LAW ON DIGITAL BANKING IN SOME COUNTRIES AND EXPERIENCES FOR VIETNAM

LAW ON DIGITAL BANKING IN SOME COUNTRIES AND EXPERIENCES FOR VIETNAMLAW ON DIGITAL BANKING IN SOME COUNTRIES AND EXPERIENCES FOR VIETNAMLAW ON DIGITAL BANKING IN SOME COUNTRIES AND EXPERIENCES FOR VIETNAMLAW ON DIGITAL BANKING IN SOME COUNTRIES AND EXPERIENCES FOR VIETNAMLAW ON DIGITAL BANKING IN SOME COUNTRIES AND EXPERIENCES FOR VIETNAMLAW ON DIGITAL BANKING IN SOME COUNTRIES AND EXPERIENCES FOR VIETNAMLAW ON DIGITAL BANKING IN SOME COUNTRIES AND EXPERIENCES FOR VIETNAMLAW ON DIGITAL BANKING IN SOME COUNTRIES AND EXPERIENCES FOR VIETNAMLAW ON DIGITAL BANKING IN SOME COUNTRIES AND EXPERIENCES FOR VIETNAMLAW ON DIGITAL BANKING IN SOME COUNTRIES AND EXPERIENCES FOR VIETNAMLAW ON DIGITAL BANKING IN SOME COUNTRIES AND EXPERIENCES FOR VIETNAMLAW ON DIGITAL BANKING IN SOME COUNTRIES AND EXPERIENCES FOR VIETNAMLAW ON DIGITAL BANKING IN SOME COUNTRIES AND EXPERIENCES FOR VIETNAM

MASTER THESIS

LAW ON DIGITAL BANKING IN SOME COUNTRIES AND

EXPERIENCES FOR VIETNAM

Specialization: International Trade Policy and Law

PHAM THI QUYNH MAI

Hanoi – 2019

Firstly, I would like to express my deepest appreciation and thanks to my mentor, Dr Ha Cong Anh Bao for precious guidance, comments and suggestions

This paper is one of the last compulsory elements of Master ofInternational

Trade Policy and Law program at the Foreign Trade University Theobjective of this study is to find out recommendations for VietnamGovernment to enhance the development of digital banking Ihope that the recommendations of this study will be useful for thelegislature in developing of policies and laws on digital banking in

the foreseeable future

COMMITMENT

I would like to assure that the research of “Law on digital

banking in some countries and experiences for Vietnam”

was carried out by me All contents, tables, figures, chartillustrated in this study are honest, accurate and quoted from areliable source

Hanoi,

January, 2019

Pham Thi Quynh Mai

MASTER THESIS

LAW ON DIGITAL BANKING IN SOME COUNTRIES AND

EXPERIENCES FOR VIETNAM

Major: International Trade Policy and Law

Full name: Pham Thi Quynh MaiSupervisor: Dr Ha Cong Anh Bao

Hanoi – 2019

LIST OF TABLES AND CHARTS iii

ABSTRACT iv

CHAPTER I: INTRODUCTION 1

1.1 Research rationale 1

1.2 Literature review 2

1.3 Research questions 3

1.4 Scope of the research 3

1.5 Research methodology 4

1.6 Structure of thesis 4

CHAPTER II: OVERVIEW OF DIGITAL BANKING 4

2.1 Origin and development of digital banking 4

2.1.1 History of Digital Banking 4

2.1.2 Electronic banking and digital banking 5

2.1.3 Fintech and threats to bank 6

2.2 Definition of law on digital banking 7

2.3 Main types of digital banking 9

2.3.1 Digital is a brand 10

2.3.2 Digital banking is distribution channel 10

2.3.3 Digital bank is a subsidiary of traditional bank 10

2.3.4 Full-scale Digital bank 10

2.4 Main characteristics of digital banking 11

2.4.1 Automation 11

2.4.2 Decision making support 11

2.4.3 Innovation 11

2.4.4 OmniChannels 12

2.5 Advantages and disadvantages of digital banking 13

2.5.1 Advantages 13

2.5.2 Disadvantages 14

2.6 The factors affect to digital banking 15

2.6.1 Client centricity approach 15

CHAPTER III: POLICY AND LAW ON DIGITAL

IN SOME COUNTRIES 18

3.1 Policy and Law on digital banking in some countries 18

3.1.1 European Union 18

3.1.2 Thailand 22

3.1.3 Singapore 27

3.1.4 South Korea 32

3.1.5 China 38

3.2 Experiences for Vietnam 44

3.2.1 Lessons learned from selected countries 44

3.2.2 Risk Identification and Mitigation Mechanism 48

CHAPTER IV: POLICY AND LAW ON DIGITAL BANKING IN VIETNAM 54

4.1 Digital banking development in Vietnam 54

4.1.1 Overview 54

4.1.2 Case Study 64

4.2 Opportunities and challenges 68

4.2.1 Opportunities 68

4.2.2 Challenges 69

4.3 Policy and Legal framework on digital banking in Vietnam 71 4.3.1 Policies of the Government of Vietnam on digital banking 72

4.3.2 Vietnam Laws on digital banking 75

CHAPTER V: RECOMMENDATIONS FOR VIETNAM ON AMENDMENT OF LAW ON DIGITAL BANKING 82

5.1 E – KYC mechanism 82

5.2 Non-cash Payment 83

5.3 Authorized agents of banks 84

5.7 Protection of Customers’ information and Data Security 89

5.8 Adoption and Application of new technology 90

5.8.1 Artificial intelligence 90

5.8.2 Open APIs 92

5.8.3 Block chain 92

CHAPTER VI: CONCLUSION 94

LIST OF REFERENCES 96

AI Artificial Intelligence

MAS Monetary Authority of Singapore

NIS

Network and Information Security Directive 2016

OCBC Bank

The OCBC Bank group comprises a family of

companies owned by Singapore's longest

established local bank

PDPA

Personal Data Protection Act 2012 of Singapore

PwC

PricewaterhouseCoopers is a global network ofprofessional firms providing Audit, Tax and Advisory services

