The development of digital banking asia experience and lessons learned for vietnam

The rationale of the research

One of the Government of Vietnam's top priorities is the digital transformation of the banking and financial industries Many commercial banks today are focused on creating digital banks and rising to the top of the digital banking industry.

Digital banking encompasses both online and mobile banking services, revolutionizing banking by offering remote access to everyday banking functions through computers or mobile devices This cashless convenience extends beyond banking institutions, as retailers embrace digital transactions Despite its widespread use online and elsewhere, digital banking remains a relatively novel concept for many consumers, highlighting its transformative potential.

Digital banking has gained significant prominence in recent years, driven by rapid technological advancements and changing consumer behavior Asia, as a region, has witnessed remarkable progress in digital banking, with several countries leading the way in adopting innovative financial technologies Understanding the experiences and lessons learned from these countries can provide valuable insights for Vietnam as it seeks to develop its digital banking sector.

Vietnam's continued economic growth can be further accelerated by embracing digital banking for its potential to enhance financial inclusion Digital technologies can facilitate access to financial services for underserved populations, especially in rural areas, providing them with banking services, credit options, and other financial offerings Examining successful digital banking models implemented in Asia can guide Vietnam in developing effective strategies to expand its financial reach and support overall economic development.

Assessing the experiences of Asian countries in developing digital banking can shed light on the necessary technological infrastructure required for successful implementation Factors such as internet penetration rates, mobile device usage, and the availability of digital payment systems play a crucial role in enabling digital banking services Vietnam can learn from the experiences of countries in Asia that have successfully built the necessary technology infrastructure to support digital banking.

However, the digital transformation of Vietnamese banks also faces many difficulties and challenges The development of digital banking is closely tied to the regulatory environment and policy framework governing the financial sector Asian countries have implemented various regulatory approaches to facilitate digital banking while ensuring consumer protection, cybersecurity, and financial stability. Vietnam can benefit from understanding the regulatory frameworks and policies that have been effective in fostering the growth of digital banking in Asia, enabling it to create a favorable environment for digital banking development while addressing potential risks.

Asia's digital banking market boasts a tapestry of models, featuring incumbents, fintechs, and tech giants (Basdekis et al., 2022) Amidst rapid technological advancements in the financial realm, banks face an imperative to embrace digital services, streamlining operations and customer experiences Digital banking empowers customers with convenience, access to value-added services, and reduces the hassle of traditional transactions By exploring the insights gleaned from diverse market players, Vietnam can navigate the dynamics of the digital banking ecosystem, forging collaboration and competition strategies This knowledge empowers financial institutions and policymakers in shaping effective approaches to flourish in the evolving digital banking realm.

Researching the development of digital banking in Asia and its lessons forVietnam is crucial due to the growing importance of digital banking, the potential for economic growth and financial inclusion, the need for robust technology infrastructure, the importance of regulatory frameworks and policies, and the dynamics of the competitive landscape By understanding these factors, Vietnam can leverage the experiences of Asian countries to formulate strategies and policies that will foster the successful development of its digital banking sector.

Aims and objectives of the research

The adoption of digital banking in Asia is influenced by technological advancements, adoption rates, and regulatory frameworks Understanding this landscape provides valuable insights for Vietnam, enabling the identification of trends and practices that can contribute to the development of a robust and inclusive digital banking ecosystem.

To achieve this aim, the research includes some objectives, specifically:

- Investigate the theoretical framework of digital banking, including exploring the key concepts, factors affecting development of digital banking, and examining the implications of these theoretical frameworks for understanding customer behavior and technology adoption in digital banking.

- Analyze the regulatory frameworks and policy considerations that have facilitated the development of digital banking in Asia countries

- Identify valuable lessons for Vietnam's digital banking journey and recommendations for policymakers, banks, and fintech players to foster the growth and adoption of digital banking in Vietnam.

By addressing these aims and objectives, the research can contribute to a comprehensive understanding of the development of digital banking in Asia and provide valuable insights and recommendations for Vietnam to shape its digital banking sector effectively.

Scope of the research

The research delves into the evolution of digital banking in Asia, encompassing the technological infrastructure, regulatory landscape, market dynamics, and adoption rates It examines the success factors and challenges shaping the industry, while also assessing its impact on financial inclusion and broader economic growth.

Additionally, the research will focus on digital banking developments in theAsia region It includes multiple countries within Asia, considering their experiences, trends, and practices related to digital banking China, South Korea,and Singapore are known for their significant advancements and influence in the field of digital banking These countries have been at the forefront of adopting and implementing innovative digital banking technologies and practices, making them important case studies for understanding the development of digital banking in the region.

Research methods

This study uses the meta-analysis method to analyze the results of multiple studies on the topic It involves systematically collecting and evaluating data from different studies and then synthesizing the findings to draw conclusions and identify trends It also involves gathering and summarizing the most recent studies, reports,articles, etc that are related to this topic The desk research for the literature review and policy review plays a dominant role in this study In order to locate, evaluate,and compare pertinent laws and regulations across different jurisdictions,comparative legal analysis and socio-legal research methods are also used All the data and figures are collected based on secondary data provided by some public institutions, like some commercial banks, the World Bank, McKinsey, IMF, Forbes,etc.

Research structure

This research is divided into four separate parts in the corresponding chapters.Chapter 1 summarizes the theoretical basis of digital banking Chapter 2 analyzes the development digital banking in Asia Finally, Chapter 3 summarizes lessons learned for the development of digital banking in Vietnam and proposes some suggestions.

THEORETICAL BASIS OF DIGITAL BANKING

Overview of digital banking

The term digital banking is no longer strange to the Vietnamese market in recent times There are many different views on digital banking on the basis that it is understood as a banking model based on a digital platform that integrates all traditional banking activities and services.

Alex L., David S & Alex P of the Massachusetts Institute of Technology

(2016) in “Digital Banking Manifesto: The End of Banking” describes the future of digital banking as follows: Dissatisfaction with current banks opens up opportunities for unique ways to build a digital bank from scratch Such a bank will fulfill its mission by using the most advanced technologies, including cryptography and distributed ledger techniques, artificial intelligence, big data, and deep learning, a function of artificial intelligence The bank will freely apply artificial intelligence and big data analytics to create excellent customer experiences, automate personal and small and medium-sized enterprise lending, and improve risk management

Other scholars have also provided definitions of digital banking According to Chris (2014) defines digital banking as a banking model in which activities primarily rely on platforms with electronic data and digital technology as the core value Sharma (2016) approaches the concept of digital banking as the application of the latest technology platforms for all functions and services at all levels of banking operations In 2015 International Business Machines (IBM) defined a true digital bank as one built on a value proposition where most products and services are delivered digitally, with an optimized infrastructure for real-time digital interactions, and a bank culture that embraces rapid digital change The Consultative Group to Assist the Poorest (CGAP) in 2021 defines a digital bank as an organization licensed as a bank that applies new technologies in all its operations primarily through digital channels Therefore, these definitions agree that a digital bank operates on a digital technology platform at all levels, with products and services delivered digitally.

According to McKinsey (2021), digital banks have characteristics such as: (i) User interface and activities on digital platforms (reduced or no reliance on paper documentation, physical transactions such as branches, Automated Teller Machines (ATMs), agent outlets, or manual processing), providing high-quality user experience and interfaces; (ii) Core business support operations based on digital technology, with small core services that can be reshaped with Application Programming Interfaces (APIs) enabling rapid delivery and innovation; (iii) Operating and functioning as a technology company: Horizontal operating model, minimizing hierarchy, empowering employees at a high level, a culture of testing and learning enabling continuous development of systems, products, and distribution channels.

