Legal framework essential for digital banking

Saigon Investment
(Saigon Investment) - Digital banking is quite different from traditional banking in its way of providing all services. The move towards digital banking will depend heavily on the Internet, digital technology, and the appropriate data. 

Illustrative photo.

Illustrative photo.

This will require all countries to prepare comprehensive legal frameworks for managing related operations under new business models, and keep factors such as security and privacy as priority.

New banking regulations  

Digital banking has recently come on the back of development of new and latest financial technology. Digital banks take deposits, and provide banking services through electronic channels, instead of branches of traditional banks. They are prone to several risks on the Internet apart from financial risks similar to those at traditional banks, such as credit and market risks, and to some extent, liquidity risks as well.

Most countries apply strict banking regulations, regardless of which technology is being used. This means that institutions providing digital banking services must complete procedures and meet the requirements applicable to traditional banks when they apply for a license. Some countries, such as Australia, allow digital banks more time for preparation while some countries in the EU give specific guidelines on new business models in accordance with fintech regulations.

In addition to general regulations on financial services, some countries have introduced particular rules for digital banking, such as limited number of branches. These are only allowed to provide services for certain market segments; they must meet certain requirements for headquarters and legal procedures; their business plans must meet sustainability requirements; they must have the required minimum investment capital; they must meet the risk management framework requirements; they must meet the exit strategy requirements; and they must satisfy the required delay in time for complying with all regulations as applicable to traditional banks.

Digital banks must also adhere to the regulations on property rights, and control rights and percentage of ownership of non-financial companies. These requirements may be different from those applicable to traditional banks. For instance, Singapore and Malaysia require that digital bank owners or holders must be national citizens. The Republic of South Korea allows non-financial companies to hold at the most 34% stake in a digital bank while the ownership percentage is upto 60% in Taiwan, but one founder must hold at least 25% of shares.

Moreover, digital banks must meet strict technological requirements. For example, Taiwan requires that more than half of the members on Board of Directors be experts in banking, financial technology, e-commerce, communications or other relevant areas. Singapore wants a bank CEO to have experience in running a company in the area of technology or e-commerce. Other places like Abu Dhabi, Hong Kong and Malaysia ask that technical infrastructure must be assessed by a third independent party.

Singapore and Malaysia also have requirements for a business license and digital banks must promote comprehensive financial development. For issue of a business license for a digital bank, the owner must meet the requirements for capital, liquidity, anti-money laundering and anti-terrorism commitments, data protection and network security like traditional banks.

Developing digital banks

Some countries have introduced policies that encourage the development of digital banks. In Australia, for instance, companies may apply for a partly operational or limited business license and ask to delay fulfilling all the responsibilities like a traditional bank, or apply for a fully operational business license like a traditional bank.

A company licensed to operate limited business activities does not have to comply with all the requirements, but it can only carry out a limited number of business activities. At the end of the transition period, the company with digital banking services will be given a fully operational business license if it satisfies all the requirements otherwise it will not be allowed to provide such banking services.

Similarly, when a company in Malaysia is licensed to provide digital banking services, it will be permitted to provide all banking services, but it must operate in a simplified framework in the first stage. When the company is able to prove that it has met all the requirements and it is in the transition period, all the restrictions will be lifted. At this stage, digital banks will have to comply with all regulations applicable to other banks.

In Singapore, issuance of a license for digital banking is provided in stages. In the first stage, digital banks can operate in a limited range of business activities, including taking deposits. In return, these digital banks do not have to abide by all the capital requirements. Then, these limits will be removed gradually until they become fully operational digital banks, but they must meet the requirements for a minimum capital like a traditional bank.

It is predicted that a new digital banking model will appear in Vietnam in the future. Therefore, the experiences in other countries will be good lessons for Vietnam in the making of an appropriate policy on digital banking services.

Dr. Trần Hùng Sơn

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