Table 1: Top 5 Centers in GFCI 24 28Table 2: Number of ATMs per 100,000 adult population and over

1000 km2 of some countries in 2016 55

CHARTS

Chart 1: Thailand’s internet and mobile banking transaction volume 22Chart 2: South Korean Internet-only banks take off 33Chart 3: Adoption of internet banking and mobile banking in China 39Chart 4: Executive Responeses on Digital Security Vulnerabilities Faced by

Stakeholders (%), Q2 2017 50Chart 5: Growth rate of ATM transaction and value 56Chart 6: The groth rate of POS, quantity transactions 57Chart 7: The number and value of transactions via Internet banking and mobile banking in the period 2015 - 2016 58Chart 8: The number and value of electronic wallet transactions during the year of

2012 to 2016 60

Development Strategy of the Vietnam Banking Sector to 2025, with orientations to

2030 which also aims to develop digital banking in order to create a basis forimproving access to banking services, in particular, broadening the network oftraditional channels in combination with enhancing the development of modernbanking channels (electronic banking, mobile banking, internet banking, etc.,)through the application of technical advances Policies on digital banking are made

up of two components, namely the digital banking policy and law; and theapplication of technical advances Researching policy and law governing the digitalbanking is meant to be the fundamental and priority condition to facilitate bothcomponents This research selected policy and law in EU, Singapore, Thailand,South Korea and China as the mirror for Vietnam thereby giving somerecommendations for Vietnam Government to amend and supplement policy andlaw on digital banking

CHAPTER I: INTRODUCTION

1.1 Research rationale

The world is coming to a new era of innovation that willchange the relationships between banks and their customers Old-fashioned banks suffer from numerous drawbacks, because theyare far behind the latest technological breakthroughs in the 21century’s the digital economy Thanks to innovations ininformation technology and mobile telecommunications adoption,there is an increasing trend in digital banking solutions Digitalbanking is a valuable investment opportunity because traditionalbanks or even online banking are no longer able to adequatelyservice their customers' requirements in the digital revolution.Customer needs cannot be satisfied by traditional banks which isunable to catch up with the digital ages The customers preferdigital banking to traditional banks due to its convenience andtime savings In Vietnam, according to a survey conducted by IDGVietnam, 81% of surveyees responded that they used digitalbanking solutions in 2017 compared to 21% in 2015 (FintechnewsVietnam, 2018)

Digital banking not only offers great opportunities for banks,but also brings many challenges for both banks and stateagencies Banks shall have to clarify how to meet the highexpectations of customers; utilize new technologies, preventnetwork security threats and protect customers’ information whilethe state agencies are being challenged by the protection ofconsumer interests, dealing with the risk of network security/dataprivacy and balancing management with innovation andcompetition

In order to meet market demand and internationalintegration timely, many domestic banks have actively applied

new technological solutions to simplify the process and increasethe coverage of products and services efficiently However,implementation of these solutions faces many challenges due toincomplete legal corridors Therefore, the adjustment and updating

of policy and laws in line with the inevitable reform of bankingtechnology is really necessary and decisive for the long-termdevelopment of digital banking in Viet Nam

In such circumstance, it is necessary to have a full scaledresearch about digital banking which is very important and needfulfor Vietnam

1.2 Literature review

There are a lot of domestic and foreign studies on digitalbanking

From the foreign writers’ point of view, this topic has been

addressed in several researches The introduction of a third wave

of innovation in banking implies that traditional banks are farbehind the latest technological innovations and how banking willevolve in the digital age (Alex Lipton, David Shrier, Alex Pentland -

Massachusetts Institute of Technology, Digital banking manifesto: the end of banks? in 2016) Due to the fact that banks need

digitize their existing businesses, creating a new digital-onlybanking business can meet an evolving set of customerexpectations quickly and effectively (Sonia Barquin and Vinayak

HV, Buiding a Digital Banking Business in 2018) Report of the Working Group on FinTech and Digital Banking in 2017 by Reserve

Bank of India explained why FinTech or digital innovations haveemerged as a potentially transformative force in the financialmarkets Capagemini’s report (2017) concluded that banks areconsidering fintech firms as partners and banks are increasingadapting public cloud services Takeshi Jingu studied financial risk

prevention as well as protection of personal information as a new

regulatory priority in his research namely China’s risk prevention initiatives in Internet finance and Fintech sectors in 2018.

From the local writers’ point of view, there has been more

newspaper, conference, discussion papers, research publishedrelated to the topic of digital banking Some researchers had quitevaluable analysis of this topic Nguyen Thuy Duong - DeputyGeneral Director of Ernst & Young Viet Nam highlighted practiceand legal framework and management and development on digitalbanking in several countries, including: India, Singapore, China in

her study namely “Kinh nghiệm quốc tế trong việc quản lý và phát triển ngân hàng số tại một số nước trong khu vực và thế giới” in

2017 A number of digital solution in digital banking such as eKYC,electronic saving deposits has been addressed in Nguyen Hung –

General Director of TPBank, Những thách thức trong áp dụng phương pháp định danh khách hàng trên nền tảng kỹ thuật số, triển khai sản phẩm tiết kiệm điện tử và phát triển dịch vụ ngân hàng thông qua đại lý ủy quyền” in 2017 Several of legal

workshops related to digital banking were held by SBV, including:

