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What can the compliance and risk recruitment market expect from the rise of the virtual bank?

Hong Kong’s entry into the Smart Banking Era has taken another leap forward with the recent announcement of the Hong Kong Monetary Authority (HKMA) now having granted eight virtual banking licenses. The licenses have gone to; Welab Digital Limited, Livi VB Limited, SC Digital Solutions Limited, ZhongAn Virtual Finance, Ant SME, Insight Fintech, Infinium and PingAn One Connect. Despite interest from a further 21 applicants, it is thought that HKMA won’t be granting any more licenses in the near future.  We can expect to see these companies start to launch in the next 6 to 9 months.

Mr Norman T.L Chan, Chief Executive of the HKMA said, “It is a major milestone in reinforcing Hong Hong’s position as a premier international financial centre. I believe that virtual banks will not only help drive fintech and innovation, but also bring about brand new customer experiences and further promote financial inclusion in Hong Kong”.

These are exciting times for financial services not only for the firms themselves but for the inclusiveness and experiences of customers. This brave new world is not without its challenges. Existing banks have found it hard to compete with the nimbleness of new virtual banks due to their legacy systems and huge cost base. It is estimated that cost savings of between 20% and 40% can be achieved through the lack of back office processing systems, office space and staffing.  

As a bank, Standard Chartered has taken the step to future proof by operating in this space, entering into a joint venture and creating SC Digital Solutions Limited. It will be interesting to see how smoothly the merging of the cultures and operations of the different industries who have come together goes.

Joint ventures with banks will not only help with stipulations around large minimum capital requirements but their financial services expertise and experience will be advantageous. Those without existing banking connections will be entering into a new area from unregulated or vastly differently regulated environments and they must build their teams to ensure they have the right skills.

Virtual banking relies on big data, ever advancing technology and analytics. Cyber-attack defenses, efficient systems and processes, and risk measures will demand risk talent to build risk models and bring quant expertise as well as implementing controls, machine learning, algorithms, and artificial intelligence (AI).

The desire to prove compliance as well as security will be just as high. Compliance expertise will be crucial for meeting existing banking standards while determining how their execution will need to be different. They will also need to be planning ahead for new regulation that is sure to swiftly follow to address virtual banks specifically. They can look to the UK to see how the Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA) have adapted to virtual banking with companies such as Munzo having been founded in 2015.

The agility of virtual banks gives them an advantage with new legislation such as GDPR and PSD2 as they won’t have historical data stored in lots of different legacy systems. Their technological base could also give them the edge when it comes to developing innovative solutions.

Roles will already have been in place, helping to address very high benchmarks set by HKMA and their ‘Guideline on Authorisation of Virtual Banks. Now that the applications have been granted, resource requirements will be stepping up as they test and gain approvals of their newly formed architecture before being released to the public, ready to meet a stringent level of scrutiny in this new market. The first years will be critical for minimising risks and then hiring numbers and requirements will grow as the companies do.

We have an unparalleled network of compliance, risk and legal professionals in Hong Kong. Please get in touch if you would like our support in building your Virtual Banking teams.

Denis Spearman

Partner, EMEA Head of Compliance & Financial Crime Practice

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