Based on the principles and operational goals of digital banking, IBM (2015) classifies digital banking into four forms, including: (i) Establishing a new digital bank brand on the existing infrastructure of the parent bank to reach the younger customer segment; (ii) Developing a digital banking distribution channel focused on providing new online and mobile applications to enhance user experience, delivered by technology and banking organizations; (iii) Establishing a new standalone digital bank operating as an independent subsidiary with a flexible operating model to meet customer-centric product and service delivery (common in cases where the parent bank has a large-scale legacy system that is difficult to transform into a digital bank); (iv) Establishing a purely digital-native bank creating the entire banking value proposition on a core digital technology platform, with or without branches, where customers interact with the bank through digital channels.

Based on the analysis using the four pillars: Accounting balance sheet,products, customer relationships, and distribution channels, CGAP (2020) presents three digital banking business models These include the fully digital bank model,which can originate from digital-native banks (NuBank, Monzo) or establish a new digital bank brand (Marcus by Goldman Sachs, Buddy Bank by UniCredit), or develop digital banking distribution channels of traditional banks (BBVA Compass, DBS); the marketplace bank model belongs to digital-native banks (Starling Bank, WeBank); the service bank model originates from the development of digital banking distribution channels of traditional banks (BBVA); or digital-native banks built by financial technology (Fidor Bank, Solaris Bank, Green Dot Bank).

This thesis uses the following concept of digital banking as described above in the definition of CGAP and adds that banking is done through the digital platform, doing away with all the paperwork like cheques, pay-in slips, demand drafts, and so on It means the availability of all banking activities online Digital banking gives you the luxury of freely accessing and performing all traditional banking activities 24/7 without having to personally go to a bank branch to get your work done Digital banking can be done either through a laptop, tablet, or mobile phone Some of its advantages are funding transfers, getting statements, paying the bills, and investing, etc.

Digital banking is the best thing that could have happened to mankind In fact, not only has it provided a means of convenience for today’s banking times, but it has also helped individuals go paperless Through digital banking, individuals can now easily make transactions, check their account balance, or even make transfers with just a single click of a button on their smartphone, desktop, or any other digital device No more requesting or looking over paper statements or withdrawal slips.

1.1.2 Evolution of digital banking service

Banking dates back to ancient times, when individuals would deposit their valuables with trusted members of their community for safekeeping However, the modern banking system as we know it today began to take shape in the 14th century in Italy, where wealthy merchants began to lend money to governments and individuals in need of capital (Dr Babasaheb Sangale, Dr T N Salve, & Dr M U.Mulan, 2013).

In the 17th century, fractional reserve banking enabled banks to lend more than their reserves, leading to paper money creation and central banks for monetary regulation During the 19th and early 20th centuries, banks played a crucial role in funding industrialization, but banking crises prompted the implementation of deposit insurance and regulatory frameworks to enhance stability.

The post-World War II era saw the rise of multinational banking as banks began to expand their operations across borders and engage in international lending and investment The 1980s and 1990s brought deregulation and increased competition, leading to the consolidation of the banking industry and the emergence of new financial products and services.

Financial crises in the 21st century, such as the subprime mortgage crisis and the COVID-19 pandemic, underscore the challenges of maintaining bank stability in an interconnected global economy The complexities of the modern financial system demand innovative and robust measures to ensure the sound functioning of the banking sector and mitigate the risks that these crises pose to the overall economic well-being.

1.1.2.2 Evolution of digital banking services

Over the past few decades, the banking industry has gone through three major stages of digital change The initial revolution involved the transition from paper- based processes to electronic ones, creating an efficient and automation-driven model that made the bank more transaction and technology focused Through the use of ATMs, call centers, and telephone banking, banks began concentrating on enhancing client convenience Several Social, Mobile, Analytics, and Cloud(SMAC) technologies that are currently clearly influencing banking products and services served as the gasoline for the subsequent wave Through the use of these technologies, financial institutions have been able to transform from effective facilitators into more specialized providers of banking services Newer technologies including artificial intelligence, robotic process automation, blockchain, API banking, and the Internet of Things, are propelling the current wave of digital transformation and have the potential to dramatically change the financial sector. When these technologies are combined, they will be able to offer a considerably higher level of customer personalization, improve the customer experience, transform banking processes, and fundamentally alter how the banking business functions today There are some key milestones in the evolution of digital banking services:

The first ATM appeared at a branch of Barclays Bank in London in 1967 (Barclays, 2017) They allowed bank customers to withdraw cash and perform basic transactions outside of bank hours.

Online Banking: The first online banking system was launched by Citibank in the 1980s, allowing users to access account information and conduct simple transactions over a dial-up connection As the number of people using the internet grew in the 1990s and 2000s, online banking portals were created Banks began developing online portals so that customers could view account balances, make money transfers, and pay bills from their personal computers Due to its convenience, online banking quickly became a popular choice for many people (Alice Ivey, 2023).

Mobile Banking: The introduction of smartphones and mobile apps in the 2000s brought banking services to people's fingertips Mobile banking apps allow customers to access their accounts, transfer money, and pay bills from their mobile devices (Alice Ivey, 2023).

Factors affecting development of digital banking

The advancement of technology, particularly in areas such as mobile devices, internet connectivity, and data analytics, is a significant driver of digital banking. The availability of advanced technologies enables the development of innovative digital banking solutions and enhances the customer experience Digital banking has undergone a revolution thanks to the widespread use of smartphones and other portable electronics (Catherine M., Rens S & Virpi K., 2017) Customers can access banking services whenever and wherever they want thanks to mobile banking apps and responsive websites, which offer convenience and accessibility. The banking industry has changed as a result of the internet Customers can use online platforms for a variety of transactions with internet banking, including checking account balances, transferring money, paying bills, and applying for loans. Digital banking could be improved in a number of ways by AI and machine learning (ML) technologies With the aid of chatbots and virtual assistants, fraud detection, credit scoring, and risk assessment can all be done with a high level of personalization The accessibility of enormous amounts of data has created new opportunities for banks to examine client behavior, tastes, and patterns Banks can use big data analytics to collect insightful information for customer segmentation, risk analysis, and targeted marketing (Mudunuri A V., Anaparthi S A., Kokku S. A., & Prithvi S M., 2022).

Technological advancements in banking have revolutionized service delivery, fostering innovation and enhancing customer experiences They have also streamlined operations, increasing efficiency However, banks must prioritize the security and privacy of customer data and mitigate potential risks associated with these technologies to maintain trust and protect customer information.

The regulatory framework governing digital banking has a significant impact on its development Regulations related to data protection, cybersecurity, customer authentication, and electronic signatures shape the operating environment for digital banks Clear and supportive regulations foster innovation and provide consumer protection, while excessive or restrictive regulations can hinder digital banking growth.

A key element influencing the growth of digital banking is the regulatory environment So how does the regulatory environment affect business?

Regulatory authorities are essential in granting licenses to digital banks and ensuring their compliance with pertinent laws and regulations This is known as licensing and compliance Different countries may have different licensing procedures, such as separate licenses for digital banks, phased licensing, or no specific licensing at all (CGAP, 2020) A level playing field and a favorable environment for digital banking require clear and well-defined regulatory frameworks.

Consumer Protection: Regulations work to safeguard consumers' interests and uphold ethical standards in online banking Guidelines for data security, dispute resolution, and privacy protection may be among them.

Digital banks must adhere to Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations to combat money laundering and other illicit activities AML and KYC require these banks to implement robust customer identification, verification, and monitoring systems to detect and report suspicious transactions effectively Compliance with these regulations helps prevent the flow of illicit funds through digital banking channels, safeguarding the financial system from abuse.

