Recently, the Hong Kong Monetary Authority issued virtual banking licenses for eight fintech companies to enter the banking sector. By opening the market for new entrants, the HKMA aims to accelerate technology innovation and improve customer experience. So, what is virtual banking, and how will it affect the traditional banking ecosystems? What are the main things traditional banks and new entrants need to consider today? Find the answers in our article. 

What Is Virtual Banking?

Virtual banks operate online with no physical branches. Using the Internet only, customers can do what they used to do in traditional banking: open accounts, make deposits, take loans, etc. Users can access their banking accounts and data at any time and anywhere. Account balance has no minimum threshold – you can open an account regardless of your financial status. 

The appearance of virtual banks will definitely impact the services provided by traditional local banks. Who could become a virtual bank? It could be not only local banks but also foreign banks looking for entering a new market as cost-effectively as possible – without the need to build branches offshore. This time, banks are not the only ones who are allowed to provide virtual services. Monetary Authority of Singapore, for example, might grant licenses for fund houses, insurance companies, and payment companies, as well. The main idea behind these opportunities is the incorporation of banking and non-banking ecosystems. 

The Difference Between a Virtual Bank and a Traditional Bank

To some extent, traditional banks have already gone digital. Today, it’s possible to check your account or pay for products or services online. However, a virtual bank is something more than online banking. It is a disruptive form of a bank with no branches all over the country. Clients of virtual banks could surely get a lot of benefits, but lots could also miss the emotional communication with physical branch staff.  

Let’s take a closer look at the key features virtual banks offer:

  • Transactions monitoring in real-time
  • Analyzing consumers’ spending habits
  • Checking the balance
  • Sending money
  • Providing a toolset for fraud protection
  • Having user-friendly and intuitive interface
  • Providing expert customer support 
  • Providing virtual advisors/chatbots

Why people choose virtual banking? According to surveys, among the key driving factors to consider a new financial provider, there are more favorable rates and fees, a variety of services, trust in securer data privacy, the ability to manage services via mobile app, convenient enrollment, etc. 

The Preconditions of Virtual Banking Evolution

The fierce competition in the financial services market was the main reason why virtual banks emerged. With the rapid development of technology, non-bank organizations can get transformed into powerful fintech companies. 

Being the most populous generations, millennials and post-millennials have become the primary target audience for fintech enterprises. These young people are tech-savvy; they expect the personalized approach to services they get, they expect from service industries quick and easy feedback. Similarly, millennials make up the greater part of the global workforce, which means that they will be a driving force for digital transformation in almost every sphere of our lives. Young people tend to use diverse digital channels for consuming services. All these aspects should be taken into consideration by all types of banks and financial institutions. 

How Do Virtual Banks Impact Finance Industry?

Traditional banks are facing significant risks from the side of virtual banking. For example, cross-border remittances seem to become more comfortable and cheaper with virtual banks. A UK virtual bank Monzo offers no fees for international payments. To overcome such and similar risks, traditional banks have to reinvent their digital strategies in order to retain existing customers and attract new ones. They should do their best to make the most of their customer base, improve their reputation, and empower resources they have. Incumbent banks will also need to rethink their value chains concerning the opportunities new technologies like AI bring. 

According to companies like SoFi, artificial intelligence can help financial organizations measure how satisfied their clients are. Also, AI could help them identify what customers are about to leave. Robust analytics tools powered with AI allow creating more customer-centric offers and pricing.   

The French Orange Bank presented an entirely new service for France. Their virtual advisor Djingo powered by AI replies to customers in a human voice. The advisor can answer questions about blocking a credit card, opening an account, or hands over the question to an expert. 

Returning to the HKMA issue, incumbent Hong Kong banks have already started to reduce account fees and loans, providing more profit for their customers. Although there are some threats traditional banking faces, the scope of the risks depends on how much power the Monetary Authority will give to the new players.  For example, in Singapore, fintech companies that got virtual banking licenses are not allowed to accept deposits and provide lending.

Key Points to Consider for the New Entrants and Traditional Banks

Both incumbents and new entrants to the banking market have some bottlenecks. Let’s find out what key points they should consider in order to stay competitive. 

Key considerations for incumbents are as follows:

  1. Reinventing digital strategy to meet today’s market needs and challenges. 
  2. Creating new value chains to determine new opportunities.
  3. Developing up-to-date banking system software and mobile apps. 
  4. Creating active marketing campaigns to improve customer acquisition. 
  5. Developing customer-centric pricing and offerings to improve loyalty. 

Key considerations for virtual banks are as follows:

  1. Addressing stringent compliance and security issues.
  2. Introducing innovative services and technology features. 
  3. Establishing and maintaining a reliable banking model.
  4. Adapting to new buying persona habits and preferences.
  5. Delivering new values to the market. 

As you see, both types of banks have a certain number of challenges nowadays. Digital transformation is the right way to address these challenges for existing banks, whereas innovation is a crucial point for new entrants. Both should think of seamless enrollment and application, secure personal data management, and providing customers with better information on rates, services, and products. 

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