Digital Banking Regulations Around the World

The landscape of digital banking regulations is rapidly evolving as countries introduce dedicated licensing frameworks for digital banks. These frameworks aim to ensure that digital banks operate safely while promoting financial inclusion.

Regulatory Frameworks: A Crucial Element in Digital Banking

Regulators play a vital role in shaping the context in which both traditional and digital banks execute their business plans. The design phase of new digital-banking frameworks is critical, as it determines what types of players can enter the market and sets requirements on ownership, shareholding structure, business plans, risk-management requirements, exit plans, permissible activities, presence, and more.

Common Criteria for Digital Banking Licenses

Regulators have established around 15 common criteria that applicants must fulfill to obtain a license. These include:

Eligibility: Meeting the required qualifications and standards
Ownership (Share Structure): Compliance with ownership requirements and shareholding structure regulations
Business Plans: Providing a comprehensive business plan, including financial projections and risk management strategies
Risk-Management Requirements: Demonstrating effective risk management practices and controls
Exit Plans: Establishing clear exit plans in case of unforeseen circumstances
Permissible Activities: Compliance with regulatory requirements on permissible activities and services offered
Presence: Meeting presence requirements, including physical or virtual presence

Design Phase Elements: A Three-Group Framework

The design phase has some common elements in three broad groups:

Eligibility and Conditions

Requirements for ownership and shareholding structure
Business plan review and approval
Risk management assessment

Permissible Activities

Definition of permissible services and activities
Compliance with regulatory requirements

Presence

Physical or virtual presence requirements
Location-specific regulations

Timeframe for Digital Banks to Launch

The time from publication of the regulatory framework until digital banks begin operations is typically around two years. For example, Singapore’s regulators announced in June 2019 that they would issue licenses, and the licensed digital banks are expected to launch in early 2022, following a delay related to COVID-19.

Key Points: Digital Banking Regulations

Regulators play a crucial role in shaping the context for digital banks.
Dedicated licensing frameworks are essential for digital banks to operate safely while promoting financial inclusion.
The design phase of new digital-banking frameworks is critical in determining market entry and setting requirements.
Regulatory frameworks have common elements in three broad groups: eligibility and conditions, permissible activities, and presence.
The time from publication of the regulatory framework until digital banks begin operations is typically around two years.
A dedicated regulatory framework sets out core digital-banking structure and permissions, determines how many licenses are to be granted, shares application guidelines and requirements, timelines, and frequently asked questions, and uses assessment frameworks and scoring systems.
The transition to digital banking leaves in place the primary regulatory mission: focusing on credit and counterparty risks, capital adequacy, risk management, and compliance.