Beyond Financial Inclusion: Reshaping the Regulatory Landscape for Virtual Banks

Banks have undergone a digitalisation process, featuring access to banking services through a smartphone. This comprehensive digitalisation process has revolutionised the way banking services are accessed and utilised by customers through the introduction of smartphone-based platforms. With this transformative shift, individuals now have the ability to manage their assets, transactions and other financial needs at their fingertips. Leading banks such as DBS Bank (Singapore) and Revolut (UK) exemplify the digital transformation of banking, offering mobile apps that enable customers to manage accounts, conduct transactions, and access personalised financial services.

These innovations highlight the convenience and accessibility of virtual banking but also underscore the challenges of maintaining personal touch and regulatory oversight in a digital-only environment. The app provides real-time notifications and spending analytics, empowering customers to have a better understanding of their financial habits. This digital transformation has brought about a paradigm shift in the banking industry, empowering customers with unprecedented convenience, accessibility, and flexibility.

While it makes banking easy, one aspect that has been overlooked during this process is that a bank is also a public utility upon which people’s quality of life depends. For example, Menand and Ricks (2023) proposed rebuilding the banking system as a public utility framework. Key reforms would include reestablishing banks’ exclusive privilege to maintain deposit accounts that function as a means of payment and store of value; limiting banks to activities consistent with this monetary purpose; constraining their geographic expansion to promote local community service; and having a government agency like the Federal Reserve regulate the money supply and set deposit interest rates.

These structural reforms would be implemented incrementally through changes to banking law, rather than relying solely on technocratic financial regulations. The overarching goal is to renew and refine the public utility model of banking that provided decades of financial stability, while also improving access to banking services and more fully realising the public purpose of the banking system. However, they did not propose specific technological reforms but appear to believe that a regulatory reform itself can adapt to technological change while preserving the stability and public purpose of the banking system (Menand & Ricks, 2023).

Yet, the digitalisation of banking services undeniably brings ease and convenience to customers, it is crucial to recognise that amidst this process, the fundamental role of banks as public utilities has often been overlooked. Banks serve as critical pillars of the financial infrastructure, facilitating economic activities, fostering stability, and supporting individuals and businesses in their financial endeavours. Beyond transactional aspects, banks play a vital societal role by providing essential services such as loans for education, housing, and business ventures, and fostering economic growth and social mobility, even to those who might not bring notable returns. They also function as custodians of people’s savings, ensuring the security and protection of their hard-earned money. Moreover, banks serve as intermediaries that channel investments into productive sectors, contributing to job creation and overall prosperity.

By recognising the significance of banks as public utilities, policymakers and stakeholders can ensure that digitalisation efforts are carried out in a manner that preserves the core functions and values of banking. This includes safeguarding accessibility, fairness, and transparency, so that banking services remain inclusive and beneficial to all segments of society, regardless of their technological literacy, income levels, or geographical location. Consequently, a holistic approach to digitalisation can better serve the diverse needs of individuals, businesses, and communities, ultimately enhancing the overall well-being and quality of life for people relying on the essential services provided by banks.

However, the current digitalisation process might have overlooked these aspects. The digitalisation of banking services has shifted control from banks to third-party providers, with customers relying on external devices (e.g., smartphones) and software contracts. Unlike traditional banking, where banks owned and operated physical infrastructure like ATMs, virtual banking platforms depend on third-party technologies. This shift raises concerns about sustainability, cost, and regulatory oversight, as banks no longer have direct control over the platforms they use to deliver services. Firstly, smartphones have emerged as the primary device through which customers access digital services. The ubiquity and increasing capabilities of smartphones have made them an integral part of people’s daily lives. Banks have recognised this trend and capitalised on the widespread adoption of smartphones to offer their services through dedicated mobile applications. These applications provide customers with a convenient and user-friendly interface through which to perform various banking activities, anytime and anywhere.

The evolution of virtual banking over the past three decades has made banking services more efficient, and digital financial services have taken a great leap forward over the past forty years, beginning with the birth of the internet.

