In the early 2000s, the evolution of digital technology alongside the development of computers and the Internet have put forward challenges for traditional credit institutions. As digital transformation has emerged as a global movement, credit institutions and fintech companies have become pioneers in these digital trends. However, due to the Global Financial Crisis, these adoptions have ceased until recently. 

COVID-19 pandemic has forced a rapid shift of customer transactions and interactions to digital. In 2021 H1, 134.8M banking customers in APAC were willing to switch to neo-banks or new digital challengers, jumping by 113.2% from the previous year. APAC banks rushed to meet an average of at least 50% growth in digital transactions. Specifically, 44% of the top 250 banks across APAC will complete their “connected core” transformation — working on platform-based and componentized modernization, and API-enablement.

Following the survey by Cloud banking platform Mambu and The Financial Times Focus (FT Focus), 67% of banks believe that they will lose their market share without digital transformation in the next 2 years. In addition, another report by FT Focus surveyed more than 500 global banking executives to investigate their perspectives on the banking industry in the present and future context in depth. The results show digitalization of financial services to be of the essence, with 58% of banking executives predicting the disappearance of the traditional banking models in 5 to 10 years. The report also indicates the Asia-Pacific region had the slowest pace of digital transformation compared to other parts of the world. Notwithstanding, banks in this region are gradually catching up with the world, with an increasing number of investment projects in big data, machine learning and blockchain. 

Personal Financial Services Survey in 2021 defines digital banking as the use of online or mobile channels to conduct banking operations. The survey also revealed that while the adoption of digital banking in developed markets such as Australia, Hong Kong and Singapore has stabilized at around 90% since 2017, emerging market, namely mainland China, Indonesia, Malaysia, the Philippines and Vietnam, have seen a rising penetration over the past few years, with an increase from just 55% in 2017 to 88% in 2021

Also, in the Asia-Pacific PFS Survey from McKinsey, more than 80% of the respondents claimed that they would continue to use or will use more online banking services. In the emerging region including the Vietnam market, only 17% of participants will switch to using services from digital banks to traditional banks.

Customers in the APAC region quickly adapt to the change and easily adopt new methods of financial services. In this way, to survive and develop, banks have no choice but to implement digital transformation 

Of 249 digital banks worldwide, APAC is home to about 50 digital banks (approximately 20% of the total digital banks in the world), of which more than 70% were established during the years from 2016 to 2020.

ASEAN – potential market 

Southeast Asia and India are now emerging as these leaders’ next expansion markets in APAC. In Southeast Asia, Malaysia, the Philippines, Indonesia, Vietnam, and Thailand are showing encouraging signs for digital banks, including positive market liberalization and attractive market demographics. However, most digital banks in South-East Asia have only recently started or are about to commence operations (Fitch Ratings, 2021). The reason is that Southeast Asian users are still mostly concerned about trust and privacy issues when adopting digital services, hindering the digital transformation process in Southeast Asia banks.  

However, the adoption rate of digital services has recently increased remarkably. As 40 million new internet users came online in 2021, ASEAN now has a total of 440M users, increasing by 10% in 2020, bringing the Internet penetration rate in ASEAN to 75%. Smartphone penetration has also been central to digital growth, with more than 90% of the region’s 400+ million internet users connecting via mobile phones. Besides, expanding 4G penetration, alongside emerging 5G opportunities, unlocks further potential for connected digital banking customers.

With the advantage of a digitally-savvy population, and despite high banking penetration, there is still room for significant growth in Malaysia’s digital banking, particularly in the area of underserved individuals and SMEs. Moreover, Malaysia recently opened up applications for digital banking licenses. Additionally, being Southeast Asia’s most populous nation where half the population is aged 30 or younger, Indonesia offers a huge market opportunity. With a growing appetite for digital financial services solutions, as well as supporting regulations for digital-only banks being under revision, this country ranks the second-highest e-payment penetration in Southeast Asia, next to Singapore. Similarly, the Philippines has encouraging demographics around the potential for digital banking adoption, including a young and digitally-engaged population. So far, the central bank has awarded three digital banking licenses to Tonik Digital Bank, UNObank, and state-backed Overseas Filipino Bank.

Meanwhile, Vietnam has one of the fastest-growing economies and a rapidly expanding banking sector. More than 40% of the population is now banked and bank cards are seeing accelerating penetration as well. Although many banks are digitizing, no clear dominant winner in the digital banking space has emerged yet. On the other hand, Thailand offers a steady and more mature economy, with relatively high banking penetration. It’s also one of Southeast Asia’s most receptive markets to digital challenger banks.