“Hành lang pháp lý cho ngân hàng số tại Việt Nam December 2017”, “Số hóa ngân hàng, cơ hội đột phá October 2018” The

above mentioned workshops had the participation of DeputyGovernor of the central bank Nguyễn Kim Anh; representative fromthe Ministry of Public Security, Ministry of Justice, State and localbanks, E&Y Company Limited, fintech companies, researchinstitutes, universities, contributing their discussion to theworkshop on the digital banking development and the needadjustment and updating of policy and laws to govern andfacilitate the digital banking services in Vietnam

Thus, all of the researches mentioned above are tended tofocus on an specific aspect of the law on digital banking such as:the appearance of digital banking, competitiveness betweenfintech and banks, financial risk and data protection, experiences

on management and development of digital banking, eKYC, etc.,

Up till now, however, there has not been a comprehensive, scale study in terms of laws on digital banking of several countries(including EU, Singapore, Thailand, South Korea and China) inorder to evaluate (i) experiences for Vietnam; (ii) ability of Vietnam

large-to learn from experiences from such countries; (iii) opportunitiesand challenges when application of such countries’ experiences ondigital banking law as well as recommendations for Vietnamgovernment to amend and/or supplement laws on digital banking

1.3 Research questions

Question 1: What is law on digital banking?

Question 2: What are differences between electronic bankingand digital banking?

Question 3: How do some countries in the world promulgate/revise their policies and laws to govern digital banking?

Question 4: Which law on digital banking of Vietnam needamending?

1.4 Scope of the research

There are lots of studies on electronic banking (or onlinebanking) where researches on digital banking are almostnonexistent Thus, this study selected the data and information onthe development of digital banking and selected countries(including EU, Singapore, Thailand, South Korea and China) as well

as Vietnam during the period of 2012 to 2018 to evaluate (i)policies of such countries on digital banking; (ii) legal framework

on banking sector in general and digital banking in particular; (iii)

protection of customers’ information; and (iv) new technologieswhich give rise to the blooming of digital banking.

On that basic, this research will find out experiences forVietnam when analyses the achievement as well as drawback ofselected countries mentioned above thereby giving somerecommendations for Vietnam Government to develop andimplement policies and law to facilitate digital banking

1.5 Research methodology

The research approach of this study is qualitative research tomake a primarily theoretical dissertation The methodologyincluding selection and discussion of theoretical material anddescriptive material, publication research, law research and casereview, include both present and historical information, anddetailed comparison of regulations, theories in terms of theirapplicability

1.6 Structure of thesis

This thesis comprises of 6 chapters, which are:

Chapter 1: Introduction

Chapter 2: Overview of digital banking

Chapter 3: Policy and Law on digital banking in somecountries

Chapter 4: Policy and Law on digital banking in Vietnam

Chapter 5: Recommendations for Vietnam on amendment oflaw on digital banking

Chapter 6: Conclusion

CHAPTER II: OVERVIEW OF DIGITAL BANKING

2.1 Origin and development of digital banking

2.1.1 History of Digital Banking

In the mid 1970s, the automated teller machine (ATM) wasfirst launched at a branch of Barclays bank which is considered as

the earliest forms of digital banking The electronic ATM isdeveloped by John Shepherd-Barron, the De La Rue CompanyLimited Thanks to ATM, customers could conduct bankingtransactions including cash withdrawals and check deposits (LindaRodriguez McRobbie, 2015)

It was not until 1980s that the online banking is introduced tothe customers Together with the blooming internet, producersstarted to sell their products online which give rise to theappearance of the Internet banking or online banking Onlinebanking allows customers to conduct several banking transactionssuch as money transfer, bank statements, and electronic billpayment through the internet by means of banks’ website or app.The modern digital banking world today was attributed to thedevelopment of the ecommerce systems in the early 2000s.Browser-based website and smartphones’ apps of banks gavecustomers easy access to banking transactions on the go beyondATM machines and banking branches In 2017, over 60% ofconsumers use their smartphones as the preferred method fordigital banking (Jim Marous, 2017)

Customer behavior is changing rapidly, especially theyounger generation of consumers, who regularly use smartphonesand the internet to make purchases online Banks which want toretain existing customers and attract new customers have toquickly digitize existing banking operations and move on to acompletely new digital business model As a result, digital bankingappears and enables almost banking transactions to be carried outthrough electronic devices such as smartphone, tablet, and laptopwithout presence of customer at banks’ branch In other words, thetraditional banking model that is dependent on the branch network

will eventually be transformed into an integrated model of digitalbanking.

2.1.2 Electronic banking and digital banking

Digital banking and electronic banking are twoconcepts that are gradually gaining popularity amongcustomers because of its convenience and efficiencycompared to traditional channels Basically, these two typesare quite similar in many respects, but in reality, there arestill significant differences Electronic banking was launched

in Vietnam when the Internet usage is blooming Bankingtransactions such as balance inquiry, withdrawal, moneytransfer, and savings are replaced by online operations (i.e.internet banking, mobile banking) as long as the customer isconnected to the Internet However, electronic banking is stillonly an alternative solution under the control of thetraditional bank Applications of digital banking will have allthe functions of a real bank as mentioned above Alltransactions are conducted online and you can sendinquiries, questions only by mobile device In general,electronic banking is just a utility of the bank, concentratingonly on digitizing some of the core features of the bank, whiledigital banking embraces every programs and activitiesundertaken by banks and their customers That is thedifference between the two concepts Digital Banking andelectronic banking It can be said that digital banking is thetrend of the future because this form of banking will helpcustomers as well as financial institutions save, reduce costsand time significantly

