by：Chen Yun Wang Rong King & Wood Mallesons
At the beginning of the Chinese New Year, the People’s Bank of China (the “PBOC“) issued an order (PBOC Order  No.1) and a notice (Notice on Canceling the Corporate Bank Account Permit, Yin Fa  No.41, “Notice No.41“). In accordance therewith, the account opening approval and permit requirement for corporates with legal personality, organizations with legal personality and individually-owned businesses is and will be cancelled step by step. Such relaxation policy has been put into trial in Taizhou (Zhejiang) and Taizhou (Jiangsu) and is being promoted to apply nationwide. The PBOC also promulgated the Administrative Measures for Corporate Bank Settlement Accounts (these “Measures“) as one of the schedule to the Notice No.41.
We are also pleased to note that, along with the cancellation of the account opening permit requirement, Article 10 of these Measures explicitly provides that “when verifying the willingness to open an account with the legal representative of a corporate or the person in charge of an institution, a bank may make such verification, depending on the risk of the customer as determined by the bank, by face-to-face measures or through video means” i.e. face-to-face verification of the willingness to open an account is no longer a mandatory requirement and banks may make the verification through videoconference. As a result, the account opening procedures for corporate customers will be facilitated and at the same time, it leaves more room for direct banks (a.k.a. virtual banks) to solicit corporate customers for account opening.
I. Current Business Status of Direct Banks
At the end of 2015, the PBOC promulgated the Circular on Improving Individual Bank Account Services and Strengthening Account Management which allows a bank to open online bank accounts for its customers through its electronic banking channels and removed the face-to-face identity verification requirement in respect of certain types of accounts. Along with that, various “direct banks” focusing on online business have sprung up on the market:
- Most of the banks conduct all or part of the direct bank business through their current electronic banking platforms (e.g. their Internet bank websites and the mobile bank applications);
- Some of the banks conduct the direct bank business through a separate department and platform in charge of the direct bank business (e.g. the Direct Bank of China Minsheng Bank); and
- Certain banks conduct the direct bank business through separate legal entities (e.g. the WeBank and MYbank).
Due to the stringent regulatory requirements imposed on traditional banks, the direct bank business is inherently subject to strict restrictions. Therefore, in practice, the major services/products provided by direct banks are limited to deposits, money market funds (“MMFs“), funds transfers and payments.
Good news is that, with the recent risk explosion of the Internet finance business, the government is regulating and restricting the Internet finance business activities carried out by non-financial institutions, which may lead to the customers’ preference in bank services/products due to banks’ financial license and advantages in risk management and control. Opportunities always go along with challenges for direct bank business.
II. Account Services Provided by Direct Banks
At present, direct bank may provide the following account services/products online, while there are still restrictions:
|Services/Products||Matters Explicitly Allowed||Relevant Restrictions and Uncertainties|
|Individual account opening||the Circular on Improving Individual Bank Account Services and Strengthening Account Management which took effect on December 25, 2015 divides the individual bank accounts into three categories: (i) Type I Bank Accounts, (ii) Type II Bank Accounts, and (iii) Type III Bank Accounts. (ii) and (iii) are allowed to be opened online.||There are specific requirements on the identity verification and specific restrictions on the account functions (i.e. the different types of basic account services) and account/transaction limits. Direct banks must comply with such requirements and restrictions.|
|Corporate account opening||
The Guiding Opinion on Optimizing Corporate Account Opening Services issued by the PBOC on December 21, 2017 recommends banks to accept account opening reservations through electronic channels so as to improve the efficiency of the examination of account opening documents.
These Measures allow banks to verify the willingness to open an account by video means.
|These Measures emphasize that banks shall verify the genuineness of the account opening application documents. It seems that banks should accept and examine the account opening application documents through both online and offline channels so as to meet the verification requirement. It is not clear that how many offline procedures could be replaced by each of an online one.|
|Basic account services (deposits, funds transfers, consumptions and payments)||No restriction in general.||
Depends on the risks of each account.
There might be transaction limits.
The functions of corporate account shall be subject to the nature of different types of accounts.
|Wealth management products managed by banks||
Individual customers: in accordance with the Administrative Measures for the Wealth Management Subsidiaries of Commercial Banks which took effect on December 2, 2018, an individual customer is no longer required to take the risk tolerance assessment at the premise of a bank before it purchases a wealth management product issued by a wealth management subsidiary of a commercial bank and sold by a bank for the first time, instead, a risk tolerance assessment taken through electronic channels is sufficient.
Corporate customers: No mandatory requirement for risk tolerance assessment at the premise of a bank.
|In respect of a wealth management product not issued by a wealth management subsidiary, individual customers are still required to take the risk tolerance assessment at the premise of a bank.|
|Mutual funds (including MMFs)||In accordance with the Administrative Measures for the Sales of Securities Investment Funds and the Administrative Provisions for the Information Management Platforms of the Sales Business of Securities Investment Funds, mutual funds could be sold through a bank and the risk tolerance assessment would be taken through electronic channels.||The direct bank shall obtain the Funds Sales Business Qualification.|
III. Online Lending Business of Direct Banks
In accordance with the current Interim Measures for the Administration of Personal Loans (apply to the loans extended to individual customers) and the Interim Measures for the Administration of Working Capital Loans (apply to the loans extended to corporate customers), banks are obliged to conduct loan investigations by on-site examination and no loan should be disbursed purely online except the loans disbursed to the individual customers with low risks and secured by pledged assets.
However, there are numerous needs for borrowing small-amount online loans in the market and many lending companies are providing small-amount online loans while various online lending information intermediaries (a.k.a P2P platforms) are matching the P2P loan needs online. In this scenario, banks also show great interest in conducting similar credit facility business through the Internet in compliance with the regulatory requirements.
Based on the above, in accordance with a news report, in November, 2018, the regulator has internally come up with a discussion paper of the Administrative Measures for the Internet Lending Business Conducted by Commercial Banks (the “Discussion Paper“). In the Discussion Paper, it is under discussion that banks may be allowed to accept the loan applications, conduct credit assessments and make credit approvals, loan disbursements and post-loan management through electronic channels in respect of certain personal loans extended to individual customers and working capital loans extended to corporate customers.
Should the final legislation of the Discussion Paper be promulgated, it would become the legal basis and a useful guideline for direct banks conducting lending business purely online. Before that, direct banks shall pay more attention to the compliance of the online lending business in order to avoid possible incompliance penalties.
IV. Embrace the Opportunities and Take the Challenges
In the era of the Internet, banks must embrace the Internet to maintain a sustainable development in the future. With the strengthening of the supervision over the Internet finance business and optimization of regulatory policies of traditional banks, the brutal growth of non-financial institutions with the Internet finance business would be effectively curbed and the direct banks would receive more and more business opportunities. This is also a great chance for traditional banks to adapt to the era of the Internet.
For domestic funded banks and foreign funded banks, how to grab the historical opportunity? It is certain that each bank shall take all the above relaxations and restrictions into consideration when exploring online business opportunities in compliance with the regulatory requirements by making full use of the financial license, no matter conducting the direct bank business through a separate legal entity or providing financial services/products online through the existing institution.