In Vietnam

The current situation in implementing digital banking in Vietnam

Theoretically, digital banking can be divided into 4 stages: the first stage focuses on multi-channel banks providing various services such as internet banking or mobile banking; the second stage is the multiplexing period, integrating all services into one application, which creates convenience for the users; the third stage is when customers can use all financial services without the existence of a physical bank, and the last stage emphasizes banks improving user experience and personalization. Currently, the process of digital transformation in Vietnamese banks is in the early stages with the most active field in electronic payment and e-wallet. This appealing piece has seduced commercial banks as well as big technology companies to gradually penetrate the market. Up to now, a number of banks have developed electronic payment systems. Typically, Bank Plus e-wallet with a collaboration between Viettel and MBBank, and VPBank with Timo (later sold to Vietcapital Bank), and Maritime Bank with MEED, LienVietPostbank with Vi Viet. In December 2018, Sacombank launched Sacombank Pay which is fully integrated with modern banking features and utilities.

According to the survey results of the State Bank (SBV), as of the first quarter of 2021, about 95% of banks have been developing strategies and implementing digital transformation; Of which, 88% plan to digitize all products and services from customer communication channels to internal business administration. Most banks have applied new technical solutions and technologies in operation and service provision, of which 9 out of 19 operations have been completely digitized by some banks. 

As core banking services (payment, credit, savings), and payment on mobile devices experienced a dramatically annual growth with 90% in quantity and 150% in value, and many banks had over 90% of transactions on digital channels, Vietnamese banks are considered to have the largest digital banking adoption rate in the region (McKinsey). Furthermore, Vietnamese users are considered to have the highest acceptance rate of digital banking and digital payments in the region, reaching 82% in 2021, two times higher than in 2017 (McKinsey). This increase is largely due to GenZ and Millennials – a potential customer segment for digital banks and challengers. According to a Morgan Stanley review, 80% of Gen Z use digital banking on smartphones. Thus, Gen Z will become the next big potential customer between the ages of 25 and 40, considered the established generation for the future development of digital banking.

The SBV forecast Vietnam digital banks will have at least a 10% revenue growth, and 58.1% of credit institutions are expected to attract more than 60% of customers in digital transaction channels with an expectation of customer growth rate to reach over 50% in the next 3-5 years.

“BCG assesses digital banking as a promising market in Southeast Asia, especially in Vietnam as the revenue of Vietnam’s banking industry can reach $27 billion by 2024, equivalent to a growth rate of 13% per year from 2019, which is the highest growth in Southeast Asia. 

Mr. Nirukt Sapru – Global Advisor of Timo Digital Bank considered Vietnam as a potential foreign direct investment (FDI) market for the digital banking sector and highly commented on the potential growth of this sector in Vietnam. 

On the other hand, Economist Le Xuan Nghia had a critical viewpoint on the speed of digital banking development in Vietnam as Vietnamese banks are still struggling at the starting point of the digital transformation race while major banks worldwide have developed advanced applications of reading the customer’s mind through their eyes.”

Additionally, Vietnam ranks second in the world with 69% of people not having access to financial services and no bank accounts (Merchant Machine, 2021). According to Viettonkin’s assessment, with a combination of supporting policies with the improvement of the recent legal framework and the construction of digital infrastructure by the government, the potential of the digital banking market in Vietnam is still very large.

Policies and Legal framework for developing digital banking

Supporting policies 

Mobile money services allow users to make payments when purchasing and selling goods and services without cash or bank accounts. However, the transaction limit does not exceed 10 million VND/month/mobile money account for total transactions: withdrawal, money transfer, and payment. With the implementation and development of mobile money through Decision 316/QD-TTg in 2021, users in rural, remote, and isolated areas will have access to financial services, hence promoting cashless payments. On the other hand, banks, fintech companies, and mobile network operators can collaborate to offer services, and exploit the networks of VNPT, MobiFone, Viettel as well as a customer base of 130 million mobile accounts.

Furthermore, on November 15, 2021, the Prime Minister issued Decision 1911/QD-TTg 2021 on connection and sharing between the National Population Database (NPD) and other national databases as well as specialized databases. Although the Decision stipulates that only state agencies are allowed to access and share NPD, it initially shows that Vietnam is converging to population data. In the future, it is possible to build a mechanism of information sharing from this database with a number of service industries such as banking, insurance, telecommunications, etc.

