With Industry 4.0 having a substantial impact on all aspects of the economy and social life, banks are forced to evolve at exponential speed to meet consumers’ needs. Vu Thanh Minh and Nguyen Dieu Linh, lawyers at LNT & Partners, write about digital transformation in the banking industry, and the future trends.

Digital banking is a model that operates on the basis of technological processes to provide services to customers through digital devices without the providers’ physical branches.

Digital or virtual banking is usually confused with online banking (including internet banking, SMS banking, or mobile banking services) since all banks involve digitalisation. Digital banking is mainly used as an umbrella term to outline all forms of financial transactions taking place with the use of tech.

In Vietnam, although the development of digital banking was initially quite upbeat and has been accepted and implemented by many commercial banks, the definition or the license of a digital bank has not been indicated in any legal legislation.

The group of customers that digital banks can focus on is a large population and a dynamic young workforce. Millennials and Gen Z are young people with a liberal spirit ready to accept new experiences who love breakthroughs and modern technological changes.

Another group that has a lot of potential for development is those in remote areas. Due to the geographical nature and rugged terrain, it is problematic for people in remote areas to move to bank branches for transactions. Providing digital banking services will help them save time and travel costs and especially avoid risks and dangers when bringing money to the centre of the district or province to make payments.

Concurrently, this would be the promoting factor for Decision No.149/QD-TTg on introducing the national financial inclusion strategy by 2025 with an orientation towards 2030 in January 2020.

On the beneficial factors, other than numerous advantages such as 24/7 access to the bank account, more convenience, lower fees, and higher interest rates than traditional banks, developing digital banks poses compliance in the legal sphere. It would make marked progress in non-cash payments, promoting the use of e-payments in the national economy under Decision No.2545/QD-TTg from 2016 approving the scheme on development of non-cash payment in Vietnam during 2016-2020.

It also supports and adapts to the new development trends of the sharing economy under Decision No.999/QD-TTg from 2019 on the development of the sharing economy and contributes to promoting digital technology applications that suit the needs and payment capacity of all nations.

The goal that the digital economy accounts for approximately 30 per cent of GDP by 2030 in accordance with Decision No.2289/QD-TTg released last December on adopting the national strategy for the Fourth Industrial Revolution by 2030 is also getting closer.

Especially amid a growing public health crisis, a drastic decline in cash usage is concurring due to the risk of contamination. Research in microbiology examines that pathogenic agents, including viruses, bacteria, fungi, and parasites can survive on banknotes and cash for 16-17 hours. Therefore, it will be much safer to make online transactions to avoid the risk of COVID-19.

Achievements and problems

According to the State Bank of Vietnam (SBV), as of December 2020, the value of charge via internet channels reached 297.4 million transactions. Payments via mobile phone channel reached 696.3 million transactions with nearly VND7.8 trillion ($339.13 million); payments via points of sale advanced more than 232 million items with VND395.86 trillion ($17.21 million); and payments via ATMs reached 660 million items.

Thus, Vietnamese banks are entering the digital transformation period with the rapid development of digital services. So far, several banks have started to deploy digital banking services such as TPBank deploying LiveBank to help customers scan fingerprints, face recognition, and electronic identification (eKYC) to help customers register and log in to their accounts; VPBank launching Yolo digital bank after the Timo model; and OCB launching digital bank OCB OMNI.

On May 11, Decision No.810/QD-NHNN on approving the plan for the digital transformation of the banking sector by 2025 with orientations towards 2030 was promulgated by the SBV with an ambitious objective to gradually create solid legal foundations for the development of digital bank models, and to set out the roadmap and clearly state nine implementation solutions for digital bank models.

The SBV not only helps credit institutions take the right steps, in line with the general global trend, but also helps accelerate the national digital transformation and brings sustainable and practical values to the country. With this new move, the legal framework and policies in payment-related activities will continue to be improved for the application of new technologies and hopefully introduce a license for registration of digital banks, leading to the booming of this model in Vietnam in the near future.

