Virtual banks are on the horizon after the Royal Gazette published on March 4 the criteria for companies applying for a licence.
Companies can submit applications to the Bank of Thailand from March 20 until Sept 19 this year, along with supporting documents and information.
The initial plan was to limit the number of virtual bank licences to three, but the final decision placed no limit on the number as the Finance Ministry wants to open up the process to qualified applicants, allowing the central bank to determine an appropriate amount to stimulate competition without jeopardising the stability of the financial system.
The central bank and Finance Ministry are expected to take about nine months to jointly consider the applications after the application deadline.
The central bank wants virtual banks to address the needs of unserved or underserved customers who have not accessed traditional financial services, such as low-income individuals or small and medium-sized enterprises (SMEs) facing difficulties accessing capital sources.
This difficulty could be the result of traditional banks rejecting applications for unsecured loans, leading applicants to rely on informal borrowing channels.
The regulator expects the formation of virtual banks will lead to lower interest rates and fees as the operating costs for purely digital banking services are lower given fewer staff and no physical branches.
Virtual banking should introduce more players to the market, fostering competition that should eventually result in virtual banks providing more reasonable rates in terms of interest and fees, according to the central bank.
However, the extent to which these banks can facilitate easy access to capital for low-income earners and SMEs while ensuring consumer safety remains a subject of debate.
OPERATIONAL IN 2026
The central bank expects the Finance Ministry to announce the approval of virtual bank licences in June 2025, with business operations scheduled to commence in June 2026.
Wipawin Promboon, senior director of the financial institutions' strategy department at the Bank of Thailand, said the formation of virtual banks should lead to lower interest rates and fees as they lack physical branches and have fewer staff.
Pure digital banking services in other countries, particularly WeBank in China and Nubank in Brazil, significantly improved financial inclusion for unserved and underserved populations, noted the central bank.
Launched in 2014 under China's Tencent Group, the operator of WeChat, WeBank offers comprehensive financial services to retail customers and micro, small and medium-sized enterprises (MSMEs). With a customer base of 370 million individuals and more than 4.1 million MSMEs and sole proprietors, WeBank is a prominent player in the digital banking landscape, according to the bank's website.
Founded in 2013, Nubank said it has evolved into the world's largest digital financial platform, serving up to 94 million customers in Brazil, Mexico and Colombia. The bank focuses on providing simple, intuitive, convenient and low-cost financial solutions for individuals and SMEs.
FRESH HOPE
The Federation of Thai SMEs is looking forward to easier access to financial resources for SMEs once virtual banks are established, helping them overcome a major obstacle.
Sangchai Theerakulwanich, president of the federation, said SMEs are grappling with the impact of three challenges: geopolitical conflicts, exemplified by shipping disruptions in the Red Sea; the low-key trade spat between the US and China; and a debt crisis in Thailand.
"The last challenge is horrifying because the country is plagued with a relatively high level of household debt, weakening consumer purchasing power and making it difficult for the government to drive the economy," said Mr Sangchai.
He contends virtual banks can help SMEs better deal with their liquidity problems, enabling easier access to loans as traditional banks adopt stricter application criteria.
The entry of virtual banks should intensify competition, helping SMEs, freelancers and low-income earners who badly need funds, said Mr Sangchai, as these banks should be able to offer lower interest rates and fees.
More competitive pricing should enable borrowers to access loans and other financial services that are currently unavailable to them at traditional commercial banks, according to the central bank.
Sanan Angubolkul, chairman of the Thai Chamber of Commerce, said he expects virtual banks to better serve the needs of customers and provide improved access to financial services to unserved segments of the population and SMEs.
Virtual banks can achieve these goals by using digital channels, leveraging alternative data and technology to provide financial services tailored to the specific needs of each customer group, said Mr Sanan.
Virtual banks are an option for certain customer groups as they rely on a database of consumers and new business operators from telecom companies, he said.
However, these banks still face challenges in terms of deposit mobilisation and loan analysis, which are at the core of the banking system, said Mr Sanan.
In addition, the mounting costs of digital infrastructure require expertise in technology, digital services and data analytics to improve operational capacity and performance, he said.
Meanwhile, many traditional banks are offering more digital financial services such as mobile and internet banking. Customers can make transactions online without fees, while banks have fewer staff at their branches, helping them save on costs over the long term.
"Virtual banks are unlikely to have a significant impact on existing banks' financial performance, but should intensify competition by offering new services," said Mr Sanan.
"Traditional banks must adapt and improve their efficiency by adopting new technology and data analytics to meet customers' needs, in response to 'Thailand Vision 2030', which aims to make Thailand a regional financial hub."
DISRUPTION UNLIKELY
Thanyalak Vacharachaisurapol, deputy manager at Kasikorn Research Center (K-Research), expects the impact of new virtual banks on traditional banks to be relatively modest and unlikely to significantly disrupt their operations during the initial three years of operation.
Prudent business models will be a key factor not only for existing banks, but also virtual banks, she said.
"The central bank aims to improve financial inclusion in the Thai market. Virtual banks need to make their first priority unserved and underserved consumers, particularly SMEs and individuals, increasing competition in these segments," said Ms Thanyalak. "Having the right business model that covers customer segments, financial products and services, and interest rates and fees, along with business operations and cost control, will be key to the success of virtual banks in Thailand."
According to a K-Research paper entitled "Virtual Banks -- Learning From Foreign Experiences", successful virtual banks overseas have thrived on a robust customer base from existing online platforms, distinct sales point operations and targeted customer outreach. The success of these banks is also contingent on aligning with the licensing objectives of a given country, noted the research unit.
