Chapter 2 virtual banking

Chapter 2
Virtual Banking
This presentation file is prepared in accordance with
Chapter 2 of the text book
“The presentation Slides for Teaching FinTech”
Website : https://sites.google.com/site/quanrisk
E-mail : quanrisk@gmail.com
Copyright © 2020 CapitaLogic Limited

Declaration
 Copyright © 2020 CapitaLogic Limited.
 All rights reserved. No part of this presentation file may be
reproduced, in any form or by any means, without written
permission from CapitaLogic Limited.
 Authored by Dr. LAM Yat-fai (林日辉),
Director, CapitaLogic Limited,
Adjunct Professor of Finance, City University of Hong Kong,
Doctor of Business Administration,
CFA, CAIA, CAMS, FRM, PRM.
Copyright © 2020 CapitaLogic Limited 2

Outline
 History of virtual banks
 Contemporary virtual banking
 Cyber customer onboarding
 Money laundering
 Risk management and compliance
 Impacts to the banking industry

Banking reform
Virtual bank

First virtual bank in United States
 Found in Kentucky in
1995
 Acquired by Royal Bank
of Canada
 Merged with Centura
Bank of North Carolina to
form RBC Centura

First virtual bank in United Kingdom
 Found by Prudential
Insurance in 1998
 Listed on London Stock
Exchange in 2000
 Acquired by Citigroup in
2007
 Decomposed and sold to
Barclaycard and
Yorkshire Building
Society in 2011

First virtual bank robbery in the world
 Egg Bank in 2000
 GBP 400,000
 Three criminals arrested

First virtual bank in Asia
 Formerly Bank of Singapore
 Acquired by the OCBC Group in 2000
 Housed finatiQ
 Business merged to the OCBC in 2011

First virtual bank in Hong Kong
 Formerly D.A.H. Private Bank Limited
 Acquired by Dah Sing Group in 2000
 Transformed to Mevas Bank in 2001
 Business merged to Dah Sing Bank in 2011

Outline

Next generation of virtual banks
 Initiated by the HKMA in late 2017
 50 expressed intention
 29 submitted applications
 10 applications pending for further information
 Plan to approve 10 in 2019

Major applicants of virtual banks
 Bank of China (HK)
 Standard Chartered Bank
 Bank of East Asia
 Citic Bank (Int’l)
 Ping An Insurance
 Tencent
 Alibaba
 Xiaomi
 Welab
 HKT

Why many applicants?
 Other people’s money
 Major funding from depositors
 Overseas customers
 Mainland China, One Belt One Road countries

Characteristics of virtual banks
 A bank which primarily delivers retail banking
services through the Internet or other forms of
electronic channels
 Should not impose any minimum account balance
requirement or low balance fees on his customers
 Incorporated in Hong Kong
 With physical office in Hong Kong

Standardized services
 Deposits taking
 Savings, current and term deposits
 Loans
 Mortgage, credit card, personal loans
 General insurances
 Travel and medical insurances
 Investments
 Stock and currency tradings

How about customized services?
 Wealth management
 Life insurance
 Retirement plan
 Insurance linked assurance scheme
Simplify and standardize

Advantages and disadvantages
 Pros
 Lower operating cost
 Higher deposits rate
 Lower lending rate and service fee
 Cons
 Little human interaction
 Capital market
 Go listing
 Build and sell

Alternatives to virtual bank
 Monetary Authority of Singapore
 No plan to promote virtual bank
 Strong ATM, Internet and mobile banking
 Small city approach
 HSBC
 Strengthening the Internet and mobile banking
 Co-operation between physical and Internet
banking services

Outline

Customer onboarding
 Is the bank allowed NOT to meet the customer
physically?
 Allowed, if the bank knows well about a customer,
same as a physically presented customer
 Is a customer allowed to submit documents
electronically?
 Allowed, if the genuineness of an electronic
document is the same as the original document

Retail customer onboarding

Account opening
documents and information
 Documents
 A valid ID document showing
 Full name
 Date of birth
 Nationality
 Document type
 Document no.
 Photo
 A bank card of an existing account in another bank
 Other information
 A mobile phone number
 A residential address

Immediate identity verification
 With a mobile banking app
 Upload the ID document with a photo
 Take a selfie photo
 The bank’s facial recognition system will verify
the two photos immediately
 With a mobile banking app
 Upload the bank card image
 The first deposit to the new bank account must be
transferred from this existing bank account

Further background verification
 Identity
 Watch list database
 Credit bureau
 Mobile phone number
 SMS
 Residential address
 Whether it is valid
Less effective for
customers outside
Hong Kong