2.1.3 Fintech and threats to bank

FinTech stands for financial technology, which meansthe application of new, innovative, and modern technologies

in the financial sector (including banking, insurance,investments, retirement funds, payment services andfinancial infrastructures, etc.,), to provide customers withtransparent, efficient and convenient financial solutions orservices at a lower cost than traditional financial services.Fintech companies are innovative because they are notdominated by legal barriers like banks Continuing to applythe latest technologies, especially automation technologies,artificial intelligence, social network data analysis, Fintechcompanies are said to bring a better experience, higherproductivity than the products of banks In addition, Fintechcompanies accept risks in a wider range, higher levels, sothey are more likely to reach out to customers who are notbanks’ customer or not qualified to be bank customers

The development of Fintech has really become athreat to the existence of organizations providing retailfinancial services in the world, specifically here are traditionalbanks In the current development trend, banks themselveshave realized that there must be a comprehensivetransformation in the way they operate, provide products andservices if they do not want to be an empty chain in thefinancial system Thus, many traditional banks choose tobecome digital banks because only digital technology canmeet the needs of customer integration quickly, convenientlyand safely which is different from traditional business model Banks are now moving from a competitive approach tocooperation as a partner with Fintech Basically, the partnershiphere is conducted in the win-win model, in which banks will be able

to apply and update modern technologies without spending toomuch on cost while Fintech can exploit the customer network, dataand capital of the bank Investigations by many internationalorganizations show that the cooperation between banks andFintech is quite fundamental which facilitates banks to adopttechnological solutions to provide products and services met theneeds of the market Specifically, according to a survey ofFintech's global financers in 2017 by KPMG, when interviewingFintech's development strategy for the banking sector, it isbecoming increasingly important that 81% of the interviewedbanks favor a cooperative model, which is 20% increase compared

to the past (KPMG, 2017) Meanwhile, according to PwC GlobalFintech report in 2017, an average of 45% of banks surveyedglobally have collaborated with Fintech companies in developingand supplying products higher than 32% of banks surveyed in

2016 (PwC, 2017)

2.2 Definition of law on digital banking

To start with, let us begin with the term “digital” and

“digitalization”

The term “digital” is typically used to refer to the storage ofdata in the form of digital signals represented using the numbers 1and 0 In digital banking, the term refers to information and theformat in which it is stored, such as digital KYC or eKYC, digitalcustomer records, etc The term “digitalization” goes beyondsimply digitization In this sense, books don't simply becomeebooks, but a complete interactive and multimedia experience;business processes give way to online dialogues between partiesthat were not previously connected directly

As mentioned in Section 2.1.2 above, digital banking is a newand broader concept than the concept of e-banking, which is the

higher stage of e-banking In practice, the concept of digitalbanking is understood in the narrow sense, which is online channel

of banking The digital banking mentioned in this thesis isunderstood in a broad sense

Digital banking is able to carry out most banking transactionsautomatically through the internet Customers who conduct banktransactions by digital banking do not have to go to a bank branchand minimize the paperwork involved At the same time, thedigital banking features can be implemented at any time,regardless of space, so customers are completely active Withdigital banking, only by financial application or website you canuse all features such as: bank remittance, money transfer; pay thebill; loans; savings deposits; engage in financial products such asinsurance, investment, personal finance and corporate finance.There are many definitions of digital banking, for examples:

“Digital Banking - a new concept in the area ofelectronic banking, which aims to enrich standard online andmobile banking services by integrating digital technologies,for example strategic analytics tools, social mediainteractions, innovative payment solutions, mobiletechnology and a focus on user experience.” (Paper of 5th

International Conference on Governance in India Financial Services Sector:Reform and Remedies, 2018, p.125) This concept clearly states thatdigital banking is a higher stage of online banking and mobilebanking By listing solutions and services offered throughdigital banking, this definition still emphasizes the purpose ofdigital banks to increase user experience

Contrary to this definition, Fivedegree took acompletely different approach when it came to arguing thatdigital banking is the digitalization of all products and

services as well as the traditional banking process and thefurther development of online banking or mobile banking.This definition clearly states that the bank requires each step

of the bank's operation process to be automated andspecifically: “Digital banking means the full digitization ofbanks and all its activities, programs and functions It’s notjust about digitizing your services and products - the front-end that customer see - but also about automating yourprocesses (the back-end) and connecting these worlds withmiddleware Digital banking is about the automation of everystep of the banking relationship, and it goes way beyond anonline or mobile banking platform.” (Fivedegree, 2018)

Another definition which focuses on benefits of digitalbanking for both commercial banks and customer has beenexplained by Rajendra Kumar Tolety In particularly, “DigitalBanking is the application of technology to ensure seamlessend-to-end (STP in the 'old' jargon) processing of bankingtransactions and operations; initiated by the client, ensuringmaximum utility to the client in terms of availability,usefulness and cost; to the bank in terms of reducedoperating costs, zero errors and enhanced services.”(Rajendra Kumar Tolety, 2018, p.2)

Bearing all of the above mentioned objective, features,characteristics as well as benefits of digital banking, from theauthor’s point of view, Digital Banking is a combination ofemerging new technologies (i.e eKYC, big data, API, artificialintelligence, etc.,) in financial services organizations toaccommodate changes in internal and external relationships thatimprove service and experience of customers in order to adapt tothe highly competitive business environment and improve the

business management capability of commercial banks in the near

future As a result, Law on digital banking is a system of

rules on Digital banking that are created and enforced by a state to regulate behavior amongst state agencies (i.e government, state bank), credit institution (commercial banks, fintech) and customers including but not limited to (i) the establishment, operation, management of digital banks; (ii) requirements and conditions for the credit institution when providing digital banking product and services; (iii) rights and obligations of the customer when using digital banking product and services.