In the 1980s, United American Bank introduced the first home banking service, allowing customers to securely access their account information. New York City’s top banks followed suit in 1981, offering home-banking access to test its viability. The Bank of Scotland embraced remote banking technology in 1983, providing customers with the Homelink internet banking service. In 1994, Stanford Federal Credit Union became the first North American institution to offer internet banking to all its customers, and by 1995, Presidential Bank provided online account access. These developments caught the attention of banking giants, recognising the potential of internet banking’s success (Retail Banker International, n.d.). Nowadays, 80% of all US banks provide internet banking services – and the trend has shown no signs of slowing down. In 2009, Ally Bank was founded – the world’s very first virtual-only bank. The trend continues and grows exponentially: a study by Fiserv in 2010 demonstrated that both online and mobile banking were growing at a faster pace than even the internet (Angrisani et al, 2013).

Whilst 80% of banking customers globally are regular users of mobile banking technology, the very fabric of the financial industry is transforming as a result of financial and blockchain technology. Technology is advancing so rapidly that, by 2026, many experts believe banking services will be predominantly virtual (England, n.d.).

The study of digital innovation is a novel discipline in its own right, as it speaks its own language. The literatures are largely interdisciplinary in nature and lack theoretical standing. To systematically review this matter in the context of financial system, I divide them into two aspects, namely: Financial Inclusion and Technology (exhibited by Virtual Banking in this research) from a socio-legal dimension, which has sparked significant interest and debate within the realms of legal studies, sociolegal research, and social sciences. These topics raise critical questions about the intersection of law, society, and technology, and their implications for individuals, communities, and institutions.

From a legal perspective, the discourse surrounding financial inclusion and virtual banks delves into regulatory frameworks and their effectiveness in promoting inclusive financial systems. Scholars and policymakers examine the role of law in facilitating access to financial services for traditionally underserved populations, such as low-income individuals, rural communities, and marginalised groups. They explore the legal barriers and regulatory challenges that hinder financial inclusion, including issues related to banking regulations, consumer protection, anti-money laundering measures, and privacy laws.

Legal debates also revolve around the need for adaptive and innovative regulatory approaches to accommodate the unique characteristics of virtual banks and digital financial services (Department for Business, Energy and Industrial Strategy, 2020), but such debates are made more challenging by the specific features in the virtual-only space. Due to outsourcing, banks might operate outside jurisdictions where it provides its banking platform and services. Existing regulation is technology-neutral and therefore might have ignored the challenges imposed on execution of the law and regulation as the bank operates very differently in the virtual space compared to when it operates with a solely physical presence. Prosecution is also extremely difficult when institutions are outside jurisdictions; there are no remedies available once the damage is done and therefore existing regulation heavily relies only on precaution and detection (Baskerville et al., 2020).

Sociolegal research further contributes to the debate by examining the social, economic, and cultural dimensions of financial inclusion and virtual banks. Researchers have investigated the social implications of financial exclusion and the potential benefits of inclusive banking practices on individual empowerment, poverty reduction, and socioeconomic development. They explore the impact of virtual banks on financial behaviours, social dynamics, and community resilience. By analysing the social contexts in which financial inclusion policies and virtual banks operate, sociolegal scholars shed light on the complex interactions between legal structures, social norms, and technological advancements (e.g., Omarova, 2020). This interacts with the realm of social sciences and creates an interdisciplinary are in which to explore how more users might be attracted to use this new platform, hence promoting financial inclusion and our understanding of how virtual banks intersect with broader socio-economic phenomena and power dynamics. Researchers have investigated the distributional effects of digital finance, analysing how virtual banks may perpetuate or challenge existing social inequalities. They delve into questions of digital divide, equity, and social justice, considering the implications of virtual banking on vulnerable populations and the potential for new forms of exclusion or exploitation. Social scientists also assess the broader socio-cultural transformations induced by virtual banking, including changes in financial practices, trust relationships, and the reconfiguration of social networks (Cosma & Rimo, 2023).

Law (2021) used the launch of virtual banking licenses in Hong Kong as a case in point and generated further insights in proving that technological aspects would further impact the regulatory focus in the following three facets: changes in the bank-customer relationship, suitability of existing transparency requirements for FinTech growth, and the role of technical literacy (Law, 2021). Law (2022) noted that technological innovations might not replicate the trust of traditional banking due to the absence of crucial human factors, suggesting that a complete absence of physical banks is unlikely to succeed. Regulators promote technological innovations to enhance accessibility and efficiency, but it is important to balance innovation with customer protection and investor returns. Virtual banks must consider human factors to establish trust and confidence, which extend beyond technology. Transparency and disclosure regarding technology are crucial for virtual bank operations. Assisting customers, particularly those with low financial literacy, can enhance accessibility and promote financial inclusion.

