The Deep dive: Virtual banking
By Puja Sharma
The deep dive’ is our bi-weekly exploration of a relevant topic, hot trend, or new product. For Prime subscribers only.
How does it work?
The idea of a virtual bank is that it offers banking services via electronic means. There are no brick-and-mortar branches for virtual banks, so all services can be performed online. An account can be opened, deposits made, loans taken out, and other banking transactions can be done with a mobile app or through the website of the virtual bank, thus saving time.
Using the Internet, e-mail, mobile check deposits, and ATMs, this financial institution handles all transactions. Virtual banks offer higher interest rates on their accounts since they do not have the overhead of physical branches. Traditional banks may also own a virtual bank subsidiary.
In 1989, the United Kingdom launched the first bank without branches, also known as a direct bank, a neobank, a branchless bank, and an online bank when First Direct bank offered telephone banking. However, in the mid-2000s, many virtual banks emerged due to the ease of access via the Internet and mobile phones.
Who is under the radar?
Newer, more disruptive forms of banking are virtual banks. Virtual banks differ from other forms of digital banking in that they only exist online. They have no branch offices within a community or a country.
In addition to receiving higher interest rates on savings and paying lower interest rates on loans, consumers expect virtual banks to save on facilities and staff. Nevertheless, some consumers might miss the emotional comfort of visiting a local branch office, renting a safety deposit box, or working with residents who support the local economy.
Virtual banking changes what we traditionally think of as a bank. And new virtual banks in Singapore might diverge in their origin. They might be foreign banks looking for a way to break into the Singapore market without the expense of building branch offices. Soon, virtual banks will pose a significant threat to the three largest Singaporean banks. New licensees are likely to be backed by benefactors with deep pockets. They will likely have significant “beyond-banking” strategies that might be hugely disruptive.
Why does it matter now?
The virtual bank has been steadily gaining momentum since 2020. However, as a new market player, its overall penetration is still lower than traditional banking Apps, like HSBC and Hang Seng Bank, which have a long history of establishment and strong market dominance.
According to a report, the Around-the-clock service of virtual banks enhances the accessibility of banking services, which offers more affordable and convenient financial services in a residential area. In the South East Asian regions, ZA Bank is the first virtual bank officially launched in Hong Kong; it still maintains its competitive position with the highest penetration in the market.
Thailand’s central bank wants the country’s first virtual banks in 2025, a consultation paper said. Firms will be able to apply for permits from the Bank of Thailand later this quarter. About 10 parties have expressed an interest to apply for virtual banking permits, assistant governor Tharith Panpiemras said. The central bank will then write to the finance ministry recommending a maximum of three candidates to set up virtual banks, it said.
Hong Kong, South Korea, the United States, and the United Kingdom have already introduced virtual banking. The benefits of virtual banking, including innovation, inclusion, and customer choice, are becoming increasingly prominent around the globe.
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