We live in the Digital Age, the era where all industries are becoming connected on a digital level and where information is widespread and flows from different sources, transforming the way people interact with goods and services. This relentless change is also affecting the financial services industry, modifying people’s expectations and changing the role of the bank in our society.
Digital natives, namely millennials and Gen Xers, expect immediate, real-time, and proactive banking. They value their time as much as they value their money, and they expect their bank to know them inside and out in order to support their financial decisions. But here comes the challenge: At the moment, smartphones, personal devices, sensors, and non-bank providers of goods and services capture more abundant and more useful information about customers than banks do.
A New Look: The Virtual Bank
To fix this, banks have started to rethink their business model and shift towards a “virtual banking” offering, providing products and services predominantly or even exclusively over the Internet. These “virtual” or “direct” banks offer financial services remotely via online banking and leverage technology to personalize products and better serve customers.
Change is happening all over the world but it’s happening at different rates depending on how heavily regional regulators are pushing for innovation and supporting banks’ digital transformation.
Regulation and Innovation: A Mixed Bag
In Europe, the Revised Payment Services Directive (PSD2), which came into force earlier this year, opened up the possibility of “open banking,” compelling banks to make their data and services available as APIs. This would turn banks into platforms and ecosystems that enable innovative new services to flourish.
Since the financial crisis, UK regulators have approved banks of any kind, opening the door to many technology-driven challenger banks. Britain’s competition watchdog has mandated software standards and industry guidelines to help drive innovation in retail banking.
The US, on the contrary, is falling behind, showing a paralyzed regulatory system with laws protecting incumbents from innovation and disruption instead of helping smaller, innovative financial companies to start, grow, and offer new choices to citizens.
HKMA will select applicants based on the following criteria:
1. Must have enough financial, technology, and other relevant resources to operate a virtual bank;
2. Must have a credible and viable business plan that would provide a new customer experience and promote financial inclusion and FinTech development;
3. Must have developed or can develop an appropriate IT platform to support their business plan;
4. Should be ready to begin operating soon after the license is granted.
Moreover, virtual banking applicants will have to create an exit plan to ensure that, should it become necessary, a virtual bank can wind down its business operations in an orderly manner without causing disruption to the customers and the financial system.
While the financial industry loves to focus on regulation and technology, customers are already changing their expectations, getting ready to adopt a new world of distributed banking that’s stacked in their favor. After all, changes in banking shouldn’t really be about technology, they should be about customer centricity. The goal must be to provide customers with banking that acts in their best interests, leveraging innovation and regulatory opportunities—like those in Hong Kong—to meet customers’ expectations.
The question is, are banks throughout the world ready to play along?