The Hong Kong Monetary Authority recently issued virtual banking (VB) licences to four more companies, bringing the total number of recipients up to eight. While Hong Kong is a finance hub, it does have a cash-reliant society, with even credit cards not penetrating the market fully. Despite this history, lawyers are optimistic virtual banking will change the industry for the better.

WHAT IS A VIRTUAL BANK LICENCE?

According to HKMA’s guidelines, virtual banks must primarily, if not entirely, deliver banking services via the internet or “other electronic delivery channels.? This does not include existing licensed banks which may use digital means to deliver their services. 

The guidelines also warn fulfilment of these criteria requires companies applying to set up a virtual bank have substance and cannot simply be a concept, “taking advantage of the growing popularity of the internet.”

Minny Siu, Hong Kong-based partner at King & Wood Mallesons says under the HKMA’s virtual bank initiative “virtual banks are generally subject to the same supervisory requirements applicable to conventional banks, but with a general HKMA policy expectation that VBs will serve primarily the retail segment. Both financial firms, including existing banks, and non-financial firms, such as tech companies, may own a virtual bank,” she explains.

Richard Mazzochi, another Hong Kong-based partner at the firm, says the HKMA has a firm stance on key regulatory requirements including prohibition against minimum balance requirements or low-balance fees, as the “aim of virtual banking is to promote financial inclusion.” The regulator also requires an exit plan to ensure that “if it became necessary to do so, a virtual bank can unwind its business operations, in an orderly manner without causing disruption to its customers and the financial system,” and a minimum paid-up capital requirement of HK$300 million, as is required of all licensed banks, Mazzochi says.

WHAT DOES THIS MEAN FOR LAWYERS?

Siu says there are a number of areas where legal assistance will be required in the VB market. Among these are “the establishment of a joint venture entity, including advising on the preferred corporate structure of the new entity, drafting and reviewing the joint venture agreement and advising on relevant corporate governance and capital-related issues,” she notes. There will also be ongoing regulatory issues related to the virtual banks operations in the areas of “cybersecurity, data privacy, outsourcing, virtual on-boarding, electronic contract enforceability, licensing and cross-border solicitation and direct marketing, as well as the overseas direct investment approval process and anti-trust filings (if applicable); and engaging in new product/services offering structuring to be launched by virtual banks,” Siu says.

HOW WILL VIRTUAL BANKS IMPACT THE HONG KONG MARKET?

But what impact could VBs have on the Hong Kong market going forward? While VBs were one of HKMA’s proposed Smart Banking Initiatives in 2017, the financial regulatory body has thus far only granted eight licences, since the first batch of licences granted in Match this year. With the number of licensed banks in Hong Kong is totaling 160, they make up a very small segment of the banking market.

“The market expects the actual launch of virtual banking services by the first batch virtual banks in six to nine months,” Mazzochi says, explaining “the first batch of virtual banks can be broadly classified with two types of background, one, those run and majority owned by traditional retail banks with strategic partnership with fintech investors, and two, those run and majority owned by fintech players from China and Hong Kong. The first batch of virtual banks are all committed to create a new user experience for their tech-savvy targeted client base.”

He predicts VBs will “revolutionize basic retail banking services with their ‘fintech’ mindset in the coming years.”

Siu says that while the impact has yet to be seen, she says there has been an “increasing hiring spree for virtual banks.” Over time, she estimates VBS will provide a new type of customer experience, while promoting the “application of financial technology and innovation in not only Hong Kong but also the Greater Bay Area and globally,” she says, adding: “As a leading jurisdiction in promoting virtual banks, we expect to see further opportunities for both traditional banks and innovative financial platforms in Hong Kong, which will attract further technology advanced businesses to turn their eye on the market developments in Hong Kong.”

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