Data Privacy and Security: Regulations related to data privacy and security are crucial in digital banking Digital banks need to comply with data protection laws and implement measures to safeguard customer data, such as encryption, access controls, and regular security assessments Compliance with data privacy regulations is essential to maintaining customer trust and protecting sensitive information.

The regulatory environment needs to strike a balance between promoting innovation and ensuring consumer protection, data security, and financial stability.

Clear and adaptable regulations that keep pace with technological advancements are essential for the sustainable growth and development of digital banking.

The acceptance and confidence of the customer are essential for the success of digital banking Customer adoption is influenced by elements like convenience, security, usability, and faith in digital platforms For customers to embrace digital banking services, it is crucial to establish trust through strong security measures, open business practices, and efficient customer support (Chandio, 2011).

Convenience and Accessibility: Customers who use digital banking have access to a variety of banking services anytime, anywhere, and through a variety of digital channels The adoption of digital banking services is facilitated by the availability of user-friendly mobile applications, online banking platforms, and self- service options (Mitch S., Cassidy H & Elizabeth A., 2023).

Consumers are highly likely to adopt digital banking if they recognize its perceived value and benefits These advantages include time and cost savings, simplified transactions, real-time account monitoring, personalized services, and access to a comprehensive range of financial products and services Recognizing these advantages can lead to consumers adopting digital banking.

User Experience and Design: For customers to use digital banking platforms, they must have a positive user experience and an intuitive design A positive customer experience is facilitated by user-friendly interfaces, intuitive navigation, and attentive customer service A user-friendly, well-designed digital banking platform can boost consumer confidence and promote adoption (KMS, 2022).

Security and Privacy: The security and privacy measures put in place by banks are what customers' trust in digital banking is based on Strong security protocols, encryption, two-factor authentication, and routine security audits all aid in safeguarding customer data and avoiding fraud Building customer trust requires clear privacy policies and strong data protection measures.

Consumer Protection and Regulatory Compliance: Establishing customer trust requires effective regulatory frameworks that safeguard consumer rights and guarantee adherence to financial, security, and data privacy laws When customers are confident that their interests are safeguarded and that banks operate within a regulated framework, they are more likely to use digital banking services (OECD, 2010).

To foster customer adoption and trust in digital banking, banks must continuously strive to provide reliable, secure, and user-centric experiences Effective communication, tailored services, and timely customer support are vital in encouraging customers to embrace digital banking as their primary channel for financial transactions.

Collaboration between traditional banks, fintech companies, and other stakeholders is vital for the development of digital banking Partnerships can leverage the strengths and expertise of different entities to create innovative and comprehensive digital banking solutions Collaboration also facilitates the integration of digital banking services with other sectors, such as e-commerce and payments (Jeroen V & Daphne S., 2021).

Partnerships with Fintech Firms: To take advantage of these firms' technological know-how and innovation, banks frequently work with fintech firms Startups in the fintech industry bring new perspectives and quick fixes that can improve the online banking experience Collaborations with fintech companies can help banks introduce new services, speed up their digital transformation, and increase customer engagement (Jan Bellens, 2020).

Security and regulatory issues

CGAP (2021) identifies three regulatory approaches to digital banks globally: (1) Separate specialized licenses for digital banks alongside traditional banks; (2) Phased licensing for digital banks (or for all banks), where new digital banks undergo a restricted operational phase before obtaining full licenses; (3)

No separate licensing or phased licensing for digital banks.

Most countries worldwide are adopting the third approach, which does not involve separate licensing or phased licensing for digital banks Examples include Brazil (Banco Inter, Banco Dico, Banco Original, B3), Germany (DKB,ING Bank, Norisbank, Comdirect), and South Africa (Discovery Bank, TymeBank) (Bloomberg, 2018) This approach is based on the belief that separate licensing for digital banks is unnecessary as the inherent risks of digital banks do not differ significantly from those of traditional banks when their products and services are similar Separate licensing regimes can create discrimination and potentially lead to price differentials in business operations The second approach of phased licensing may be suitable for Fintech, traditional banks, digital-native banks, and other financial service providers to encourage participation in the financial sector The first and second approaches can be combined and applied to digital-native banks, which is a common practice in rapidly developing digital banking markets in Asia.

Risks related to information security: An ominous risk in digital banking is the risk of the system being compromised or fraudulent (Pennathur, 2001) Some of the common risks to digital banking are: (i) Identity Theft: Theft becomes easier online because there are fewer obstacles to this type of crime (ii) Account takeover: Account takeover occurs when criminals gain unauthorized access to someone else's bank account and change the account information, such as the address or email linked to the account The true owner of the account does not receive updates about the account because the communication is rerouted to the criminals (iii) Automated threats from malicious software: Malicious code can be introduced into the system through automated tools like internet programs. Hackers can carry out repetitive tasks without incurring significant costs This is particularly attractive to cybercriminals as they can reap substantial financial benefits with minimal associated expenses.

Security and regulatory issues are critical considerations in the realm of digital banking As technology evolves and more financial transactions are conducted online, ensuring the security and compliance of digital banking systems becomes increasingly important.

 Data Privacy: Digital banking involves the collection, storage, and processing of sensitive customer information Protecting customer data privacy is crucial to maintaining trust and complying with data protection regulations, such as the General Data Protection Regulation (GDPR) in the European Union.

 Cybersecurity: Digital banking platforms are vulnerable to cyber threats, including hacking, phishing, malware, and data breaches.

Financial institutions must implement robust cybersecurity measures, such as encryption, multi-factor authentication, intrusion detection systems, and regular security audits, to safeguard customer data and prevent unauthorized access.

 Fraud Prevention: Digital banking introduces new avenues for fraud, including identity theft, account takeovers, and unauthorized transactions Banks need to implement fraud detection and prevention mechanisms, such as transaction monitoring, fraud analytics, and real- time alerts, to identify and mitigate fraudulent activities promptly.

 Regulatory Compliance: Digital banking is subject to various regulatory frameworks and compliance requirements, which vary across jurisdictions Banks must adhere to regulations related to anti- money laundering (AML), KYC requirements, consumer protection, electronic signatures, data localization, and more Compliance with these regulations is essential to avoid penalties, legal issues, and reputational damage.

Strong customer authentication is essential for ensuring the security of digital banking accounts, preventing unauthorized access Employing robust methods like passwords, biometrics, security tokens, and OTPs helps banks verify customer identities and authorize transactions safely.

 Cross-border Transactions: Digital banking enables cross-border transactions, which may involve compliance with international regulations, foreign exchange controls, and anti-terrorism financing measures Banks need to navigate the complexities of cross-border transactions while ensuring compliance with relevant laws and regulations.

Addressing these security and regulatory issues requires a comprehensive approach that combines robust technology infrastructure,ongoing monitoring and risk assessment, staff training, and collaboration with regulatory bodies Financial institutions must prioritize security and compliance to protect customer interests, maintain trust, and ensure the stability and integrity of digital banking systems.

The future of digital banking holds several exciting possibilities and trends that are expected to shape the industry It is poised to bring convenience, personalization, and innovation to customers while transforming the way financial institutions operate and deliver services.

Digital banking will continue to evolve toward offering highly personalized experiences Banks will leverage customer data and advanced analytics to provide tailored financial products, services, and recommendations based on individual needs and preferences.

Although Artificial Intelligence (AI) and Machine Learning (ML) have different definitions, they both aim to assist humans in automating and improving tasks that are frequently carried out manually While ML refers to the process of letting computing systems learn on their own to get better through repetition, Al is more broadly defined as a computer performing tasks that need human intelligence.