Law (forthcoming) has identified four thematic factors that clients might not adopt or respond to when operating virtual-only banking platform: users’ sense of security; engagement of regulators; promotion of the social acceptance of technology; and transparency and history of bank operations (Law, 2024). The journey should not stop here, as there is an obvious gap: the responsibilities of the regulators in encouraging users to adopt digital-only platforms should be investigated.

There is a need to obtain an unbiased understanding of clients’ perspectives in order to assist prioritisation of policy and law making, and to achieve the original intent of promoting financial inclusion through technological innovation. This can only be done through a forward-looking approach, as opposed to a “reaction to crisis” approach, as the damage caused to a digital-only platform might not be reversible. It can only be done through addressing clients’ resistance to virtual-only platforms. However, it is worth noting that the banks might not be motivated to address the client’s factors unless it relates to their very existence. But in the virtual-only space, the consequences of neglecting these factors typically result in a sharp decline in bank business due to ease of exit and arguably these client’s perspectives shall have more weight, and hence regulatory intervention may not be necessary. Nevertheless, regulators should pay attention to the impact of technology, which banks have little control over, on the banking system.

The role of technology acceptance is ignored in existing risk-based approaches of supervision. The technology-neutral financial regulatory system is still adopted in Hong Kong, and likely elsewhere, despite the launch of virtual banks (Bank for International Settlements, 2022). Regulatory frameworks play a crucial role in shaping the operations of virtual banks in the ever-evolving landscape of virtual banking. The emergence of virtual-only banks driven by technological innovations has expanded the range of services available through digital distribution channels. Despite its potential to deepen financial inclusion and enhance competition, achieving a balance between innovation, market stability, and consumer protection remains a challenge.

The Alliance for Financial Inclusion has developed a policy framework to guide regulators and policymakers in promoting financial inclusion, providing guidance on licensing, supervision, and regulation of virtual banks. Inquiry persists in the ambiguous relationship between technology, specifically hardware, and the accessibility of internet connectivity, as these factors lie beyond the purview of banks or regulatory bodies. Stated differently, banks find themselves compelled to depend on third-party technological resources over which they possess no direct oversight or authority (The Alliance for Financial Inclusion, n.d.).

Different jurisdictions employ varying approaches to regulating virtual banks. Some countries incorporate virtual banks within existing regulatory frameworks, while others develop a somewhat tailored regulatory approach, such as licensing regimes. Phased licensing processes have been adopted by countries like Australia, the United Kingdom, Singapore, and Switzerland, allowing new entrants to start with limited activities before becoming fully licensed banks. These regulatory approaches aim to foster innovation while ensuring adequate oversight and risk management in the virtual banking sector (Deloitte, n.d.).

But the unique characteristics of virtual banks remain unexplored. The experiences of virtual banks operating in different jurisdictions highlight critical success factors. Virtual banks require a substantial customer base to thrive in the competitive landscape. Proficiency in serving customers efficiently is also crucial for their success. By focusing on these factors, virtual banks can establish themselves as reliable and customer-centric financial institutions in the digital era. As the virtual banking landscape continues to evolve, regulators worldwide are refining their approaches to adapt to this dynamic form of financial institution, ensuring a balance between innovation, consumer protection, and market stability (CGAP, n.d.).

There are at least three unique characteristics of virtual banks that are ignored in existing regulatory approaches. Firstly, the virtual-only aspect of banking platforms means that the clients have limited physical presence; they are fundamentally different to non-virtual banks offering digital access, where clients could always go to the branch and find bank staff to assist. This imposes additional risks on virtual banks, such as the absence of physical branches and the need for robust cybersecurity measures and availability of online dispute resolution channels. Changes were already underway at the time the focus groups were held. While virtual banks in Hong Kong were not allowed to have physical branches, this requirement may be relaxed following the change in terminology from “virtual bank” to “digital bank.” This move has been welcomed by most virtual banks in Hong Kong, as it clearly opens up more business opportunities that better align with the needs of bank consumers—a sentiment echoed by our focus group participants (Law, 2024).