False ID document
 An ID document not issued by the
corresponding country government
 Relying on watch lists and credit bureau to
verify the name, date of birth and ID number
 Cannot verify photos
 Creating and/or using a false document is a
serious crime in Hong Kong

Risk based approach
 Not everyone can open an account using a
mobile app
 Only accept the simple and normal majority
 In case the cyber account opening process
shows any abnormality or complexity, the
customer will be invited to visit the bank office

SME customer onboarding

Basic customer due diligence
for corporations
 Customer identity
 Identify verification
 Relationship objective
 Beneficial owner
 Watch list searching
 Risk assessment

Impacts from the KYC
 Costly to the FI
 Offensive to customers
 KYC standards vary among countries
 KYC practices vary among FIs
 One customer submits documents to many FIs
 One customer KYCed repeatedly by many FIs but
only one FI will get the customer

Peer-to-peer KYC model
Many customers
Many FIs

KYC utility model
Many customers
Many FIs
One KYC utility

Outline

Components of a ML event
Criminal
Laundering trades
Money laundering instrument
34

Vulnerabilities of the KYC
 A real ID document of a real person
 But with a fake photo
 Mitigated by the first deposit from another bank
account of the same customer
 But if another bank account was opened with
the ID document with a fake photo, then the
mitigation fails
 Particularly vulnerable for customers outside Hong
Kong, with a bank account outside Hong Kong

Components of a ML event
Criminal
Laundering trades
Money laundering instrument
36

Major regulatory AML components
AML
regulations
Know your
customer
Basic
CDD
Enhanced
CDD
Ongoing
monitoring
Suspicious
transactions
Sanctions list
matching
Transaction
monitoring
Internal
investigation
Exception
Assessment
Reporting
Risk based
approach
Record
keeping

Market development vs
anti-money laundering
Banking
development
Anti-money
laundering
38

Outline

Risk management
 Financial risk
 Credit, market, interest rate, liquidity
 Non-financial risk
 Operational, legal, reputation, strategic
 Technology risk

Technology risk management
 Cyber security
 Business continuity
 Customer data privacy
 Customer device security
 Independent assessment

Technology risk map
Chance of failure →
Lossoffailure→

Compliance
 Regulatory capital
 Business plan
 Exit plan
 Customer protection
 Outsourcing

Compliance challenges
 Cyber security
 Customer data privacy
 International standards
 Professional advisory
 Public relation strategy

Cyber security
 20 years experience on host protection, very
strong
 10 years bad practices on customer devices,
the weakest link
 Computer – No anti-virus software
 Mobile – Agree, Accept , OK without thinking

Customer data protection
 Customers really care their own data
 Too many staff turnover and outsourcing
 Leakage can never be eliminated
 Committees, policies, procedures and
compliance reviews to demonstrate NO
systematic failure

International standards
 How much cyber securities need to do?
 The more the better
 The more the less marginal benefit
 International standards serve as a minimum
level
 ISO27000
 Many reference implementations

Professional advisory
 Knowledge networking
 Bring in awareness without bad experience
 Case studies
 Vulnerabilities
 Preventive measures

Murphy's law
 Anything that can go wrong, will go wrong

Recent scandals
 Facebook
 Cathay Pacific
 PayMe
 Faster Payment System
 TransUnion

Very bad public relationship strategies
 道高一尺魔高一丈
 Reduction of security
can lead to more
convenient service
 No evidence to ascertain
that customers have
been subject to loss
arising from data
leakage

Apology from Cathay Pacific
Mr. Rupert Hogg (何杲)
Chief Executive Officer

Outline

Segregation of the banking businesses
 One banking group with two banks
 Virtual bank
 Retail banking
 Lower cost of retail funding but lower profit
 Physical bank
 Corporate banking and private banking
 Higher cost of operation but higher profit
 One virtual bank doing retail banking
 One supermarket bank doing everything

Banking habits of customer
 One virtual bank account
 High deposit rate
 Lower borrowing rate
 Credit card, residential mortgage, personal loan
 Payroll
 Payment
 Foreign exchange
 Stock trading
 One physical bank account to do the rest

Future banking culture
 FinTech
 Product standardization
 Product harmonization
 Employees
 Technology competency
 Knowledge transfer
 Benchmarking
 Media view of incident response

Traditional retail banks
 Strengthening Internet and mobile banking
 Less branch offices
 More customer awareness programmes
 Preventive public relationship management
 Enhanced technology risk management

Banking career
 Fewer tellers
 More middle office
 Risk management, in particular TRM
 Compliance, in particular AML
 More China related positions
 More outsourcing of technology services

Chapter 2 virtual banking

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