What difference can virtual banks make in a financial market where depositors are not happy with the low interest rates offered by commercial banks while borrowers are fretting about higher lending rates?
The net interest rate spread in Thailand is much higher compared to banks in Malaysia and Singapore.
The idea of a virtual bank
A virtual bank will operate only on the digital platform, without physical branches. This is expected to offer a cost advantage over traditional banks, as no office space would be required.
Use of digital technology would also mean lower overheads in terms of staffing. The main disadvantage is the lack of human touch that traditional banks can provide to large corporations. Virtual banking services may be suitable for consumer lending more than for corporate clients.
The Bank of Thailand (BOT) had initially planned to issue only three licenses for virtual banks, but later the central bank and the Finance Ministry announced the number would not be limited to three.
The authorities have set seven critical conditions for virtual banks: the ability to run the business; proper use of the vast access to information; well-versed in the use of technology to offer service via the digital channel; have robust technology and ensure security as well as offer continual services; knowledgeable executives and license applicants; ability to manage financial business and a strong risk culture; strong capital base and solid support from shareholders.
Applications will be accepted from March 20 to September 19.
Several local business groups have expressed interest in applying for a license. First off the blocks was Gulf Energy Development Pcl, teaming up with AIS and Krungthai Bank with proposed registered capital of 5 billion baht.
Other interested parties include a consortium led by SCB X Pcl, parent company of Siam Commercial Bank, along with China’s digital WeBank and KaKoaBank, a digital bank from South Korea. Another license bidder could be the Charoen Pokphand Group.
A disruption in banking sector
Anusorn Tamajai, an economics lecturer at the University of the Thai Chamber of Commerce (UTCC), was optimistic about the launch of virtual banks. He said it would disrupt traditional banks. Commercial banks may cut jobs and close some branches. They would also be forced to narrow their interest rate margin, offer more attractive interest rates and lower their fees.
“Bank customers, especially small and medium-sized enterprises [SMEs] and retail customers, would have a greater choice of services,” said Anusorn, a former board member of the BOT.
In the long run, banks would have lower revenue as their semi-monopolistic power would diminish due to competition from virtual banks. There would be decentralization in the Thai banking system.
The advent of virtual banks would also change the role of the BOT, especially in banking supervision, Anusorn said.
The key task for the BOT now is to hand out the appropriate number of licenses that would usher in health competition but also ensure stability in the financial market.
A well-functioning financial system that makes productive use of funds would upgrade Thailand’s economic development, he said.
An underdeveloped financial market was one of the factors behind Thailand getting stuck in the middle-income trap, he added.
Virtual banking abroad
Virtual banks abroad have been a mixed bag of success and failure. Among success stories, WeBank in China has a customer base exceeding 100 million while Starling Bank and Atom Bank in the United Kingdom have several million customers.
Current, a financial technology company part of Choice Financial Group, and Vora Bank in the United States have succeeded in raising over US$2 billion funds for lending to borrowers. N26, a virtual bank in Germany, could provide innovative financial services to 7 million customers.
Kakao Bank in South Korea has 17 million clients, according to Anusorn.
Tech giant Apple has joined hands with Goldman Sachs, a US-based leading financial group, to create a fintech giant. Apple offers both its credit card and savings account services through the wallet app on iPhones, while the banking back-end is handled by Goldman Sachs.
According to one estimate more than 8 billion people would have access to the Internet – about 90 per cent of the global population – by 2030.
Currently there are 5 billion internet users. More users would increase the potential for digital financial services.
Anusorn predicts a decentralization of the financial system with alternative mediums of exchange like cryptocurrency or money issued by a private entity. This would erode the role of the central bank, as cryptocurrency would compete with traditional fiat money.
Central banks around the world are considering issuing their own retail digital currencies.
Cybersecurity the key
Many experts believe the one important factor for a virtual bank to be successful is cybersecurity, which has a bearing on the confidence of customers. Criminals have often exploited bank customers’ lack of awareness about different kinds of financial scams via internet banking.
By Thai PBS World’s Business Desk