Secondly, the examination of the impact of technological advancements may not have been fully incorporated into the digital innovation process. Taking a client-centric approach involves addressing user experience, ease of use, and customer satisfaction. These factors are reflected in user interface design, accessibility, personalised services, and offering effective customer support, and contribute to building trust and fostering long-term relationships with customers in the virtual banking era.

Thirdly, different standards in cybersecurity, data privacy, anti-money laundering measures, and fair practices could be adopted to better suit the digital-only space. For example, it is extremely difficult to “arrest” a criminal who conducts crime through cyberspace. Also, once the hacker successfully attacked the system, it would be almost impossible to rectify the damage except by paying a ransom. This means that the only feasible way to regulate is to make sure the “fortress” is strong enough such that no one can break in. Recognising the importance of regulatory oversight and fostering collaboration between regulators and industry stakeholders is essential to strike a balance between innovation and regulatory compliance in the virtual banking landscape.

This study employs a qualitative research design, utilising focus groups to explore the perspectives of retail banking clients on virtual-only banking platforms. A purposive sampling method was used to select participants who represent a diverse range of demographics, including age, gender, and technological literacy. The sampling strategy aimed to capture the experiences of both users and non-users of virtual banking services to ensure a balanced perspective. The demographic breakdown of the participants is listed below. This demographic distribution was not known to the researcher and other participants during the focus groups, as the information was only collected in the after-match survey.

• a)

  Participants ranged from 18 to 65 years old, with a median age of 38

• b)

  Gender: 55% female and 45% male

• c)

  Income Level: They are all perceived to be in a high-income group projected by their reported occupation – mainly from banks.

• d)

  Technological literacy: all participants are frequent users of technology devices.

In this research, a total of 20 focus groups of a total of 64 people were held. These groups consisted of retail banking clients, all but three of whom resided in Hong Kong. The main objective was to evaluate the effects of digital technology by examining virtual banks that operate exclusively on a virtual platform.

The emergence of virtual banks gained prominence during the COVID-19 pandemic in 2020, as the demand for remote banking services increased. The introduction of virtual bank licenses in Hong Kong in 2019 means it is a favourable environment in which to conduct an empirical study to observe factors influencing their acceptance and the societal implications of rapid bank digitisation. Around half of the participants in the study were clients of virtual banks. The focus group questions were based on existing studies related to financial inclusion and virtual banking, with a focus on theoretical perspectives rather than routine virtual banking issues. Participants were asked to express their willingness to use virtual services under various circumstances and the percentage of their total wealth they would entrust to a virtual bank.

This research has three main limitations. First, the small sample size may be an issue. Second, the Hong Kong-centric focus may restrict generalisability of the findings. However, Hong Kong’s status as an international financial centre, with over 300 authorised institutions and a regulatory landscape aligned with global standards, makes it a valuable proxy for understanding virtual banking trends worldwide. Its diversity and prominence in the financial sector ensures that insights from this study remain relevant and informative for other regions (Law, 2023). Third, a self-reporting bias may have influenced participants’ responses due to social desirability or the problem of recalling inaccuracies. To mitigate this, the study employed triangulation, cross-referencing the focus group findings with expert interviews and existing literature.

Despite these limitations, the findings highlight the significance of regulatory bodies and provide actionable recommendations for shaping laws and regulations in virtual banking. Additionally, the research identifies theoretical implications that can serve as a conceptual framework for future studies.

The absence of personal touch has emerged as a prominent concern in the virtual-only banking landscape. With the shift towards virtual interactions, the traditional face-to-face engagement between banks and clients diminishes. This absence of personal touch can result in a sense of detachment, reduced trust, and limited opportunities for personalised assistance and guidance. Consequently, authorities should recognise the importance of maintaining a human element within virtual banking services and consider strategies to foster meaningful connections and personalised experiences for clients. The focus group continues to elaborate on this aspect:

Firstly, there is a concern regarding whether clients receive the necessary attention they require. For instance, the chatbot function often serves as a mere alternative to browsing the website, as it typically directs users to click on pre-set responses when they enter their inquiries. Engaging in a conversation with a real person can be a laborious process, as clients are required to navigate through various options before they are allowed to interact with a bank staff member. This experience is like phone banking, when clients eventually reach a bank staff member and can verify their authenticity through interactive dialogue. However, in the virtual-only platform, clients are uncertain whether they are conversing with actual bank staff members or outsourced contractors who lack the authority to resolve issues. But the real issue is not this, since it can also happen with phone banking. The real problem lies in the requirement for clients to communicate through typing. This raises concerns about whether clients possess the necessary literacy skills to articulate their cases clearly using written words. Additionally, if clients send multiple messages in separate segments, it becomes challenging for the recipient on the other side of the screen to ask follow-up questions effectively. It is crucial to consider whether banks are willing to invest in upgrading their communication systems to ensure clarity and facilitate effective communication between clients and bank representatives. It represents a decline in the quality of client communication, which impacts a client’s trust and the sense of security it used to have. Clients may feel less assured when communicating their concerns and may perceive a decreased level of security in their interactions with financial institutions.