Overseas success stories in virtual banking highlight the importance of having a comprehensive ecosystem to venture into other businesses. This crucial element enables them to operate businesses more sustainably as they can tap into new customer segments while sharing management costs in some operations areas, said K-Research.
In addition, these virtual banks have developed a user interface that meets users' needs and creates a satisfying user experience, noted the paper.
While the ability of successful virtual banks to secure unbanked and underbanked customers has helped bolster their loan growth, they often grapple with high operating costs, as evidenced in a sample group that had a high cost-to-income ratio, said K-Research. This is one reason why it remains challenging for virtual banks to maintain profitability, the research house noted.
LOCAL ADJUSTMENTS
Piti Tantakasem, chief executive of TMBThanachart Bank (ttb), said the bank has no intention of applying for a virtual bank licence, focusing instead on enhancing the ttb touch mobile banking app, expanding its user base and increasing digital transactions.
"Given the positive growth of digital banking services, we do not need a virtual bank licence. With digital banking development, 94% of all our financial services can be conducted on ttb touch, replacing traditional branch transactions," Mr Piti said.
"We anticipate increased competition from new players, with the bank's primary strategy to improve existing services across both offline and online channels. This approach aims to meet the diverse requirements of all customer segments as industry competition intensifies."
Kasikornbank (KBank), Thailand's second-largest bank by total assets, shares a similar stance and does not plan to apply for a virtual bank licence. The bank offers digital banking services through the K-Plus mobile banking app, ranked by some measures as the country's top platform in the segment.
Among the financial groups expressing an interest in the virtual banking business are SCB X and Krungthai Bank (KTB). SCB X, the holding company of Siam Commercial Bank, Thailand's fourth-largest bank, has formed a consortium with KakaoBank, South Korea's largest digital bank.
KTB formed a partnership with local large corporations including Advanced Info Service, the country's largest telecom firm, Gulf Energy Development, a leading sustainable energy and infrastructure company, and PTT Oil and Retail Business.
Ascend Money, which operates under Ascend Group and is conglomerate Charoen Pokphand Group's online business arm, is interested in applying for a virtual bank licence. The company said it is studying the terms and conditions of the licence application.
CYBERTHREAT RISK
Khongsak Kortrakul, security engineer director for Southeast Asia & Korea at Check Point Software Technologies, said that similar to their traditional counterparts, virtual banks are susceptible to a range of cyberthreats such as phishing, social engineering, malware and data breaches.
However, virtual banks do face a distinct set of risks because of their heavy reliance on technology and third-party service providers. Virtual banks often depend on third-party services for crucial functions such as payment processing and customer support, potentially exposing both the bank and its customers to risks if these vendors are compromised, he said.
As fully digital entities, virtual banks are also prime targets for cybercriminals seeking to exploit vulnerabilities, said Mr Khongsak.
While a data breach or cyber-attack could inflict significant damage on traditional banks, it could also result in a catastrophe for virtual ones, he said, citing the recent example of a massive distributed denial-of-service (DDoS) attack on a virtual bank earlier this year, resulting in service disruptions for its customers.
Check Point Research uncovered related incidents over the years, including banking hijacks that replicate the interfaces of more than 40 banks to deceive victims into divulging personal and financial details, as well as banking trojans exploiting accessibility services to target instant payment systems and bank applications.
"Effectively combatting these challenges requires a comprehensive risk management approach. Each type of attack demands a variety of security measures for detection and protection," said Mr Khongsak.
He said certain attacks may require multi-layered protection or platform security to effectively thwart them.
Factors such as robust governance structures, regular risk assessments and control testing, as well as promoting risk awareness among all stakeholders, are crucial for ensuring the development of safe and secure virtual banks, said Mr Khongsak.
Anothai Wettayakorn, managing director of IBM Thailand, said information from the 2024 X-Force Threat Intelligence Index suggests finance is the second-most attacked sector in Asia-Pacific.
As banks look to experiment with emerging technologies such as generative artificial intelligence (AI), hackers are expected to leverage AI technology at the same speed, scale and sophistication, he said.
Generative AI is a force multiplier in cybersecurity that will likely benefit attackers in the same way it benefits the financial sector, said Mr Anothai.
The primary avenues for generative AI-related attacks could be on both banks and customers, he said. For example, researchers have shown that generative AI can be prompted to create realistic phishing emails within minutes.
Moreover, Mr Anothai said there is growing concern over the threat of generative AI audio deepfakes where criminals could potentially feed recordings, using the voice of a company's chief executive to instruct the chief financial officer to pay a bogus invoice to attacker-controlled bank accounts.
As banks go virtual and leverage an application programming interface, bringing greater risk to customer data and potential processing data based on a more open system, cybercrimes in virtual banking could go beyond accidental customer assets and sensitive data leakage to attackers manipulating info-stealing malware to pilfer personal identifiable information such as banking details, encrypted wallet data and more, he said.
Financial institutions need to be hyper-sensitive to data life cycles and establish stringent safeguards to minimise the risk of financial data exposure to unauthorised parties, said Mr Anothai.
Of even greater concern is if data is tampered with, it can incite panic and erode trust, meaning financial institutions must extend their typical vulnerability management as well as development, security and operations processes to secure AI model development by scanning for vulnerabilities in the pipeline, hardening integrations, and enforcing policies and access, he said.
It is important to secure the usage of AI models by detecting data or prompt leakage and issuing alerts regarding evasion, extraction or inference attacks, and deploying infrastructure security controls as a first line of defence against adversarial access to AI, said Mr Anothai.
He said financial organisations and virtual banks must enable responsible, explainable, high-quality and trustworthy AI models, while adhering to regulatory compliance. Knowing which models go into which decisions, detecting bias and other deviations, as well as reporting compliance will become key areas of governance required to deliver trusted AI.
Phusadee Arunmas