2.3 Main types of digital banking

In the course of transformation from traditional banking todigital banking in terms of infrastructure, back-office, distributionchannels, as well as service products, the digital banking model isdivided into four types hereunder

2.3.1 Digital is a brand

Many traditional banks with full range of identificationservices find it difficult to reach young customers and they do notwant to change their image with existing customers Thus, setting

up a new brand through the design of products, sales andpromotion policies that appeal to young customers is a safestrategy This is basically seen as a new type of digital bankdespite the fact that it will take the advantage of infrastructure,back-office, and distribution channels of the traditional bankwhenever possible The Singapore-based OCBC's FRANK brand andYOLO by VPBank Vietnam are prime examples of the digitalbanking brand

2.3.2 Digital banking is distribution channel

User experience is important and can be achieved byproviding online and mobile services that focus on the userexperience This pattern often re-uses the existing office andbanking license, and then builds and releases products andservices with an enhanced user interface that is completelydifferent from the existing service products provided by traditionalbanks This model shall be deployed in test and learn approach Inparticular, after pilots and tests, the digital products and servicesshall be full deployment in flexible and agile execution Moven inthe United States is a good example of this type.

2.3.3 Digital bank is a subsidiary of traditional bank

Large banks with comprehensive innovations have found thattheir current banking systems are too large and cumbersome intheir transition As such, they set up a subsidiary as a stand-alonebanking model with all the systems from the back-end to the front-end completely separated from the parent company A typicalexample is HSBC's First Direct In Vietnam, VPBank's Timo hasbeen established as e-banking channel of VPBank which just useback-end system of VPBank and provide stand-alone digitalproducts, services, and sales force

2.3.4 Full-scale Digital bank

Full-scale digital bank is based entirely on the core of digitaltechnology Some banks built in this model may not exist anyBranch or use branches for accelerating digital only Bank officersshall be disseminated with digital in term of company regulations,culture and innovation Take an example of South Korea’s K-Bank,customers of these banks will interact with the bank primarilythrough technical channels

2.4 Main characteristics of digital banking

2.4.1 Automation

According to the traditional branch model, the bankonly works for 8 hours, while the majority of customers,especially individuals, also work at the same time, so they donot have time to go to the bank Therefore, the requirement

to automate the process of providing products and services,banking procedures through non-human channels is acompulsory requirement of digital banks It provides solutionsthat support the automation of product creation and deliveryprocesses to integrate digital distribution channels, providinghigh-tech content to customers For the new core bankingsystems in the market, automation is supported through newfeatures such as product packaging by customer segments,which easily manages the delivery of these products throughdifferent distribution channels

2.4.2 Decision making support

In order to simplify the process, and provideappropriate products and quickly to the right customers ondifferent channels, the bank’s system also have to handlelarge amounts of internal as well as external data which isused for the decision-making process Therefore, the digitalbanking application system needs to be able to analyze datafor more accurate, faster and better decision making based

on customer choice and risk management of the bank Inaddition, core banking solutions such as CustomerRelationship Management (CRM) and Loan OriginationSystem (LOS) are good solutions for automating processes inthe areas of customer care, marketing, sales, decisionsupport, automation of key processes in the business

2.4.3 Innovation

In the process of building a digital bank, it is necessaryfor the bank to carry out research and development in order

to innovate, breakthrough and take advantage of thedevelopment of technology in the banking sector Thanks toseveral innovations such as biometrics, block chain and nearfield communications, payment transactions are more andmore popular with customers Artificial intelligence, socialmedia-based support channels and live chats are notablewaves in the banking industry which enables theimprovement of customers’ experiences Innovation labs arefounded in many banks in cooperation with Fintechcompanies to explore new banking applications

2.4.4 OmniChannels

To meet the needs of customers, banks must modernize

to have many channels connected with customers such asbranches and transaction offices; Internet Banking, Mobilebanking; Customer Contact Center, social networking channel(i.e Facebook fan page) Technology platform to ensure thatbanking services are easily provided on a variety of channels,with similar quality is also a must A very importantrequirement of digital banking is that when banks deploymultiple channels to connect with customers, such channelsmust have interconnectedness and ensure uniformity ofservices among the channels that the customer hastransacted Take an example of a customer inquiries aboutthe service of savings deposits and has entered information

to perform deposit transactions on the internet, select thetransaction point, the next morning which customer performsdeposit transactions, bank officer must already know thecustomers’ information and requirements to advise, support

customers complete the savings deposit procedures Thesystem of banks must take advantage of the information thatcustomers entered on the internet the day before withouthaving to re-enter information or ask customers, the face-to-face meeting with customers is just for the purpose ofcustomer authentication, record of documentary as well asadvise further the information to meet with the customerneeds As such, the digitization of products, processes havebeen done both on the internet and bank’s counters wherethe counter channel must communicate and inherit theinformation provided by the customer by internet channel To

do so, the bank must make a major investment in technologywith the latest features that allow banks to provide the socalled ommi channels and improve customer experienceacross channels

2.5 Advantages and disadvantages of digital banking

2.5.1 Advantages

Digital banking becomes increasingly fundamental inthe banking industry because of its main characteristics ofdigital banking mentioned above

Firstly, digital banking enables customers in remoteareas take advantage of banking solutions and services.Thanks to the evolution from traditional banks to digitalbanks, customers in rural areas can get access to bankingservices In addition, they can carry out various bank relatedprocedures such as money transfer, savings deposits andloans with ease Never before have online paymenttransactions been done as easy as it is carried out by digitalbanking since all customers’ account history, transactions,

their partners’ account number is tracked through bankingapplications Customers do not have to go to the bank andwait for their turns as payment happens right after a click of

a button Customers can check their account balanceanywhere and at any time to prevent fraudulent charges

Secondly, as mentioned in section 2.1.3 above, thedevelopment of Fintech has really become a threat to theexistence of organizations providing retail financial services

in the world, specifically here are traditional banks As aresult, banks are under pressure to enhance customer’sexperience reduce their costs to remain competitive Thanks

to automation of functions, processes by digital platform,there is no need in hiring lots of staff for costly back-officeprocessing operations which also give rise to feweroperational risks and errors As a result, banking processshall be simpler and quicker, new digital products andservices could be launched quickly to react to marketdemand This enable banks to supply full service with thesame innovation and quality level as fintechs