The second issue relates to the manifestation of commitment within virtual-only platforms. A notable drawback of such platforms is the absence of an assigned individual to handle banking matters. Digitalisation appears to remove human judgments and it becomes extremely difficult to have a dialogue with the bank itself. The presence of a designated officer offers several advantages, most notably the elimination of the need for clients to repetitively articulate their needs during subsequent interactions. While a randomly assigned officer can refer to previous messages in the chatbot, the inherent uncertainty lies in whether the subsequent, unseen officer possesses a comprehensive understanding of the underlying issues. Clients continue to seek a dependable point of contact, fostering a sense of connection and continuity within the banking relationship.

It is widely acknowledged that banking is fundamentally a relationship-oriented business, a long-standing recognition spanning centuries. However, the transition to the digital realm has seemingly mechanised this relationship, diluting its humanistic aspects. Nonetheless, it is imperative to recognise that human judgment plays a pivotal role in determining the feasibility of conducting business transactions. Despite the regulatory landscape imposing constraints on the exercise of human judgment, its significance remains intact due to the fundamental reliance on human judgment in the drafting of rules and regulations, grounded in principled decision-making (Law, 2023, pp.73–75):

“I feel that without a direct point of contact or even knowing the business’s address, it’s challenging to feel that the banks are committed. The lack of connection and uncertainty leaves me feeling disengaged”

Thirdly, a closely related issue concerns the aspect of accountability. It is a seemingly straightforward yet frequently overlooked point that emerges when bank clients exclusively interact using pop-up messages. In this context, the bank effectively absolves itself from any potential wrongdoing in disputes, as every decision is made by the clients themselves in response to the instructions provided. Consequently, clients are unable to contest transactions, as there is no identifiable party to hold responsible for any potential misguidance.

Participant 31 astutely notes that, in previous communication modes, such as phone interactions, clients had the ability to inquire about the identity of the counterpart and request a specific name. However, in the current email-based communication paradigm, the notion of an accountable individual seems to have dissipated. Responses received from the bank solely display the institution’s name, conveying a clear message that the entire bank collectively assumes responsibility for the operation. Consequently, clients face a binary choice of acquiescing to the provided terms without recourse or rejecting them outright:

Policies relating to personal touch could focus on requiring banks to ensure clients have access to a phone number or email address that would be attended to by the bank, and in order to resolve resource constraints (for example, banks not hiring so many people to answer phone calls or emails) the following measures could be implemented:

• Implementing a tiered support system where routine inquiries are handled by automated chatbots or self-service options, freeing up human representatives to focus on more complex or high-priority issues.

• Adopting a hybrid model where clients can choose between self-service options and scheduled appointments with a dedicated relationship manager for more personalised attention.

• Leveraging technologies such as virtual assistants and video conferencing to provide more personal interaction without the need for in-person meetings.

• Incentivising clients to use digital channels for routine transactions, while reserving phone or email support for more complex queries that require human intervention.

• Providing comprehensive training and performance management for customer service representatives to ensure a high level of empathy, problem-solving skills, and responsiveness.

• Regularly gathering feedback from clients to identify areas for improvement and continuously enhancing the personal touch experience.

In essence, the transition to virtual banking channels has inadvertently eroded the perception of individual accountability within client-bank interactions. This limited avenue for seeking redress or clarification contributes to a perceived lack of transparency and accountability within the virtual banking landscape.

