IN recent months there has been a sharp increase in the number of virtual banks across Asia. Eight new virtual banks have been approved in Hong Kong, Singapore is expected to approve five new digital banking licenses, Taiwan has just handed out its first virtual banking licenses, and Malaysia, India and Japan all look set to jump on the virtual banking bandwagon in the near future.

And while virtual banks promise to shake up the banking industry, they’re also leaving themselves vulnerable to harsh financial penalties if they don’t prioritize compliance.

The unexpected cost of compliance

Anyone in the banking sector will attest to the difficulties of meeting the growing compliance requirements. Regulators are paying particularly close attention to anti-money laundering (AML) and know your customer (KYC) regulations, and anyone found in breach is being slapped with hefty fines. APAC is no exception.

Because of this, traditional banks have spent the last several years updating their systems and processes to enhance their compliance measures. Not to mention the amount spent on hiring top-notch professionals in the compliance space.

The financial services industry is highly vulnerable and very different to how it was a decade ago. Is it possible that virtual banks don’t fully have a grasp on just how cumbersome keeping on top of compliance requirements can be? Have they put enough resources aside to hire the very best compliance experts to keep them on the right path?

Regulators aren’t going to turn a blind eye just because a virtual bank is the new kid on the block. When you consider that an AML breach could result in a fine as high as US$500 million, if a startup copped a fine that big in their first years of business it could put them on the back foot financially. Potentially even put them out of business altogether.

Do virtual banks have what it takes?

Of course, virtual banks would have to meet the basic regulatory requirements, or the regulators wouldn’t approve them in the first place. The real question is whether these new entrants to the market are putting the right systems in place and hiring the right people to keep up with the ever-changing requirements.

We know it doesn’t take much for things to go wrong. Take Revolut, for example; a UK based neobank full of promise, which boasted having onboarded over 4 million customers since its 2015 launch. However, a simple error put the company in crisis.

Earlier this year a whistle-blower revealed that Revolut had failed to block thousands of suspicious transactions. The company had had a system in place which automatically blocked suspicious transactions; but after it was found to also be blocking legitimate transactions, the company decided to turn off the switch, ultimately allowing a flood of fraudulent transactions to pass through its system. It was a grave error which has resulted in an ongoing investigation by the Financial Conduct Authority and worldwide negative press. An error which could have possibly been avoided had the startup placed more focus on hiring the right compliance experts to closely monitor their business.

The digital advantage

While traditional banks may be on the front foot in terms of compliance resourcing, virtual banks have the advantage of being truly digital; something traditional banks continue to grapple with. Clients have the expectation of a seamless onboarding experience and virtual banks certainly have the capacity to deliver that. However, they also need to ensure this slick onboarding experience includes a seamless, digital screening process which captures ultimate beneficial owners (UBOs) and other required documentation.

If consumers are online and their onboarding process takes more than 5 clicks, they lose interest. It’s vital that virtual banks meet customer expectations on this front, because this is what sets them apart from traditional banks. If virtual banks are able to successfully deliver a seamless digital onboarding process while also meeting the required screening checks, then they’ll certainly find themselves at a huge advantage over their traditional competitors.

Finding the right balance

For traditional and virtual banks alike, there’s a delicate balance between meeting customer expectations and meeting compliance requirements. Without offering a streamlined onboarding experience, traditional banks risk losing customers to virtual banks. But without stringently meeting compliance requirements, virtual banks risk fines so great it could put them out of business completely.

It’s going to be very interesting to see how the rise of virtual banks in Asia will change the financial landscape in the region. It’s likely we’ll see traditional banks up their digital offering. And it’s possible some of the newcomers may not last the distance. How exactly it plays out in the long term is anyone’s guess. But the next 12 months will prove to be very interesting indeed.

Greg Watson is head of APAC at Fenergo