Thirdly, digital banking plays an important part inhelping banks quickly adapt to new issued legal regulation.For example, the State bank of Vietnam has promulgatedCircular No 14/2017/TT-NHNN on methods of calculatinginterest on depositing and credit extension transactionbetween credit institutions and customers in 29 September

2017 which shall take effective only after 3 months since thedate of issuance Failing to comply with the new guidance ofSBV on methods of calculating interest on depositing andcredit extension transaction between credit institutions andcustomers, banks shall be subject to threat of financial

penalties as well as additional penalty measures such asRevocation of licenses, certificates; termed suspension of one

or more than one banking activities and other businessactivities However, with digital core banking, banks canquickly and completely comply with new legislation in terms

of setting up new module calculating interest and automation

of operation on amendment of contract on depositing andcredit by publishing new terms and condition on website,giving automatic notification to customer on the new termand condition which shall save time and money for banks

Finally, digital banking is said to be a good chance fortraditional banks to take the advantage of new technologies.Big data, API, block chain, artificial intelligence are expected

to have fundamental influence on increasing the efficiency ofthe sales process

2.5.2 Disadvantages

Despite a number of advantages mentioned above,there still some disadvantages that the customers may have

to confront with when using digital banking

Firstly, it might be difficult for the customer to learnhow to make transactions by means of internet banking,mobile banking, CRM, ATM at the beginning Although somedigital banks have detail guidance and demo video on how touse digital banking services such as opening accounts,making savings deposits, issuing debit card, but not all digitalbanks/ websites have such facility Hence, a new customershall have to spend time on using digital devices to transact

by digital banking

While traditional banks have physical presence, fullscaled digital bank does not have any branches or offices

which make it hard to build up trust and confidence incustomers using digital banking products Where customersmake a saving deposit of large sums of money, they mayhave lots of concerns about how they can contact the digitalbanks if the bank server goes down, their password is stolen

or identity is theft In such a case, it might be difficult for thecustomers to log in to their account and make anytransactions whatsoever Besides, the customers shallneither take the advantage of contacting the bank officer northe bank’s hotline for customer service because digital bank

is teller-less bank and the incidence of server might also giverise to the overloaded status of the hotline of the contactcenter department

Digital banks shall enable customers to transfer money orpay bills in a couple of minutes However, digital banking shall not

be customer’s choice when they have to carry out complicatetransactions For example, a customer who is the buyer in Share

purchase agreement (an agreement setting out the terms and conditions relating to the sale and purchase of shares in a company) would like use escrow account opening and service The

escrow account agreement which is signed amongst the seller, thebuyer and the bank shall set out conditions for fulfilment of Sharepurchase agreement and due date Accordingly, funds meant forpayments under the Share purchase agreement shall be blocked inthe escrow account and the seller shall receive them only afterrequired conditions are met In such a case, the traditional bankshall be guarantor and controller for the performance of suchagreements Most of the digital banks cannot offer such serviceswhich require an in-person visit and transaction amongst seller,buyer, and bank

2.6 The factors affect to digital banking

2.6.1 Client centricity approach

Where products centricity is the key strategy of thetraditional banks, client centricity is the new approach of in digitaltransformation Before the evolution of digital banking, traditionalbanks have operated as product-centric where current customersare provided with more new products with lower cost andcustomers have to come to banks for all of their financial service’sneeds However, with the existence and appearance of banks’competitors like fintech, customers who need a new financialservice may have another choice other than banks In such a case,banks should change it approach and concentrate in increasingcustomers’ experience This requires a change in mindset of thebank officers which results in changes in their habits, beliefs,behaviors and other new skills to satisfy digitized customers Bymeans of training, workshops and communication, all of thedepartments of the bank shall be forced to pay attention to newdigital and technology products and services Besides, banks’employee shall have to be well adapted to “test and learn”approach where they can test, use and sharing feedback on digitalproducts and services of the bank

2.6.2 Technological innovation

An agile technological platform is one of the most importantfeatures which enables improvement of the customer experience.Thanks to this platform, banks could enhance their customerexperiences while offering new digital products such as lending,money transfer, and personal wealth management products,investment products Additional functionalities should be addedand integrated with the existing core banking system which willrequire highly automated solutions At a deeper level, this trend

will require banks to open up their systems or middleware layers

to third parties and use open APIs

2.6.3 Organizational flexibility

In addition to technological transformation, organizationalstructure which changes from traditional banks into digital banks isalso a must This trend forces banks to establish the so calledTransformation Project Manager Department to make sure thatbank’s officers are moved to necessary teams quickly so that all ofthe new digital products and services are launched timely Themembers of above mentioned department should be well-qualifiedexperts with experience managing a number of large-scaleprojects at the same time, clear understanding of legal issues, andhigh level with agile banking development They shall have theresponsibility to find out the pros and cons of each of thedepartment in the banks as well as its partners, vendors in order toquickly resolve any incidents and issues or refer to the CEO or theboard of management for final decision

2.6.4 Get creative with marketing

Contrary to traditional banks with branch networks across thecountries, full scaled digital banks does not have the opportunities

to approach the customers because of their digital-based platform.Thus, in order to attract the customers’ attention to digitalproducts and services of newly start-up digital banks, it is advisedthat digital banks should spend a major cost on marketing Tocommunicate with customers cost-effectively, banks must take theadvantage of recommendations and feedback through socialmedia One of the successful creative marketing strategy is used

by China messaging app Tencent’s WeChat in 2014 WeChat haslaunched messaging app allows customers to send an amount ofmoney to a number of beneficiaries (family members, friends,

colleague) The amount of money shall be assigned randomlywhich shall be put in a traditional red envelope during the NewYear Eve Beneficiaries shall have to sign up for a WeChat account

to receive the money As a result, WeChat has got 200 million ofits existing and new customers to link their bank cards to theiraccount thanks to such marketing project (WeChat, 2014)