This naturally leads to the second issue: the inadequacy of digital resolution channels, which poses challenges in handling complaints effectively. Although banking activities increasingly occur in the digital realm, this has not been reflected in dispute resolution mechanisms. This can lead to frustration, delayed resolutions, and potentially negative impacts on client satisfaction and trust. Authorities should therefore prioritise the development and implementation of robust digital resolution mechanisms that enable swift and efficient handling of client queries, complaints, and disputes. As reflected by our focus group participants, there are missing elements within banks’ digital channels that can seriously affect the trust and confidence that the conventional banks could have offered:

“Since the transactions I make through the apps are usually of low amounts, I might just let any system-related issues slide without bothering to address them. However, it’s important to understand that, regardless of the transaction size, I should not be discouraged from seeking resolution for any problems I encounter. My satisfaction as a user should be valued, as it contributes to building trust and fostering a positive, long-term relationship with the service provider”

Participant 55 mentioned that the email channel has already been removed from the mobile apps. This forced them to use the chat function, which presents a similar problem as it is extremely difficult to save a complete record. This has serious implications because any evidence provided by clients would come from an incomplete record. Screenshots would not provide clear dates and times of correspondence, and the complete dialogue would not be downloaded in a single document. As a result, clients might perceive that these documents would not be recognised by the court. This means that whenever a dispute arises, clients would have to rely on the bank’s discretion to resolve the issues based on incomplete records. Consequently, clients must “wait” for the results accordingly. It is worth noting that this phenomenon also occurs in non-virtual banks (Law, 2023, Ch. 5). However, with virtual banks, these issues become even more serious because the ability for clients to collect evidence becomes even more difficult:

“When faced with a dispute, I was advised to keep a receipt as evidence and proceed with raising my case. However, I find it quite challenging to ascertain what information the bank already possesses and what specific steps I can take to resolve the issue effectively. The lack of clarity regarding the available options and the extent of the bank’s knowledge leaves me uncertain about the best course of action to address the dispute. It is made more difficult for me when I have no one else to ask, and when I have to type out my enquiries in the chatbox. I wish for clearer guidance and transparency to navigate the resolution process more confidently”

The above statement provides theoretical insights into the issue at hand. When clients encounter a dispute with a virtual bank, the clients are not adequately informed beforehand about the specific information already possessed by the bank and the information required from them. While it may seem somewhat amusing to advise clients to prepare for a dispute before a dispute has happened, lack of clear instruction before a dispute occurs imposed additional confusion when they can only rely on typed interactions. Furthermore, there is a lack of specific guidance and steps for achieving an effective resolution, which further compounds the uncertainty faced by clients when they are left in the virtual space. This uncertainty arises from their lack of knowledge regarding available options and the bank’s familiarity with the dispute. Consequently, clients seek clearer guidance and enhanced transparency from the bank to navigate the resolution process with greater confidence. This underscores the significance of effective communication, comprehensive record-keeping, and transparent procedures in virtual banking, thereby ensuring that clients feel adequately supported and empowered when addressing disputes.

Here, a self-corrective mechanism emerges. Clients would not bother to escalate a dispute in the first place because of the loss of personal touch. The self-corrective mechanism implies that clients will not actively escalate a complaint due to the low possibility of winning against the bank. In such a situation, clients would know that they have little or no chance of prevailing against the bank (Law, 2023, pp. 206–208). In the context of virtual banking, clients would find it very difficult to initiate a complaint due to the lack of documentary support and the fact that they are merely following the bank’s instructions through online systems.

Banks also have the discretion to terminate the handling of a dispute without notifying the client. They possess full authority to conclude a complaint without any communication to the client. For instance, Participant 60 raised a dispute with their virtual bank in HK and discovered a function in the mobile apps specifically for disputing a transaction. However, it became apparent that the bank requested documents that the client had not retained, thereby impeding the effective escalation of the complaint. Also, the complainant had no influence over the outcome or the process of the complaint. Participant 60 further described that his complaints ticket has been eliminated. While this issue is not exclusive to virtual banking, where banks can adjudge their own disputes (Law, 2023, pp. 146–148) it becomes more severe in the context of virtual banking as clients have limited recourse to address it:

“When I try to raise a complaint about a disputed transaction in my virtual banking app, I notice that my complaint is silently removed without any notification. It takes persistent follow-ups, asking three times, before someone finally responds in the chat. However, I remain unaware that they are actually seeking more information from me. The lack of clear communication leaves me uncertain about when the conversation began and when it will conclude”