This Decision will build a unified national database system on personal identification towards open sharing and connection with service industries such as banking, telecommunications, insurance to help verify customers’ information and identity with ease and certainty. As a result, it will reduce the effort and costs for all subjects in society, promote digital transformation in the economy, and allow fast, safe, convenient, and low-cost digital service to a large number of people and businesses. Following this Decision, on the afternoon of June 20, 2021, the first 4 commercial banks together with the Ministry of Public Security signed an agreement to exploit citizen identification data. When there is a reference source from the national population database, the bank can provide almost comprehensive products to customers on the digital banking channel without limits stipulated in Circular 16/2020. /TT-NHNN

Moreover, in May 2021, the Governor of the State Bank of Vietnam issued Decision 810 on the Digital Transformation Plan of the Banking Sector to 2025, with a vision to 2030. ALSO, OTHER DOCUMENTS RELATED TO THE DIGITAL TRANSFORMATION OF THE BANKING INDUSTRY. The decision has designed strategies for the banking industry development in both the short and long term, which are built based on the current situation and issues of this industry in the context of Industry 4.0. 

• Focusing on developing a modern, advanced State Bank with a reasonable organizational model, 
• Promoting the role of operating, orienting, and managing the operation of the entire banking system, 
• Ensuring the banking industry operates synchronously, effectively, and efficiently in alignment with the market mechanism, and adapts to the technological advances of Industry 4.0.

The policy creates a legal framework for credit institutions to accelerate digital transformation, and establish a comprehensive digital banking ecosystem with the goal of developing digital banking models and increasing utility and customer experience

In addition, the State Bank also allows the opening of personal payment accounts in electronic methods (eKYC) according to Circular 16/2020/TT-NHNN, thus encouraging users to change their habits from physical transactions to online transactions in order to lead a cashless society. Under the viewpoints of the banks, eKYC application is also economical in investment in facilities and human resources compared to traditional paperwork, promoting the digital transformation of the banking industry.

Policies for legal framework improvement 

Although there is a document on the national database, so far there are no specific regulations on the methods of the exploitation of the national database for credit institutions. This leads to the wastefulness of social resources as each credit institution builds a separate database system, not accessing and making use of the national databases, thus lacking transparency, and failing to promptly detect fraud through the banking system. Therefore, it is suggested that the Government should have documents of permissions for organizations namely banks, insurance. Along with this, SBV should request the Ministry of Public Security, the Ministry of Planning and Investment to allow credit institutions in exploiting and using national databases through a directly connected portal. At the same time, the SBV should propose supplementary regulations on Credit Institutions provision and sharing of national data on citizens, businesses and land, finance, property, taxes, etc to contribute to transparency and a healthy economy. 

Even though eKYC is implemented and banks can now use identification measures such as taking a photo of an ID card on both sides, recording a person’s face online, in Vietnam, there remains  ID card counterfeiting. Accordingly, when implementing eKYC, banks have to access the national database of the Ministry of Public Security to ensure accurate information or exploit information that has already been identified by a 3rd party. Similarly, Viettonkin recommended that a mechanism should be developed to allow banks to identify customers based on the verified information of 3rd parties with equivalent standards, or the national database, and organizational databases. 

Besides, Vietnam lacks legal testing mechanisms (sandboxes) to support the implementation of new technologies and new business models. Simultaneously, allowing banks in the digital transformation process to have certain exceptions in meeting safety and efficiency criteria as prescribed by the State Bank will help banks boldly research and test new things. As a result, the Vietnamese government should issue a DRAFT on Decree on Sandbox Regulatory for Fintech in the banking sector.

The impediment of digital transformation in banking is security infrastructure as data security is weak. Regarding the protection of data users, the enforcement of regulations is challenged despite the Law on Cyber ​​​​Information Security devoting a whole section to regulating the protection of personal information on the internet. Consequently, the Vietnamese government should build regulations on user data protection, digital identity, and an eKYC alliance, along with completing regulations on transaction security, information security, and detailed regulations on electronic signatures, electronic certificates, and electronic transactions in accordance with international practices. Additionally, the Ministry of Public Security is submitting to the Government a proposal to develop a separate Decree on the protection of personal data. This Decree is expected to be a comprehensive legal framework on the protection of personal data in the current online environment.