CHAPTER III: POLICY AND LAW ON DIGITAL BANKING

In 2017, total value of card transactions is €69.2 billion Theimportance of transactions initiated electronically continued toincrease, with the number of electronic transactions is as ten times

as paper- based ones Besides, the total number of ATMsdecreased by 1.0% to 0.43 million, while the number of POSterminals increased by 9.9% to 13.5 million Mobile wallettransactions in EU are expected to grow at 61.8% during 5 yearsperiod from 2016 to 2021 (European Central Bank, 2018)

a Policies on digital banking development

In order to harmonize the electronic payments in the Europe,European Payments Council has established Single Euro PaymentArea (SEPA) which consists of 34 European countries Thanks toSEPA rulebooks and guidelines on electronic payment instrumentsincluding credit transfers, direct debits and cards, Europeancustomers can use the same payment instruments when makingelectronic payment transactions across Europe as if in their homecountry

Policy on cash payment limit has been imposed in manyEuropean countries Take an example of payment policy in Italy,any and all purchase agreement with total value of €1,000 or moremust be carried out by electronic payment method The

government of France and Spain has put lots of effort inencouraging their citizens changing payment method from cashand cheques to digital payment by decreasing transaction fees.

b Legal Framework

The Payment Services Directive (PSD1) was first promulgated

in 2007 to increase competition in payments amongst banks andnon-banks, as well as protect consumer rights by applying thesame rules across EU market In addition to banks, central banks,government bodies, PSD1 define new legal concept, namely

“payment institution” which can provide payment services byproviding for the authorisation subject to a number of strict andcomprehensive conditions However, PSD1 only governs paymentwithin the European countries, but not cover transactions to orfrom third countries and PSD1 exemptions on payment activitiesleave customers unprotected Hence, Payment Services Directive(PSD2) was enacted by the Council of the European Union in 2015

to better protect customers, improve the cross-border paymentsystem in EU and encourage innovation in digital banking UnderPSD2, banks are required to follow technical standards which areestablished in multiple layers The first layer is about the basiccompliance In the second layer, banks are subject to severalstandards on liabilities, disputes, refusals, refunds The third layersets out additional optional services PSD2 is considered as thelegal basis for third party service providers to use open APIs tocollect customers’ data if such collection has been prior approved

by customers Customer identification information can be provided

to third parties by banks in order to shorten the customeridentification term Fintech and non-bank financial servicesproviders’ activities are also added to govern subject of PSD2which is said to be the biggest amendment in PSD2

Electronic Identity and Electronic Services (eIDAS) which wasenacted to increase digital growth among EU countries enteredinto force on 17 September 2014 It provides requirements onelectronic transactions, advanced electronic signature, qualifiedelectronic signature, qualified digital certificate, and trust services

in order to facilitate secure and seamless electronic interactionsbetween businesses, citizens and public authorities EU membersmust ensure the establishment of a common framework that willrecognize eIDs from other member states as well as itsauthenticity and security Accordingly, the electronic signatureshall have the same legal validity with the text signature anddigital service providers in EU states shall recognize electronicidentification from all EU member states as of September 29,

by means of digital platform, eID, and digital signature

Up till January 2019, there are 5 of 28 Member Statesincluding Denmark, the Netherlands, Poland and the UK havingestablished the Regulatory sandboxes which is a closedenvironments allowing testing of innovations by financialinstitutions under the regulator’s supervision In the case of the

UK, the UK Financial Conduct Authority has enacted the InnovateRegulatory Sandbox in 2016 Under the Financial ConductAuthority’s Regulatory Sandbox, the process for a financialinstitution to apply the regulatory sandbox including 7 steps,

including: (i) Firm proposal to use sandbox; (ii) Financial ConductAuthority assessment; (iii) Firm and Financial Conduct Authoritycollaborate and agree the testing approach; (iv) delivery ofsandbox option and; (v) testing and monitoring; (vi) firm submitsfinal report for Financial Conduct Authority’s final review; and (vii)firm decides whether it will offer solution In general, the financialinstitution’s new solution must be proved to meets the criteria byseveral tests If the final report on such new solution is approved

by Financial Conduct Authority, the financial institution shall makedecision on whether it will offer the new solution outside thesandbox or not Regulatory sandbox enable the financialinstitutions to reduce cost related to compliance consultants andlawyers as well as fast-track the regulatory process while offers asafe space with safeguards to customer using new financialservices and products

c Protection of customers information and transactions security

Regarding the payment security, the Europeanauthorities have enacted several guidelines to provide thelegal basis for all payment services providers in EU memberstates In 2014, Guidelines on Security of Internet Paymentwas promulgated by the European Banking Authority toenhance the understanding of issues on the security ofelectronic retail payment services This guideline enablessecure and efficient internet payments amongst EU marketwhich force payment service providers to implement strongcustomer authentication Accordingly, to prevent fraud andcybercrime when performing banking services throughinternet or mobile banking, payment service providers arerequired to perform know your customer process before carry

out an online payment All of the payment service providersacross the member states shall be subject to minimumsecurity standard prescribed by Guidelines on Security ofInternet Payment from August 2015