The bank has dictated the dispute resolution process, perhaps by taking advantage of the technical illiteracy of clients or lack of sensitivity to pay attention to the information provided by the bank.. This agreement is outlined in the one-sided contract drafted by the banks (Law, 2023, p. 54). Participant 37 informed us that when there was a change in bank policy or practice, the bank, despite being obligated to inform clients of the change, does so in a very subtle manner. They send a letter to clients stating that “there is a change of important terms and conditions.” Unfortunately, clients often tend to ignore this notice out of habit. Participant 37 noted that, in one instance, the minimum balance requirement was changed. Although the bank did inform them using the same method, they were still charged a significant administrative fee. Participant 37 lodged a complaint with the bank, and without admitting fault, the bank refunded all the money and allowed some discretion for clients to maintain a balance lower than the minimum before imposing charges. Participant 37’s concerns about the virtual-only platform were echoed by other participants in different focus groups. They worried that the lack of direct communication with bank staff would make the dispute resolution process more difficult. Similarly, Participant 60 experienced the removal of the log they made in the dispute channel without any notification. It appears that the bank is relying on clients to forget about the disputes they logged online. When things moved online, the visibility of these channels and communication became more remote, an issue that should be addressed through the following suggestions:

• Establish a clear, well-documented dispute resolution process that is transparent and accessible to clients.

• Implement robust tracking and reporting systems to monitor dispute resolution, and use data to identify and address recurring issues.

• Proactively communicate with clients about the status of their disputes and encourage feedback to drive continuous improvements.

• Empower and train customer service representatives to handle disputes effectively, with the necessary tools and decision-making authority.

• Regularly review and enhance the digital dispute logging system to improve user-friendliness and provide clients with clear status updates.

Banks should retain autonomy to innovate and compete, but they must also be subject to targeted regulatory intervention to address the unique challenges of virtual banking when necessary. This includes ensuring accountability, mitigating systemic risks, balancing innovation with consumer protection, promoting fair competition, and enhancing transparency. Regulatory intervention is not about stifling innovation but about creating a framework that supports responsible innovation and safeguards the integrity of the financial system. Moreover, the reliance on third-party providers and non-bank infrastructure, such as Wi-Fi, exacerbates these challenges. If these external systems fail, clients may face delays or lose access to dispute resolution channels entirely. This lack of reliability further undermines trust in virtual banking platforms. Additionally, the absence of clear explanations about how virtual banking platforms operate securely leaves clients uncertain about their rights and options during disputes.

Rapid advancements in technology and the evolving nature of virtual banking necessitate a regulatory environment that keeps pace with these developments. However, the current regulatory framework often falls short in addressing the unique challenges posed by virtual-only banking platforms. While banks must retain a degree of autonomy to innovate and compete effectively, this autonomy should not come at the expense of consumer protection, systemic stability, or the public utility role of banks. Regulatory intervention is therefore still essential but the issuance of a virtual banking license raises an initial concern.

While the Hong Kong Monetary Authority asserts that promoting financial inclusion is the primary objective, the actual challenge lies in the restrictions imposed on account opening. However, disregarding this issue, the very purpose of virtual banking licenses encounters broader problems. Traditional banks are already driven to establish their virtual presence, thereby blurring the competitive advantage of virtual banks. Instead, virtual banks may resort to offering discounted services or adopting less stringent client onboarding requirements. Participants across various groups have voiced apprehensions regarding the divergent banking practices observed, despite the adherence to the same regulatory requirements. For instance, conventional banks may mandate voice recording prior to executing an investment trade, while virtual banking merely necessitates a few button presses. This raises the critical concern of how virtual banks can effectively ensure the authentication of authorised individuals operating the banking app, given the potential risk of unauthorised persons gaining control of the device and executing trades. The ongoing debate revolves around the question of whether different banks should conform to uniform practices under a common regulatory framework. Moreover, the significant disparities between virtual and non-virtual banks may engender confusion among clients and prompt scrutiny of the regulatory role. An illustrative example, as underscored by Participant 22, lies in the disparity between conventional banks, where clients are required to open an account and activate virtual banking apps in person, and certain traditional banks, particularly virtual banks, which eliminate the need for physical presence altogether:

“What are the underlying reasons and intentions of regulators when they issue virtual banking licenses? Yes, virtual banking has gained significant traction in recent years, transforming the way financial services are delivered. But the regulatory bodies have done nothing to adapt to this evolving landscape. By obtaining insights into the motivations behind issuing these licenses, we can better comprehend the regulatory objectives and the potential benefits they aim to achieve. It is essential to explore how virtual banking licenses contribute to financial innovation, consumer protection, increased competition, and the overall development of the banking industry”