In self-driving cars, for instance, AI refers to a computer that controls the vehicle, while ML enables a computer to optimize driving through repetition These two technologies complement each other Customer service, provided by chatbots or voice-enabled computer-based customer representatives, would be the most immediate use of AI and ML in the financial services industry.

Distributed Ledger Technology/Blockchain: Distributed Ledger Technology(DLT) is a database of asset transactions that are shared and stored in multiple locations at the same time There is no centralized administrator or storage location.When a ledger is updated, each machine in the network votes by consensus to determine which copy is correct, and other machines update their own copy of the ledger The adoption of blockchain technology and cryptocurrencies are expected to increase in the digital banking sector Blockchain can improve security, transparency, and efficiency in areas such as payments, identity verification, and cross-border transactions Banks may also explore offering cryptocurrency-related services to meet evolving customer demands.

ANALYSIS OF THE DIGITAL BANKING DEVELOPMENT

Introduction to digital banking in Asia

2.1.1 Overview of the digital banking landscape in Asia

Digital technologies fuel economic growth and civic engagement by facilitating communication and access to essential services They empower governments, businesses, and citizens during crises, fostering innovative solutions to development challenges Harnessing digital advancements has enabled the delivery of digital banking and telemedicine, enhancing accessibility and efficiency.

The digital banking landscape in Asia is at the forefront of the global digital banking trend Consumers in the region are open to using one-stop applications like Grab, Go-Jek, and Alipay, which has propelled the growth of digital banking. Technology companies are venturing into the financial sector, making digital banking more readily accepted in Asia despite uncertainties regarding security and regulatory environments Digital banks are expected to become formidable competitors to traditional banks.

Asia is known for its high mobile penetration rates, and digital banking has primarily been driven by mobile platforms Mobile banking applications have gained widespread adoption, allowing users to access banking services conveniently through their smartphones.

Asia boasts the largest population of internet users globally, reaching nearly 2.9 billion in June 2022 Europe holds the second position with over 750 million users These figures contribute to the total global internet user base of 5.47 billion.

Table 2.1: Global internet user count from 2009 to 2022, by region

The Asia-Pacific region had the most mobile subscriptions in 2022, with over4.8 billion, the highest number of any region globally and an increase of roughly 1.4 percent from the year before With roughly 1.1 billion subscriptions, the Americas came in second to Europe, which had about 832 million The only region where the number of subscriptions remained stable at about 362 million was theCommonwealth of Independent States (Figure 2.1).

Figure 2.1: Mobile cellular subscriptions worldwide from 2005 to 2022

Source: The International Monetary Fund (IMF), 2023

Asia is the region with the largest number of Internet users in the world, with a rapid growth rate of mobile cellular subscriptions from 2005 to the present In the past decade, the banking sector in Asia has not only led the world in terms of profits, assets, and market capitalism but has also focused on building new business models centered around digital innovation The future of Asian banks looks promising, especially after the COVID-19 pandemic, as customers increasingly turn to online services for their banking needs, encouraging the expansion of digital services beyond their limitations.

So digital banking was previously a convenient option, but it has now become a crucial lifeline As the demand for digital access and financial control rises among customers, the future of digital banking will witness strong development and market penetration across Asia.

According to a report by software provider Backbase and global market research firm International Data Corporation in 2021, digital banking in Asia is expected to grow rapidly in the next five years, with over three-fifths

(approximately 63 percent) of customers willing to switch to neobanks, the new banking model It means the type of bank that does not establish any branches or physical offices Instead, Neo Banking provides all services through digital channels such as smartphone or Web interfaces Neobanks are primarily online-only banking platforms without any physical locations, but they are not the same as online banks Online banks offer a wider range of services to their customers and have a bank charter, including loans (Forbes, 2021).

The report suggests that the region is projected to have over 100 new financial organizations by 2025, driven by liberalization in certain markets and the issuance of new banking licenses The convenience of digital banking has been highlighted by the COVID-19 pandemic, with 70 percent of customers finding banking transactions mundane and only 30 percent engaging in digital banking channels provided by traditional banks.

On the other hand, over 35 neobanks across the region have built their operations based on innovative and agile activities, outpacing traditional banks in terms of flexibility, self-service capabilities, and customer-centric and personalized services Consequently, with the emergence of neobanks and further digital disruptions in the industry, 38 percent of traditional banks' revenue will face the risk of competition from digital banks by 2025 The report suggests that digitization and the implementation of AI will be the focal points, with 44 percent of the top 250 banks completing the transition to a "connected core" by 2025.

From the above numbers, it can be seen that digital banking is thriving and is an indispensable trend in Asia.

2.1.2 Digital banking trends and adoption in Asia

Asia has experienced a boom in digital banking since 2011 According to aMcKinsey study, consumers of financial services are increasingly using computers,smartphones, and tablets to interact with their banks rather than going into physical locations or calling customer service lines About 16,000 financial consumers in 13Asian markets were polled by McKinsey in 2014 about their banking practices The study, which involved online and in-person interviews, is a component of an ongoing project to monitor personal finance trends in Asia beginning in 1998. Similar to other developing Asian markets, a quarter of consumers use computers and smartphones for banking The rise of digital banking in Asia has been predicted for many years, but recently several factors have combined to drive the trend. Among the most important changes is the presence of a much stronger ecosystem to enable digital banking, including a rapid increase in Internet and smartphone usage as well as growth in e-commerce, leading to demand for digital banking shifting from early adopters to a broad range of customers For incumbent banks, the stakes are particularly high for the consumers In a McKinsey & Company survey of developed Asian markets, more than 80 percent said they were willing to move some of their holdings to a bank offering a digital proposition In emerging Asia, more than 50 percent of consumers indicate such a willingness Multiple account types are in use, with respondents generally saying they can transfer 35 to 45 percent of saving account deposits, 40 to 50 percent of credit card balances, and 40 to 45 percent of investment balances such as those held in mutual funds, etc.

The difference between emerging and developed markets has significantly shrunk as digital banking penetration approaches 90 percent throughout the region.The percentage of consumers in emerging markets in Asia-Pacific actively using digital banking increased by 33 percentage points between 2017 and 2021, from 54 percent to 88 percent Consumers in developed Asia-Pacific markets have been adopting digital technology at a steady rate of about 90 percent.

Figure 2.2: Asia–Pacific emerging markets are at par on digital banking and lead in the use of fintech apps and e-wallets

Consumer enthusiasm for these new solutions has pushed the penetration of fintech tools and e-wallets in emerging markets above market acceptance in the region's developed markets Fintech innovators across the region's emerging markets have developed compelling value propositions Fintech applications and e- wallets were used 54 percent of the time in emerging Asia-Pacific in 2021 compared to 43 percent in developed Asia-Pacific.

In general, digital wallets and payment services have gained immense popularity in Asia Companies like Alipay, WeChat Pay, Paytm, and GrabPay have revolutionized the way people make payments, allowing users to pay for goods and services using their smartphones.

According to a report by financial technology service provider FIS (USA) in

Experience of digital banking development in some Asian countries

2.2.1 National strategies for digital banking development

The development of digital banking in various countries is often integrated into broader national strategies for digital financial development or smart nation initiatives Countries like Singapore, China, Indonesia, and others prioritize fostering innovation and technological advancements in the financial sector They recognize the potential of technology to enhance efficiency and benefit consumers, and create favorable environments for the growth of digital banking by establishing flexible policies and supportive measures.

China has implemented various national strategies to promote the development of digital banking in the country.

