Virtual Banking——The Combination of Traditional Banking and Internet

Back in early May 2019, the Hong Kong Monetary Authority (HKMA) has issued all eight virtual banking licenses which means that the revolution in Hong Kong banking industry has officially begun. As the world-renowned financial center, Hong Kong has a thriving banking industry and meanwhile in a city of only 7 million people, it has attracted over 160 traditional licensed backs, with an average of 21.43 bank branches per 100,000 people which is way higher than the global average of 12.6[1]. In light of the fierce competition within the industry, questions arise concerning where will virtual banking be heading towards?

The uniqueness of virtual banking

A virtual bank is defined as a bank without a physical branch in which all services or transactions such as loans, deposits etc. are conducted online. In fact, the trend of electronic banking services has existed for a long time and major banks have already launched their own mobile phone applications to advance their services. However, the reason why virtual banking is at a highly-advantageous position is not about its focus on pure electronic; but to further enhance banks’ operational efficiency by applying new financial technology (FinTech). For instance, loan procedures are often very complicated for traditional banks. Instead of using traditional credit rating, virtual banks will use technologies like the big data to quickly assess the credit rating of customers and the process is much faster and comprehensive.

The impact of virtual banking on financial markets

Since major internet companies had begun to actively expand their FinTech businesses, it rendered the status of traditional banking untenable by launching various upgrade programs to embrace the internet, including the launch of virtual banks. Hong Kong as a financial and international center, influenced by the development of FinTech in the mainland, the introduction of virtual banking will undoubtedly bring revolutionary impacts into the local banking industry. Meanwhile internet and smartphones technologies which also play major parts in advancing financial payment are gaining popularity, the core nature of the bank has not changed. Yet the payment patterns and tools have been different: from the traditional paper-and-coin trading to the use of computer and mobile phone network. These new transaction methods can complete actions such as fund transfer and financial flows within a short period of time. Therefore, where traditional banks are no longer capable of fulfilling customers’ ever-growing demand for efficiency, virtual banks come right on the spot by providing round-the-clock services and meeting customers’ individual needs, thereby changing the current landscape of Hong Kong banking industry.

Potential problems of virtual banking

Although virtual banking can bring transformation and a new way of thinking into the traditional banking industry, small and medium-sized banks may not be able to withstand such a huge impact, thereby posing immediate threats to their operations. To ensure that traditional banks can still retain customers after virtual banks come into the market, they must update their technology products from time to time. Because small and medium-sized banks usually lack the funds and fast response to cope with the challenges, they will inevitably be phased out sooner or later.

On the other hand, as the development of virtual banking demands astronomical research costs, major banks are not willing to pioneer for the development because of the great risk that comes with it, let alone other small and medium-sized banks. As a result, the immensely high threshold of applying virtual banking is also one important factor that will hinder its development. Therefore, it may not be feasible to apply virtual banking widely in various areas in the short term, and the immaturity of relevant technology will eventually blow customers’ confidence.

Besides, as virtual banks do not have physical branches, customers’ confidence will solely depend on their trust towards the bank. In addition to the worry of cybersecurity, the short-term launch of the plan may deter most customers. For the older generation, the fear of electronic will also render them reluctant to accept virtual banking that may cause inconvenience. Therefore, physical banks are still irreplaceable and it will take some time for virtual banks to be accepted by the general public.

The security of electronic finance is still questionable. Although the launch of virtual banking can offer more choices for us to manage our assets, if personal data is not adequately protected, it may intensify the problem of data leakage which encourage illegal activities and financial crimes and finding the way to solve this problem is not something that could be done within a short period of time. As long as the problem remains unsolved, it may deter banks from developing new technologies and consequently, hinder the development of FinTech as a whole.


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