DIGITAL-ONLY BANKS – CHANCE FOR DEVELOPMENT IN VIETNAM

With a large amount of smartphones users and internet subscribers, and the vast development of technology, Vietnam has the potential to develop the digital-only bank business model.
Photo by Marcus Nguyen from Pexels

In the past few years, we are currently seeing the competition between FinTech and traditional banks in the race of providing banking and financial products and services to customers, especially through the emergence of the digital-only bank. With no bricks-and-mortar branches, no time-consuming for waiting on the line to receive banking services and reduction of paperwork, it is undeniable to state that virtual banks will be the future of the banking industry. The vast development of technology creates opportunities for FinTech companies to apply its modern technology in the banking sector.

Several digital-only banks by FinTech firms have been emerging in the world in recent years, including Monzo or Revolut in the UK, bunq in the Netherlands, N26 in Germany, some from China, Taiwan and Hong Kong. Singapore also has planned to issue up to five banking licenses to digital-only banks this year though the plan has been delayed a bit due to the Coronavirus. Vietnam cannot stand outside this trend with the potential this country has in hand. 

Vietnam has the potential to develop virtual banks arising from significant demand from the market, with features of young population, group of smartphone users being the majority of the young generation with knowledge and willing to use new financial services and products, high rate of the population using the internet with a good pace of growth. Payment via mobile phone is trendy in the world, including Vietnam. The growth of mobile payment service in Vietnam is predicted to be faster in the future because of the growing rate of smartphone users and the popularity of payment via mobile phone.

FinTech is also an area that attracts lots of investment from foreign countries. According to Fintech in ASEAN report published by United Oversea Bank (UOB) late 2019, Vietnam ranks second in venture capital funding into Fintech, with 36% of total Fintech investment in South-East Asia, rising by 35.6% compared to 2018 (see Figure below).

Fintech investment in South-East Asia, 2018-2019
Source: Tracxn, as at 30 September 2019

Vietnamese government are encouraging the non-cash payment method and trying to support this initiative. In recent years, the government has been trying to complete the regulations on non-cash payment methods, including intermediary payment services (e.g., e-switching service, e-wallet). Last year, the government opened the gate for electronic Know-Your-Customer (e-KYC) process, while allowing financial institutions to conduct the e-KYC when they do the transaction with the customers for the first time. This regulation is the significant progress in the regulatory process in Vietnam, and also open more space for the development of FinTech.

Early June 2020, the State Bank of Vietnam (SBV) released the first draft of Regulatory Sandbox for FinTech. According to this draft, there are seven sectors to be tested in the sandbox during the period from one or two years, including, among others, payment services, credit, P2P lending. Although this is only the first draft and the SBV is still collecting opinions from the public to update the sandbox in the future, the regulatory sandbox creates an excellent opportunity for FinTech to participate into the financial market in Vietnam.

There are some challenges concerning the establishment and operation of digital-only banks in Vietnam. Firstly, it is uncertain how a FinTech firm can establish a digital-only bank. There are a few digital-only banks in Vietnam right now which are established by traditional commercial banks, such as Timo Bank, backed by the Vietnam Prosperity Commercial Joint Stock Company. However, we have not witnessed any digital-only banks established or supported by a FinTech firm. Secondly, FinTech and their digital-only banks need to consider specific concerns from customers about personal information protection and cyber security. They were top concerns from customers and companies when they gave data to platform-based companies without knowledge about how the service providers can protect their data. Those challenges are raised from two primary sources: the legal framework of Vietnam needs improvement, and the FinTech and the digital-only banks need to have their secured systems to increase the trust of customers.

Having said that, Vietnam has many potentials to grow digital-only bank business model in Vietnam: the young generation who are willing to adapt the innovative technology, the large number of people who are using smartphones and internet in daily lives, and the encouragement and support from the government in this sector. There is a reason to believe that, once the legal framework is completed for FinTech and digital-only banks to test themselves, Vietnam’s banking and finance market will be hustling with the participant of a new business model—digital-only banks. 

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