Likewise, there is no unification in the definition of digital assets, and the definition of evidence in electronic contracts in the field of digital assets, or the definition of electronic transactions, digital transactions,  and what is the integrity and originality of digital evidence. For this reason, when there is a dispute or an administrative or criminal violation, banks have to face many problems. Therefore, there should be a document to expand the understanding of Property which includes digital assets in the Civil Code. 

When it comes to Intellectual Property Law, the concept of business secrets is still very general and abstract. This leads to controversies over whether data should be considered a trade secret and what protection mechanism should be in place. In fact, there has been a situation of data theft, but state agencies are still hesitant to consider data as a type of intellectual property that needs to be protected. However, the Intellectual Property Law is in the process of reviewing and amending and the recognition and protection of intellectual property in the digital economy need to be focused on. The Government should also 

• Amend the Law on Electronic Transactions in the direction of adding new contents of the digital economy in line with the development requirements of the field; 
• Formulate the Government’s Decree on the management of the platform economy and business on the Internet; 
• Finalize and promulgate the Decree on electronic identification and authentication; 
• Finalize and submit for approval the Decree on personal data protection; 
• Promulgate legal documents on codes of conduct in the digital environment as well as regulations to create trust and assess credit in cyberspace.

Policies on the construction of digital infrastructure 

The Strategy for Development of Vietnam’s Banking Industry to 2025, Orientation to 2030, and the Strategy for IT Development of Vietnam’s Banking Industry have identified technology as the leading solution for the development of the banking system, in which the objectives are to focus on developing banking products and services based on modern information technology; IT infrastructure development, safety, and security. Those strategies help to change public awareness, considering technology infrastructure as the key in digital transformation

The Strategy for Development of Vietnam’s Banking Industry to 2025, Orientation to 2030, and the Strategy for IT Development of Vietnam’s Banking Industry have identified technology as the leading solution for the development of the banking system, in which the objectives are to focus on developing banking products and services based on modern information technology; IT infrastructure development, safety, and security. Those strategies help to change public awareness, considering technology infrastructure as the key in digital transformation

In accordance with the strategies, the Payment Department’s Branch Committee directs to prioritize the following specific tasks: 

• focus on building and developing technology infrastructure in the direction of being synchronous, centralized, unified, capable of integrating and connecting with other industries and fields to provide banking products and services on digital platforms, and improve service quality, convenience features, and experience for customers.

• continue to build and perfect the technology infrastructure for the supply of digital products by upgrading and completing the Inter-bank Electronic Payment System, the Automatic Clearing House to serve the customers in retail transactions (ACH) with a 24/7 operation, 
• process payments instantly (real-time), and enhance integration, connectivity with other industries and fields. 
• at the same time, strengthen security and confidentiality in the provision of banking services. 
• Convert magnetic card to chip card.

Being specified, those tasks promote non-cash payments, especially payments by phone, synchronously develop infrastructure for digital payments, and universalize finance to all people. Hence, they can push the development of the electronic switching and clearing system for retail payment transactions towards the establishment of a unified, synchronous payment infrastructure capable of integrating and connecting industries and fields, thereby expanding the digital ecosystem.

In addition, the project “Industrialization and modernization guidelines and policies to 2030, with a vision to 2045” fully absorbed and synthesized all opinions to be submitted to the Central Committee in 2022. The project will promote the application of the cloud computing model; prioritize the use of digital infrastructure solutions developed by domestic units. In order to develop infrastructure to serve important systems, it is necessary to assign large prestigious state-owned enterprises with experience and human resources to implement. Moreover, this project boost the telecommunications infrastructure, and information technology in terms of speed, to meet the requirements of developing the Internet of Things in digital transformation.

The pandemic and the high demand for online banking services, as well as the high level of mobile usage among the Vietnamese population, has promoted the number of online transactions, hence accelerating the process of digital transformation in the banking sector. This is, therefore, the turning point for Vietnamese banks as there are tremendous opportunities for banks to develop and catch up with the digital trends.

How can Viettonkin Consulting help you?

If you are interested in investing in the digital banking sector, please contact our Vietonkin consultant team via email or contact page. Our professionals, who are insightful of the Vietnam market and legislation, can provide detailed advice on helping fintech companies navigate through the legal processes of setting up business in Vietnam.