Nevertheless, in the process of digital transformation, the banking industry has been facing several critical challenges. First is the difficulty in exploiting information about the national database. Until now, only four commercial banks signed an agreement with the Ministry of Public Security on the exploitation of citizen identification data which is newly put into operation from July 1.

However, due to not being able to directly connect to the citizen database, banks implementing eKYC solutions have to set up a post-inspection department to check all collected information from electronic data to ensure safety.

The second challenge is that the legal corridor for digital banks is still not specific. Currently, the organisation and operation of banks are conducted following the provisions of the Law on Credit Institutions 2010 amended and supplemented in 2017 and guiding documents.

Meanwhile, e-transaction activities are carried out in accordance with the provisions of the Law on E-Transactions 2005 and guiding documents. These documents are currently not keeping up with new technology, which may slow down the development of technology application in the sector.

Thirdly, the problem of personal information security is also serious. The Information Security Administration recorded over 2,000 cyber-attacks on information systems in Vietnam in the first half of 2020, mostly on financial institutions and banks. Cases of customers using a service improperly and being tricked into fake bank pages mean fraudsters can take advantage of and appropriate money in customer accounts.

In addition, during operation, digital banks will cooperate with a third party, such as TP Bank deploying the biometric services of PFT, with the responsibilities of the parties in the process of collecting and protecting personal data being ambiguous as the current cybersecurity law, as well as the law on credit institutions, do not have specific regulations on what information personal data includes.

Finally, there remains difficulty in synchronisation of regulations causing confusion and creating gaps in application. For example, the issuance of Circular No.16/2020/TT-NHNN grants permission for banks to open checking accounts online or through eKYC for customers, thus, some banks allow customers to open online checking accounts only with a one-time-password code over their phone without going to the bank or signing anything.

For transactions exceeding VND100 million ($4,350), multi-factor authentication is applied at the final approval step, yet still excludes the electronic or digital signatures of the parties.

Meanwhile, Article 13a of Circular 16 stipulates the agreement on opening and using a checking account between bank and customer, meaning that even if these agreements are made online, a form is still required and the parties still need to conduct signing by e-signatures so as to be in compliance with Decree No.35/2007/ND-CP on electronic transactions in finance. Thus, it is crucial to put a question mark on whether it is legal for banks to conduct opening checking account without the signatures of customers.

Solutions

In general, completing the legal framework is a priority in creating favourable conditions for digital banking to develop shortly. Policies and regulations related to digital banking need to be improved, such as the policy of creating an information platform and a national citizen database; regulations on the process of electronic customer identification; and network security laws and regulations. In particular:

Firstly, the government needs to tighten regulations on IT security. The SBV needs to survey the experience and development trends of digital banking of the world in the promulgation of legal documents, and at the same time consider raising the level of administrative penalties for committing violations in order to ensure general prevention.

For example, the government needs to issue documents similar to the General Data Protection Regulation of the European Union. This details the responsibilities of the subject collecting and processing personal information, including the responsibility of the person directly conducting the work of collecting and processing personal information in the enterprise.

The draft decree on the protection of personal data was posted on the website of the Ministry of Public Security for public comments in April this year. Finalising the decree is a necessary step in bringing Vietnam’s domestic regulations up to international standards, directly reducing the rate of cybercrime and reassuring customers when using digital banking.

Secondly, in order for the identification of customers to be the most synchronised and effective, the government should take the lead in upgrading the population’s national data infrastructure that can authenticate customers and support payment solutions.

Along with that, there should be a policy to allow the national population database to be shared and open connected with service industries such as banking, telecommunications, and insurance to support service development digital banking and finance, promoting financial universalisation for people, especially in rural and remote areas.

Finally, promulgating the new decree governing electronic identification and authentication is a must. In April, the Ministry of Information and Communications sent a draft decree stipulating electronic identification and authentication to create a legal basis for the management and use of related services.

The Vietnamese government needs to quickly consult the citizens and ministries to rapidly issue the official decree with the aim to create favourable conditions, contributing to ensuring information security and safety for individuals and organisations when participating in electronic transactions.