The issuance of the Digital Financial Framework in 2015 established the framework for the development of digital finance The Guidelines for Digital Banking Services in 2015 emphasized the importance of digital banking for comprehensive and decentralized financial management

- The People's Bank of China (PBOC) is responsible for general regulatory activities and primarily oversees payment services, anti-money laundering operations, and credit information.

- The China Banking Regulatory Commission (CBRC) is responsible for consumer protection.

- The China Association of Electronic Financial Industry (ACIFI) is responsible for promoting banking operations.

It provides an overview of the promotion of mobile payments in China as a means to reduce cash usage and transition towards a cashless society Furthermore,China's thriving fintech ecosystem includes the establishment of innovation hubs, support for fintech startups, and collaboration between traditional financial institutions and fintech companies (McKinsey, 2021).

- Promotion of mobile payments: The Chinese government has actively supported and promoted mobile payments as a means to reduce cash usage and transition towards a cashless society Companies like Alipay and WeChat Pay have gained significant popularity by offering convenient and secure mobile payment solutions.

- Digital currency: China has been at the forefront of exploring and developing digital currencies The People's Bank of China (PBOC) has been working on the development of a central bank digital currency (CBDC) known as the Digital Currency Electronic Payment (DCEP) The implementation of the DCEP aims to enhance the efficiency, security, and transparency of digital transactions in China.

China's fintech sector has flourished thanks to government support for innovation and entrepreneurship The establishment of fintech innovation hubs like the Shanghai Fintech Innovation Center and the Beijing Fintech Innovation Pilot Zone has facilitated startup growth and fostered collaboration between legacy banks and fintech firms, driving China's position as a fintech powerhouse.

- Open banking: China has introduced measures to promote open banking, encouraging collaboration and data sharing between banks and third-party service providers This allows for the development of innovative financial products and services, enhancing the overall customer experience.

- Financial inclusion: The Chinese government has made efforts to promote financial inclusion, particularly in underserved rural areas Digital banking technologies have been leveraged to provide access to financial services, such as digital wallets and microloans, to previously unbanked populations.

- Regulation and risk management: China has implemented regulations and risk management frameworks to ensure the stability and security of digital banking services The government has established guidelines to protect consumers, prevent fraud, and safeguard against cyber threats in the digital banking space.

Collaboration between traditional banks and tech giants, particularly Alibaba and Tencent, has been instrumental in bolstering digital banking innovation in China Their combined efforts have led to the emergence of comprehensive financial services platforms that encompass a diverse array of digital banking and financial offerings.

Singapore has implemented several national strategies to foster the development of digital banking in the country The strategic vision of becoming a smart country is based on the foundation of the Smart Financial Center built in 2015 by the Central Bank of Singapore.

- Digital banking licenses: The Monetary Authority of Singapore (MAS) introduced a digital banking licensing framework in 2020, allowing non-bank players to provide digital banking services This initiative aimed to encourage competition and innovation in the banking sector, promoting the development of digital-first banks.

- Open banking and API framework: Singapore promotes open banking through the development of an API framework This framework enables secure data sharing between banks and third-party service providers, encouraging collaboration and the development of innovative financial services.

- Fintech innovation: The Singapore government actively supports fintech innovation through various initiatives, including the establishment of regulatory sandboxes, innovation labs, and funding schemes These efforts aim to create a conducive environment for fintech startups and encourage collaboration between traditional financial institutions and technology companies.

- Smart nation initiative: Singapore's Smart Nation Initiative is a national strategy that aims to harness technology and data to improve the quality of life for citizens Within this initiative, digital banking plays a vital role in providing seamless and convenient financial services to individuals and businesses.

Experience in breaking down barriers to digital banking development

Amidst evolving customer demands, medium-sized banks lack the resources to swiftly develop payment system infrastructure Collaboration with fintech companies offers a solution, benefiting both parties Banks gain access to advanced technology, while fintech companies leverage extensive consumer data for competitive advantage This strategic partnership empowers banks to meet growing customer expectations while enabling fintech companies to capitalize on valuable data insights.

Second, about digital identity and building a digital ecosystem, digital identity is at the core of the digital transformation of financial and banking services This is particularly challenging for developing countries where individuals lack proper standardized identity data storage.

Third, the improvement of the legal framework for Payment Service Providers (PSPs) have a responsibility to ensure stricter customer identity verification KYC every time a payer accesses their payment account online, conducts remote electronic payment transactions, or performs any other actions through remote channels Additionally, access rights to user accounts must be granted to third-party service providers for comprehensive account information services Payment Services Directive (PSD2) regulations specify the responsibilities/obligations of account information service providers, as well as the responsibilities of payment service providers.

Fourth, ensuring security and confidentiality, banks are required to establish appropriate measures to verify customer access to third-party websites and enforce strict customer verification procedures, similar to those for direct customers When providing electronic banking services, banks are also required to implement monitoring and reporting mechanisms to identify potential money laundering activities This allows the central bank to ensure that the banking sector keeps up with the development of information technology, communications, and technology while maintaining the integrity of the financial system and preventing misuse by money launderers.

The digital banking development process from banks

The process of digital banking development within Asian banks is characterized by a multifaceted and strategic approach to adapt to the region's dynamic financial landscape Asian banks embark on this transformative journey through a series of well-defined steps.

Market assessment and research are crucial for digital banking success in Asia Banks conduct thorough analyses to grasp market dynamics, customer preferences, and regulatory landscapes unique to the region This market intelligence enables banks to tailor their digital banking solutions to meet the specific needs and requirements of Asian markets, fostering customer satisfaction and business growth (Mc Kinsey&Company, 2014).

- Digital Strategy Formulation: Building on market insights and internal assessments, banks formulate a robust digital strategy This strategy outlines the bank's objectives, target customer segments, and the role of technology in achieving these goals (Robert Ortstand & Binan Sonono, 2017).

- Business Model Selection: Banks make strategic decisions regarding their digital banking business model This includes choosing between in-house development, strategic partnerships with fintech firms, or hybrid approaches that blend internal and external capabilities (IMF, 2022).

- Infrastructure and Technology Enhancement: A critical step involves upgrading the bank's technological infrastructure This may include modernizing core banking systems to enable seamless digital operations and integrating Application Programming Interfaces (APIs) for data sharing and interoperability.

- Product Development: Asian banks focus on developing a suite of digital banking products and services These often include user-friendly mobile banking applications, online banking portals, digital wallets, and additional offerings such as online lending and robo-advisory platforms.

- Security and Compliance: Banks prioritize cybersecurity measures and compliance with regulatory requirements Robust security protocols are implemented to safeguard customer data, while stringent adherence to data protection and anti-money laundering (AML) regulations is maintained.

To enhance digital banking, user experience is prioritized through customer-centric design Banks focus on simplicity, ease of use, and accessibility when designing interfaces and services By leveraging data analytics and AI, personalization is incorporated to elevate customer experiences, meeting their specific needs and preferences (Alex Kreger, 2023).

- Testing and Quality Assurance: Rigorous testing is conducted to identify and rectify any issues or bugs in digital banking platforms Quality assurance measures ensure that the systems are reliable and secure.

Chapter II of the thesis gave that regulatory frameworks for digital banking vary across different Asian countries, with some embracing innovation and facilitating the entry of new players, while others have stricter regulations in place.

LESSONS LEARNED FOR THE DEVELOPMENT OF

Technological Infrastructure and digital transformation

3.1.1 Overview of digital banking in Vietnam

In Vietnam, digital banking has witnessed remarkable growth, with 82% of users engaging in online or mobile banking at least once monthly in 2021, a significant increase from 41% in 2017 This growth surpasses the average usage rate of 88% in emerging Asia-Pacific countries and approaches the 90% mark seen in developed nations in the region, reflecting the rapid adoption of fintech and e-wallets in Vietnam.