Besides, since the issuance of Network and InformationSecurity (NIS) Directive in 2016 which is the first piece ofEuropean cybersecurity legislation, member states hasstarted to establish the Computer Security Incident ResponseTeams as well as cooperate with others to controlcybersecurity incidents and share information about risks,cybercrimes and practices on cybersecurity breaches Alldigital service providers shall have to carry out appropriatesecurity measures and to notify serious incidents toComputer Security Incident Response Team and a competentnational NIS authority in order to comply with the securityand notification requirements under the new Directive

Regarding data privacy, the first regulation on dataprotection and security was EU directive on data protection 1995.With the blooming of the internet usage and digital era, GeneralData Protection Regulation (GDPR) which was promulgated in 2016shall emphasize individuals’ right to control their own personaldata as of 25 May 2018 The GDPR set out rules and requirementsapplied to data “controllers” (i.e banks, fintechs) and “processors”(i.e third-party vendors, including mobile banking platforms, other

service providers) across EU member states The governing

subject of GDPR has also been covered any business that mayinvolve processing European citizens’ data even if such businesshave no physical presence in EU According to GDPR, thecontrollers shall have to build products and services which set outdata protection safeguards at the earliest stage of development

The controllers reserve the right to share the customers’ data toprocessors only after they have prior consent from customers bymeans of a statement or clear affirmative action As required byGDPR, upon request of customer, data controllers should give theircustomers access to any of personal data in the course of dataprocessing as well as transfer the data to any service providersfollowing the direction of the customers If any security gives rise

to a risk to the European customers, data controllers shall have tonotify a designated data protection authority within 72 hours and

to the affected customers without undue delay Any controllers orprocessors which are failure to perform GDPR obligations shall besubject to administrative fees which may be up to a maximum ofEUR 20 million or 4 per cent of the global annual revenue –whichever is higher

3.1.2 Thailand

The future for banking in Thailand is clearly digital with moreand more technology investment and policy support Thailand hasalways been one of the leader in digital banking transformation ofEast Asia Thus, almost banks in Thailand are in the course ofdigitalization to improve customers’ experience KBank, one of thepioneers in term of digital transformation, has begun to invest indigital technology services with total investment of THB480 millionannually There are 7.3 million customer using mobile bankingservices of KBank which increase number of transactions from 300million in 2014 to 3 billion in 2017 (Somruedi Banchongduang,2018) THB40 billion was also used by Siam Commercial BankPublic Company Limited to develop its digital banking platform in

2017 Bank of Ayudhya took its very first step in the course ofdigital transformation by investing THB20 billion to enhance

technology infrastructure of the bank (Somruedi Banchongduangand Oranan Paweewun, 2018).

Chart 1: Thailand’s internet and mobile banking

2018 is 1,269 Billions of Baht and internet banking transactions’value is 2,187 Billions of Baht

a Policies on digital banking development

In the development of the policy framework in digital bankingdevelopment, the Bank of Thailand (BOT) has promulgatedFinancial Sector Master Plan in three phases, in particulars: Phase I(2004-2008), Phase II (2010-2014), Phase III (2016-2020) Phase Iset out a number of measures regarding post-1997 financial crisis

“house-cleaning” including: structural improvement and organization of Thai financial institutions, with the main goals of

re-improving risk management and governance practices, as well asexpanding the public’s access to financial services Phase IIprovides guidance on access to financial services and effective riskmanagement measures were still key considerations in this secondMaster Plan The State Bank of Thailand also sets out the FinancialSector Master Plan Phase III for the period from 2016 to 2020, withthe participation of government agencies to grant access and dataconnection to the data system, the promoting of coordinationamong financial institutions and electronic payment serviceproviders, and the establishment of a legal framework, technologyinfrastructure for services and delivery electronic transactions Keyconsiderations in Phase III are not only promoting electronicfinancial and payment services but also supporting financialservice providers to develop infrastructure and offer financialproducts and services that meet customers’ needs.

Besides, National e-Payment Plan which launched by thegovernment will also be supported by the BOT in 2017.Accordingly, risk and fraud also pose a threat to the development

on the digital banking which leads to BOT’s policies on ensuringstability of financial institutions by improving risk managementand supervision Commercial banks is requested to promulgatestrategies and regulation on operation management, specialexamination, analysis and monitoring as well as conduct onsiteexamination and risk assessment for significant activities andinformation technology

In addition, Thailand has proved its leading position in digitaltransformation by adopting and applying block chain technologyfor banking application Under Thailand’s central bank’ disclosure

on March 14 2018, Thailand Block chain Community Initiativeincluding 14 Thailand top banks have been established to develop

Linux Foundation’s Hyperledger Fabric, a block chain-basedplatform designed by IBM block chain services to digitize letters ofguarantee and other documents The service will be tested inregulatory sandbox to streamline data verification, prevent fraudinformation, simplify the normal process, and increase theefficiency for business.

The latest project of Thailand or the so called ProjectInthanon has been launched in August 2018 to create a new way

of conducting interbank settlement using wholesale central bankdigital currency - Thailand national digital currency Accordingly,prototype will be built on open-source block chain namely Corda, adistributed ledger technology (DLT) platform developed by R3, an

US fintech company This project aims to raise the Thai financialsector’s technological readiness in adopting new financialtechnologies to enhance operational efficiencies

b Legal Framework

The State Bank of Thailand issues Notification SorNorSor7/2559 guiding financial institutions on accepting deposits orreceiving money from the public Accordingly, banks are allowed touse mechanisms in digital platform to ensure effective andaccurate identification and verification of their customers(electronic – know your customer or eKYC) In eKYC process, bankscan use the following methods: (i) video camera which interactwith bank teller via video channel during the account openingprocess; (ii) electronic documents having the same legality withtraditional documents; (iii) electronic signature of the customer;(iii) Authentication of customer information and identificationdocuments shall be made by means of smart card reader and/orthrough personal information systems, identity card or fingerprintidentification As provided by Notification SorNorSor 7/2559, eKYC