The divergence arises from the technology-neutral approach adopted in bank regulation, where there is no control over how banks deliver and fulfil regulatory requirements. However, this raises concerns about sustainability and potential cost increases if these third-party providers cease operations or significantly raise their charges. Secondly, society is not obligated to provide access to non-bank components, particularly crucial elements like access to Wi-Fi, which are essential for gaining online access. These technology-centric elements are beyond the scope of regulatory control, including their maintenance, operation, data management, and privacy issues, thereby posing challenges for bank regulators. Banking services have become dependent on other infrastructures that were traditionally provided directly by banks. While banks have the choice to adopt digital or non-digital delivery methods, the resulting differences have created confusion among clients. It is necessary to provide clients with clear explanations of how different approaches can be securely delivered, ensuring the same level of depositor and investor protection as having a physical presence would offer. Participant 32 said:

“Can the regulator exert control over the device we are using? What if, one day, the iPhone ceases to function? What if the cost of the internet increases by 100 times its current price? Who bears responsibility for teaching me how to use all of these?”

This situation presents yet another significant predicament of regulatory arbitrage. Participant 55 opened a bank account without providing an address proof from a virtual bank, and subsequently acquired a bank address proof from that virtual bank to open a bank account in a conventional bank that requires an address proof. However, upon approaching a traditional bank to initiate an account, Participant 55 found themselves lacking proof of address. The rationale behind the traditional bank’s acceptance of the virtual bank’s proof of address remains obscure. Such a scenario has engendered regulatory arbitrage, wherein banks intentionally or unintentionally exploit third-party evidence to circumvent their internal compliance measures, potentially driven by the need to alleviate constraints. In this instance, the traditional bank has evidently chosen to repose trust in the documentation issued by the virtual bank, which, in essence, simply relies on the information provided by clients without seeking corroborating evidence. Consequently, this affords the client an arbitrage opportunity, allowing them to open an account with the traditional bank without the obligation to furnish a proof of address:

“When I first arrived Hong Kong as a student, I sought to open a bank account and discovered that conventional banks required address proof, while virtual banks did not. The virtual bank staff explained that they used innovative verification methods instead. This experience highlighted the evolving nature of banking, with virtual banks prioritising strong data security, innovative verification, and regulatory compliance. It showcased the convenience offered by virtual banks and their ability to adapt to customer needs in a digital era”

The only intervention inserted by the regulators is the issue of the virtual banking license, but notably ignoring the impact of technological advancement. By wrongly assuming the positivity of technology advancement, and wrongly assuming that the usual problems of technological advancement and hurdles are mainly technical, such as cybersecurity, data privacy, and cybercrime. The very essence of these issues are they cybersecurity issues are impossible to rectify once invaded, data privacy and cybercrime are impossible to prosecute if the criminal did the crime in a foreign jurisdiction. The dependency of third-party technology also means that the banks and the regulators would have no control and authority to obtain necessary evidence once these occurred. At the client level, all the above impression, be it a perception of reality, presents a huge problem for client acceptance to the virtual bank:

“As a virtual banking client, I’ve come to understand that regulators launched virtual banking initiatives to achieve a range of goals, with a key focus on promoting financial inclusion. Virtual banking offers convenience and accessibility, allowing individuals who may be underserved by traditional banks to access essential financial services. The digital nature of virtual banking eliminates geographical limitations and reduces barriers, making banking more accessible to a wider audience. By leveraging technology and fostering competition, regulators aim to create a dynamic marketplace that encourages innovation and customer-centric services. While many individuals already have virtual banking accounts, expanding virtual banking options further enhances financial inclusion by providing a broader range of services to those who face barriers in traditional banking. However, addressing challenges like digital literacy and ensuring access to technology and connectivity are essential in realising the full potential of virtual banking for financial inclusion”

It is suggested that the existing supervisory approach may be sufficient, but it is crucial that banks address customers’ complaints and document any changes made as a result. More importantly, banks should proactively inform clients about any changes they have implemented in response to the complaints, in order to show two-way forms of communication and impose supervisory measures from the client’s end (Participant 36, Focus Group, March 2022).