a clear business model that does not focus on short-term growth.

In addition, they should have good governance, effective risk management, and expertise in digital service and agile technology. Importantly, they should have a strong financial status.

Can foreign investors apply for the licences?

Qualified foreign investors can apply for the licences. They are allowed to own no more than 25% of a virtual bank, according to the Financial Institution Business Act of 2008.

Licence holders can ask the central bank to ease this foreign shareholding rule by lifting the level to a maximum of 49% on a case-by-case basis.

Q: What is the Bank of Thailand's criteria when considering the business models of the licence applicants?

The central bank will consider their models based on many factors, including their capacity to acquire and expand their customer base, especially for the unserved and underserved.

Other criteria include their expertise in offering digital services, their IT system, and their financial projection and risk management plan.

Q: What is the central bank's process for selecting the licence holders?

The Bank of Thailand plans to set up a virtual bank selection committee, comprising financial, banking and IT experts who are not associated with the applicants.

A working committee is expected to back up the selection committee, made up of Bank of Thailand representatives from the units related to licensing development.

The central bank is expected to finalise the licensing regulations and open licence applications this year, then announce the names of applicants approved by the Finance Ministry in 2024.

The licence holders are given one year to prepare for the launch of operations, which is expected to be in the second quarter of 2025.


Q: What is the central bank's approach to regulating virtual banks? Will it be different or the same as the approach for commercial banks?

The virtual banks must comply with the same regulations as traditional commercial banks. The central bank plans to supervise them, emphasising corporate governance, risk culture, IT system continuity, efficient customer support via digital channels, and appropriate outsourcing services.

Virtual banks are expected to stringently ensure system availability. For example, downtime on their main service channel must not exceed eight hours a year. If a problem occurs, they must recover the system within two hours.

Like traditional banks, virtual banks can outsource non-core banking work or non-core IT work to third parties, such as debt collection.

However, virtual banks have to ask for the central bank's permission on a case-by-case basis if they want to outsource core banking and core IT system functions.

Q: Why are virtual banks not allowed to have ATMs or cash deposit machines? Can they offer cash deposit and withdrawal services?

The central bank wants virtual banks to mainly offer services via digital channels, with a low staff and office costs. But they can offer cash-in and cash-out services via networks, such as ATM Pool, or other financial service operators.

Virtual banks must set up their headquarters in Thailand to enable the central bank to effectively supervise them, offering a channel where customers can contact them or file complaints.

Q: Why do virtual banks have to operate in what the Bank of Thailand calls a "phasing" period for 3-5 years before they are permitted to be fully functional?

During this "phasing" period, the virtual banks are subject to specific conditions and are under the central bank's close supervision to ensure sustainable business operations without posing a systemic risk to the financial sector.

Regulators in Singapore and Malaysia also applied this phasing approach to supervise virtual banks in the initial phase.

Thai virtual banks are required to operate in the phasing period for 3-5 years. If they operate smoothly after three years, they can ask for central bank permission to be fully functional.

The factors the Bank of Thailand will consider when permitting full functionality include internal operations, business expansion potential, and the ability to raise capital to meet central bank requirements.

Virtual banks must have paid-up registered capital of at least 5 billion baht on the first day of operations, gradually increasing to at least 10 billion before the first day of full functionality.

Q: What can virtual banks do in the first days of operation?

In foreign markets, they have gradually launched services and products, starting with cash deposits, money payments, and transfers and lending, before expanding to other services.

Q: What if virtual banks fail to pass the evaluation during the phasing period?

The Bank of Thailand will ask the banks to explain the reasons for their failure to operate as planned, and request proposals for how to solve the problems.

The central bank will extend the phasing period for them if they come up with clear solutions.

If their failure to pass the evaluation is deemed to have a severe impact on the financial sector and consumers, without offering a good explanation for the failure or a clear solution, the central bank can consider asking the virtual bank to cancel the business and ask the Finance Ministry to consider revoking their licence.

All licence holders will have to prepare their exit plans in advance.

Q: Will customers' deposited money be protected by the Deposit Protection Agency?

Virtual banks are financial institutions under the law governed by the Deposit Protection Agency, meaning consumer deposits are protected.

Virtual banks have a duty to make an annual contribution to the Deposit Protection Fund from day one of operations, just like other financial institutions.

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