Digital Financial Inclusion: Observations and Insights from Hong Kong’s Virtual Banks

Abstract

This Article focuses on the connection between financial inclusion and digital financial inclusion as it assesses the role of virtual banks in Hong Kong’s financial inclusion agenda because this connection may be key to virtual banks’ success. Given that virtual banks are incorporated in and will operate from Hong Kong, a small market that has long been dominated by traditional banks, including those six recently designated by the HKMA as domestic systemically important banks (D-SIBs), virtual banks may not be able to provide complete financial inclusion for two reasons. First, under Hong Kong’s current legal regime, virtual banks are, in general, subject to the same legal requirements as traditional banks, which prompts the question of whether and how this might hinder digital financial inclusion. This Article undertakes the original contribution of examining why Hong Kong’s inflexible capital requirement, unclear demands on digital banking innovation, and outdated laws against technical risks may render its financial inclusion policy less effective. Second, limitations inherent in the business models of virtual banks can also hinder digital financial inclusion.