Figure 3.1: Statistics on active users of digital banking and the penetration of fintech and e-wallets in Vietnam

The above data is published by McKinsey in the report on digital banking service usage, based on an analysis of the behavior of individual customers in metropolitan areas in 15 Asia-Pacific markets The data shows that digital banking services are gaining popularity in Vietnam, with the number of users of fintech services and e-wallets reaching 56 percent in 2021, a significant increase from 16 percent in 2017 This penetration is higher than the average of 54 percent in emerging Asia-Pacific markets and 43 percent in developed Asia- Pacific markets.

3.1.2 Development environment for digital banking services

In 2022, roughly 95 percent of credit institutions will have either implemented or be developing their digital transformation strategies, according to State Bank of Vietnam (SBV) statistics published in 2023 44 financial institutions offer mobile banking services, and about 80 financial institutions offer Internet banking There are more than 90,000 QR payment points in the market as a whole.

Notably, over 36 quadrillion Vietnamese dong (VND) were exchanged through online and mobile channels in the first nine months of 2021 Over 435 million transactions totaling nearly 23 quadrillion VND were made using online payments Comparing this period to the same time last year, during the COVID-

19 pandemic, shows an increase of over 54 percent in transaction volume and 30 percent in value Additionally, there was a notable rise in mobile payments, with a nearly 75 percent increase in transaction volume and a 94percent increase in transaction value.

These figures indicate that digital banking is a current trend, as its development brings numerous benefits to both users and credit institutions.

Vietnam has prioritized infrastructure development, investing heavily in internet and telecommunications infrastructure The nationwide coverage of 4G networks is almost complete, and 5G networks are being tested and deployed Fiber-optic networks extend to 100% of communes, facilitating internet access Moreover, Vietnam's digital payment infrastructure has witnessed significant growth, fostering convenient financial transactions.

30 million users of Internet banking systems daily With a daily transaction value of about 300 trillion VND, mobile banking transactions in Vietnam are growing at a rate of 200 percent National databases are being integrated, and the data infrastructure is generally quite prepared With over 63percent of the population owning smartphones, Vietnam is also among the top 10 nations in the world for smartphone penetration As of early 2023, Vietnam has 77.93 million internet users, equivalent to 79.1 percent of the total population, an increase of 5.3 million users (+7.3 percent) compared to early 2022 These positive indicators reflect the readiness of Vietnam's infrastructure and its efforts to integrate digital technologies into various aspects of life, including banking and telecommunications (Ngân hàng Nhà nước, 2022).

The population structure of Vietnam in 2022 with 100 million people, and the young population structure with a labor force aged 15 and over accounts for nearly 70 percent of this is considered a potential market for digital banking development by the next generation Young people represent various shopping patterns and are the main sources of revenue for digital banking because they are technologically savvy and agile (Tổng Cục Thống Kê, 2023).

Banking habits, the COVID-19 pandemic has significantly impacted people's cash usage habits and has led to a notable increase in digital transformation and cashless payments Vietnamese people have shown a growing preference for non-cash payments, with approximately 85 percent of banking service users tending to use digital banking services more than they did 18 months ago (Bộ Tài Chính, 2021).

The orientation and determination of state management agencies have led to the issuance of numerous decisions and initiatives aimed at accelerating the digital transformation in the banking sector Notable examples include Decision

No 1813/QD-TTg dated October 28, 2021, approving the Cashless PaymentDevelopment Plan in Vietnam for the period 2021 - 2025; Directive No 02/CT-NHNN on promoting digital transformation and ensuring information security in banking activities; and Decision No 810/QD-NHNN issued on May 11, 2021,approving the Digital Transformation Plan for the banking industry until 2025,with a vision towards 2030 These initiatives outline specific targets, including enabling at least 50 percent of banking transactions to be conducted entirely in digital environments; having at least 50 percent of adults use electronic payment services; and ensuring that at least 70 percent of customer transactions are conducted through digital channels (MOF, 2021).

In 2022, Vietnamese commercial banks have embraced advanced technologies to enhance banking operations AI, biometrics, and virtual assistants improve security and customer experience Collaborations with fintech companies have integrated mobile payment technologies As a result, this digital transformation has strengthened payment services, improved security, and increased customer satisfaction.

According to the assessment of the Vietnam Banking Association in 2022, the Covid-19 pandemic has accelerated the digital transformation of banks by 3-

By 2021, the banking system had made substantial strides in digital payments Internet payment services were offered by 79 organizations, mobile payment services by 44, and the ATM/POS network spanned the country with over 19,000 ATMs and 271,000 POS terminals Compared to 2020, Internet transactions surged by 65.9% in volume and 31.2% in value, while mobile transactions experienced an 86.3% volume increase and a 123.1% value increase Notably, QR code transactions witnessed a remarkable 95.7% volume growth and a 181.5% value surge during the same period.

Additionally, according to the statistics of the State Bank of Vietnam, as of the first quarter of 2023, the number of individual payment deposit accounts nationwide reached 155,931 accounts, and transactions through the interbank electronic payment system increased by 32.37 percent in terms of transaction value compared to the same period (SBV, 2023) According to the statistics of the State Bank of Vietnam, non-cash payment activities in 2022 experienced high growth compared to 2021 Specifically, non-cash payment transactions increased by 69.7 percent in volume and 27.5 percent in value; transactions through the Internet increased by 48.39 percent in volume and 32.76 percent in value; transactions through mobile phones increased by 97.65 percent in volume and 86.68 percent in value; transactions through QR Code increased by 56.52 percent in volume and 111.62 percent in value compared to the same period in 2021; the total number of activated e-wallets increased by 10.3 7 percent compared to the end of 2021.

During the Covid-19 pandemic, the application of information technology and digital transformation was an important solution to limit person-to-person contact in economic transactions, promote non-contact transactions, and contribute to both disease prevention and economic and social development.

Limitations in Vietnam's progress towards digital banking

Firstly, the deployment of banking technology applications is still limited.

The application of information technology in the development of banking products and services in Vietnam has been and is changing the structure,operation methods, and providing modern services of the banking system,creating convenience for customers in using modern banking services and saving transaction costs However, according to the Vietnam Report 2021 survey results, 58.33 percent of banks are implementing on a scale, 16.67 percent of banks have partially implemented, and 25 percent of banks are in the system consolidation phase In addition, the survey also indicates that mobile data platforms, big data, open banking, process automation using robots, AI, chatbots,etc., are being highly and very highly applied by many banks to analyze customer behavior and needs However, the implementation of Blockchain technology is still limited (Vietnam Report, 2021) Furthermore, the application of information technology in enhancing management capacity and risk control according to Basel II standards is also subject to various limitations Moreover, the implementation of projects in some banks is prolonged as these banks have not been fully standardized according to international practices.

Financial strength is crucial for banks investing in digital technology, as the transition from traditional core banking systems to digital banking requires significant capital Outdated IT systems with inflexible structures pose a challenge, hindering banks' ability to adapt to digital banking Furthermore, changing these systems is complex, time-consuming, and expensive, making the transition even more challenging.

Technology poses a significant challenge, and the market constantly introduces new factors that require businesses to invest in technology and keep up with regular updates According to Gartner, a leading global information technology research and consulting company in 2021, digital transformation projects are a priority for many businesses in the market, including banks. Specifically, 87 percent of executives consider process digitization as their top priority, 40 percent of organizations have extensively implemented activities to digitize their business and management processes, and 91 percent of business leaders have begun digital operations within certain scopes Statistics from Market Research Future, a market research company, in 2018 showed that global investment in digital transformation reached $205.65 billion By 2025, this figure is estimated to reach around $817.05 billion, with an average annual investment growth rate of 18.87 percent.

