In September 2017, the Hong Kong Monetary Authority (HKMA) launched seven initiatives aimed at creating a “new era of smart banking”. The HKMA has recently published consultation papers relating to two of these. Firstly, on 11 January 2018, the HKMA launched an industry consultation setting out its planned approach to Open Application Programming Interfaces (Open API), and secondly on 6 February 2018, the HKMA published revised guidelines on the authorization of virtual banks for public consultation.
Open API enables more seamless integration for systems and services between banks and other industries (such as retail services). The HKMA in its consultation emphasised both the increased integration, and the added benefit to users of being able to stay on a single secure system whilst carrying out complex transactions. For example, Open API will enable information about the products and services offered by a range of banks to be shared on one system, thereby aiding customer comparison and financial planning. The Open API framework set out in the consultation covers the following: (i) Open API functions, (ii) deployment timeframes, (iii) technical standards, (iv) third-party service provider governance, (v) facilitation measures and (vi) maintenance models. The ultimate ambition of the HKMA in formulating an Open API framework is, in the words of the Deputy Chief Executive Howard Lee, to “maintain [the banking sector’s] competitiveness and improve financial services for better consumer experience through collaboration between banks and tech firms”.
Whilst the Open API consultation is more a starting block for comments than a set policy statement by the HKMA, it is a good indicator of the HKMA’s position – an initial focus addressing fairly uncontroversial areas whilst leaving trickier issues related to third-party access to customer data and associated liability issues to a later date.
The second consultation relates to the updated Guideline on Authorization of Virtual Banks which was originally published in 2000. When published, the updated guideline will facilitate the establishment of virtual banks in Hong Kong which the HKMA is keen to encourage in the belief that they will both promote fintech innovation and also increase the range of options available to consumers.
The HKMA defines a “virtual bank” as one which delivers retail banking services primarily, if not entirely, through the internet or other forms of electronic channels instead of physical branches. Whilst the original guidelines published in 2000 are still applicable to such banks, the HKMA recognises that a number of alterations / refinements to the guidelines are necessary, the main ones being:
- Enabling banks, financial institutions and technology companies to apply to own and operate virtual banks in Hong Kong.
- Ensuring that virtual banks promote financial inclusion, and as such preventing them from imposing minimum account balance requirements or fees for low balances.
- Requiring virtual banks to be locally incorporated, since they primarily focus on Hong Kong retail clients.
- Ensuring that virtual banks are governed by the same supervisory principles and requirements as non-virtual banks (whilst recognising that some of these will need to be tailored to take account of the particular business model of virtual banks). Whilst it is unlikely that the HKMA will allow a wholesale shift to technology firms offering financial services, the updated guidelines may be the start of an incremental change in supervisory principles which may make it easier for non-financial firms (which currently are deterred from providing banking services due to a range of reasons such as tough prudential controls and practical requirements such as risk assessments) to own and operate virtual banks.
- Requiring virtual banks, at the time of application, to submit exit plans due to the fact that they are untested in Hong Kong, and the HKMA wishes to ensure that they can be unwound in an orderly manner should this be required.
Whilst the public consultation on virtual banks runs until 15 March 2018, companies may already apply to the HKMA for a virtual banking licence and are encouraged to review the revised guidelines prior to doing so.