Furthermore, to implement digital banking, the issue of investment costs is also a challenge for Vietnamese banks The costs of investing in AI research and development are relatively high, as are the costs of core banking conversion and investment in new technology systems The payback period is often long (SBV,2022).

In addition, technology applied in digital banking often develops rapidly and is easily replaced by new technologies Therefore, the cost of technology does not stop at the initial investment but also includes continuous improvement, maintenance, system upgrades, and technology replacement to remain competitive This creates significant pressure for commercial banks, especially those of medium and small scale This is a challenge for investing in technology for the digital transformation process of banks.

3.2.2 Human resources participating in digital transformation

To implement a digital transformation, commercial banks urgently need human resources capable of operating and developing digital products and services on modern technology platforms Vietnamese banks are currently facing the problem of a shortage of human resources in building and developing digital banks This is a problem for training institutions and banks in Vietnam when they have not kept up with the speed of technology development.

According to the consensus of bank leaders, there is a limited number of personnel with the knowledge, vision, and skills to implement the digital transformation of the banking industry in Vietnam Meanwhile, the market is vast, and it's not only banks that need to digitize, but also Fintech companies, other financial institutions, and businesses that are actively involved in the digitization process Employee turnover is inevitable, which negatively affects the digital transformation process of each bank.

Banks face numerous risks and threats to information security in the context of the Fourth Industrial Revolution due to the explosion of technology such asBig Data, Cloud Services, AI, and Internet of Things (IoT) connectivity The increasing sophistication of digital technology also brings about an increase in security vulnerabilities, providing opportunities for high-tech crimes and cyberattacks.

Alongside the benefits it brings to customers, the development of digital banking also encounters challenges in protecting personal information, as the banking sector is always the top target of cybercriminals With the majority of banking users installing transaction applications (Apps) on their mobile phones, banks are constantly issuing warnings about fraud In Vietnam, security risks such as fraud, customer scams, network attacks on banking infrastructure, and data breaches are on the rise According to a survey by the Vietnam Information Security Association, more than 50 percent of cyberattacks target financial institutions and banks Meanwhile, according to statistics of the Information Security Administration (Ministry of Information and Communications) in 2021, this agency recorded 9,700 cyber attacks on information systems in Vietnam, an increase of 42.42 percent compared to 2020.

These surveys also indicate that the banking system is facing several cybersecurity challenges: hackers attacking bank data systems through bank partners, direct website attacks to manipulate interfaces for extortion or data theft, system infiltrations to execute fraudulent money transfers and steal information and assets from banks and customers, and the creation of fraudulent websites impersonating banks to scam customers.

Therefore, all three entities involved in the digital banking space - banks, customers, and bank partners - can become gateways for cybercriminals to launch attacks The problem lies in the fact that while banks prioritize ensuring cybersecurity, their partners may not place the same emphasis on this issue, and in many cases, they lack the necessary capabilities and infrastructure for information security In practice, many cases have shown that customers misuse services and fall victim to fake banking websites, leading to financial losses in their accounts This poses a challenge not only for banks but also for customers themselves, who need to equip themselves with knowledge of digital technology to mitigate risks As for banks, building a team of cybersecurity experts with knowledge of business operations remains a challenge that needs to be addressed.

Lessons learned for Vietnam in the digital banking

Vietnam's banking sector is embracing digital transformation, following the government's "Plan for the digital transformation of the banking sector up to 2025," which mandates at least 50% of banking operations to be available digitally by 2025 Accordingly, commercial banks have invested in technology and partnered with fintech companies to enhance their services For instance, GOFS collaborated with Ban Viet Commercial Joint Stock Bank to create Timo Plus, a digital banking platform, while Vietnam Prosperity Joint Stock Commercial Bank partnered with ride-hailing apps to offer innovative solutions.

Be Group to create the CAKE digital banking platform; cooperation betweenPhuong Dong Commercial Joint Stock Bank and Fintech Farm Company to establish LioBank digital banking platform In essence, these models do not generate their banking license but operate on the basis of the license of the parent bank or the cooperating and sponsoring bank, therefore, the digital bank will be responsible for the legal operation of these models activities related to digital banking platforms and is ultimately responsible for risks related to digital banking services and platforms.

Thus, it is extremely necessary to build a legal framework for the operation of new digital banks in Vietnam, or at least provide guidelines for the operation of the organizational model that carries out such activities banking as it is today with some suggestions for the development of legal regulations on digital banking:

Firstly, before studying and promulgating a comprehensive legal framework for the establishment and operation of independent digital banks, competent state agencies should promote the development of policies and regulations to promote promoting the development of the Fintech industry in general and digital banking in particular, such as building and operating a trial legal framework (Regulatory Sandbox) for Fintech activities in the banking sector; researching and building a legal framework on open API, sharing open banking data (Open Banking); amending, supplementing or promulgating new legal regulations to facilitate the application of digital technologies, the use of alternative data in banking activities For example, in Malaysia, before the promulgation of the legal framework For digital banking in 2020, the Central Bank of Malaysia introduced several policies to promote Fintech activities to develop and create a premise for digital banks such as: Developing the Mykad card system implemented since 2001 with contact chip authentication technology, combined with the digital signature platform, integrated 08 services including 04 public services (ID card, driver's license, domestic passport, and medical book) contacts) and 04 private services (e-wallet, automatic withdrawal card, Touch'n Go card for traffic, and digital signature card for electronic transactions) With this integrated card system, the identification of individuals and personal information are systematized, creating a premise for the issuance of digital bank account numbers in the future.

To ensure effective regulation in the digital age, policies should prioritize regulating the underlying technology rather than solely targeting service providers In this regard, critical technologies like blockchain, e-KYC, and cloud computing hold immense significance as the drivers of digital transformation in banking By focusing regulatory efforts on these technologies, policymakers can foster innovation and facilitate the secure and efficient delivery of digital financial services.

Therefore, there is a need for prioritized regulations that promote development and ensure the safety and security of consumers However, customer information is stored in a vast database, and without regulations to ensure the security of the system and strict penalties for cybercriminals who exploit or steal information, customers' rights will not be adequately protected Additionally, setting standards for e-KYC is also a direction that can help Vietnamese businesses expand their cooperation with partners in countries that have strict regulations on customer information security Therefore, to establish the foundation of an information technology infrastructure, the State Bank of Vietnam needs to coordinate with relevant ministries and agencies to develop special support programs This includes upgrading the national payment infrastructure and close cooperation between the central bank and regulatory bodies in the fields of data protection, telecommunications, information technology, and cybersecurity to ensure the liqieffective supervision of digital banks.

Thirdly, in the long term, the State Bank of Vietnam can consider issuing a comprehensive legal framework governing the organization and operation of digital banks as independent legal entities When developing this legal framework, the government needs to consider the overall context of relevant laws and regulations such as the Law on the State Bank of Vietnam and the Law on Credit Institutions, as well as the restructuring direction of the banking system The regulations governing the operations of digital banks should prioritize the stable development of the national financial system, comprehensive financial inclusion, and access for vulnerable groups Therefore, the legal framework for digital banks needs to ensure elements such as:

(i) Prescribing the conditions and standards for digital banks to operate effectively and safely, including minimum capital requirements, maximum total assets, provisioning ratios, and liquidity requirements that are similar to existing traditional banks Special attention should be given to regulations and requirements regarding anti-money laundering, consumer protection, ensuring security, safety, and confidentiality, as well as requirements for information technology systems.

(ii) Establishing new conditions and standards regarding legal capital/charter capital, ownership ratios, and financial capacity requirements for founding shareholders, as well as limitations on foreign ownership (the structure and requirements for foreign shareholders need to be adjusted to suit the model, scope, and target customers of digital banks).

(iii) Regulating the application of information technology systems in the banking model (this regulation is crucial because all activities of digital banks are conducted on technology platforms, therefore, independent digital banks need to establish their closed technology systems that are mandatory and also require protective measures to prevent cybercrime attacks).

(iv) Establishing different stages for the licensing process and trial periods for the initial operation of digital banks (which could last for 3-5 years under the supervision of the State Bank of Vietnam) At the same time, it is necessary to establish a safety regime for these digital banks in case of failure during the trial period.

Solutions to improve the digital banking in Vietnam

Compared to other industries, the development of technology in the banking sector has received significant attention and has made notable progress. However, in terms of meeting the requirements for managing modern banking systems according to regional standards, Vietnamese banks still need to make substantial investments in this area To apply digital technology in developing banking products and services in Vietnam soon, banks in Vietnam need to pay attention to the following solutions:

Enterprises must prioritize Industry 4.0 technologies, such as China's advancements in information technology, telecommunications, and digital payment platforms By leveraging these technologies, organizations can modernize and restructure, enhancing management capabilities Non-credit services should be emphasized to foster competitiveness and ensure transparency within the industry.

Banks in Vietnam lag behind in technology compared to regional and global norms, with outdated core banking systems hindering digital transformation To address this, banks need to upgrade their systems to newer generations with features like digitalization, intelligent management, automation, and risk control based on AI, Big Data, and robotics This will support banking operations, risk management, and compliance with Basel II standards.

Thirdly, enhancing collaboration with domestic and international technology corporations and companies is crucial to share experiences,exchanging information, transfer technology, and stay updated on appropriate information technology development trends for the banking industry In particular, banks need to strengthen cooperation with Fintech companies from experience of China or Malaysia Fintech companies always have advantages in technology, innovative ideas, and organizational flexibility, while Vietnamese banks often lag in terms of technology In recent times, most Vietnamese banks have signed agreements with several Fintech companies to provide payment and money transfer services to customers Collaboration with Fintech companies has helped banks alleviate financial burdens when financial capabilities are limited,enabling them to promptly deploy modern technology applications that are suitable for banks and achieve strategic goals in digital transformation In the future, as the Vietnamese banking industry moves towards a digital banking model, banks will greatly benefit from equipping themselves with advanced technologies and upgrading their core banking systems, and strengthening collaboration with Fintech companies remains the optimal solution.

Fourthly, banks should prioritize capital investment in information technology applications and development, especially for banks that are technologically behind To achieve high efficiency in information technology applications, it is necessary to focus on improving and adjusting business processes before planning to procure technical equipment such as experience of India and China above Chapter 2 Smaller banks should actively seek funding sources for their technology development or collaborate with banks that have higher technological capabilities They should also effectively receive and implement information technology projects from funding sources within and outside the country.

Furthermore, to implement technology development programs, banks need to review regulations, rules, and irrational statistical and accounting criteria that hinder the application of modern technology The State Bank of Vietnam should consider reviewing and modifying these regulations shortly.

Vietnamese banks need to rely on their actual manpower needs and existing human resources to develop recruitment and training plans for digital transformation Digital transformation is a long-term process that requires banks to have a workforce with expertise and knowledge in information technology, cybersecurity, digital skills, business acumen, and social skills, like in Malaysia, training on emerging technologies, providing training and salary subsidies, and various initiatives to help upskill and retrain human resources For example, Ant Financial which is a subsidiary of Alibaba Group and operates popular platforms like Alipay It offers a wide range of financial services, including digital payments, wealth management, lending, and insurance Ant Group has achieved massive scale and has become a dominant player in the Chinese fintech market.

In another case, Paytm (India) is an Indian fintech company that started as a mobile payments platform and has expanded to offer a range of financial services, including digital wallets, digital banking, merchant services, and investment options Paytm has experienced rapid growth and has become one of the leading fintech players in India In the other case, Grab Financial Group (Singapore) is the fintech arm of Grab, a Southeast Asian ride-hailing and super app platform.

Firstly, it is important to optimize the use of existing human resources To meet the job requirements of digital transformation in banks, recruitment should be based on the current capacity of the workforce For positions that require deep expertise in information technology that the bank cannot fulfill in a short period, external recruitment may be necessary For positions that require additional personnel with digital skills, business acumen, and social skills, banks should consider selecting from existing personnel and providing training to enhance their skills Additionally, to build a strong team of cybersecurity engineers in the future, equipped with knowledge of digital banking operations and the ability to handle constantly evolving cybersecurity risks, training and upskilling the existing cybersecurity engineers would be an optimal approach for banks.

To foster digital transformation in banking, policies must attract and retain skilled talent Banks face a shortage of professionals proficient in both finance and technology To address this, banks should offer competitive compensation and benefits packages to entice technology specialists and foster their long-term commitment to the organization By ensuring a stable workforce, banks can effectively leverage information technology to drive innovation and enhance customer experience.

Third, it is essential to enhance the awareness of employees and staff about the role of digital technology in banks and the significance of applying advanced technology in modernizing and innovating the banking sector.

Fourth, banks need to have a training plan for their workforce Regular training sessions should be conducted to equip employees, IT engineers, and bank staff with the necessary skills to implement modern technology and have a command of scientific and technical knowledge This will enable them to design and develop specialized software packages for banking activities, ensuring quality and security The IT workforce, including specialized engineers responsible for system management and application development, should receive in-depth training Furthermore, attention should also be given to training business and management staff who heavily rely on IT applications in their daily operations, equipping them with sufficient basic computer knowledge and enhancing their skills to effectively utilize application programs Therefore, IT knowledge needs to be continuously disseminated to the management and operational staff of banks to meet the requirements of new technology. Gradually, the banks should standardize the qualifications and expertise of their personnel Additionally, banks should collaborate closely with financial and banking training institutions to help guide the training of young talent and meet the practical requirements of the industry.

Currently, there are various types of data in the system, complex business logic, insufficient human resources to meet the requirements, and an inadequate legal framework to support the exploitation of Big Data and ensure data security for customers Therefore, banks need solutions to secure information and protect customers as Singapore's strict user protection regulations.

First, enhance the construction and improvement of bank data governance.

For data optimization, banks should implement Big Data infrastructures and dedicated data repositories leveraging cloud computing In data governance, banks must establish organizational structures and appoint specialized experts in IT, data analysis, and data management Additionally, banks require comprehensive policies and procedures governing data management and utilization practices.

Second, banks need to strengthen information security measures. Information security has a significant impact on the reputation and success of banks in the banking industry (up to 90 percent) To prevent unauthorized access and attacks, and to prevent the leakage of sensitive data through workstations, end devices, networks, email, and internet access, Vietnamese banks need to implement synchronized protection solutions, prevention, and detection of data breaches across their entire information systems They should increase monitoring and supervision of all processes and stages that pose potential risks to information security Furthermore, banks and Fintech companies should establish procedures, and scenarios, and conduct regular exercises to enhance their ability to respond to incidents and reduce the negative impacts and consequences of cyber attacks.

Some recommendations for policy makers

One aspect is the need to prioritize and accelerate the completion of the legal framework for digital banking development Initially, it is necessary to prioritize regulations related to financial experimentation and e-KYC in the financial sector Additionally, the State Bank of Vietnam should review and amend regulations to facilitate identification and electronic authentication in the banking industry They should also review guidelines on data storage, protection, and sharing, as well as guidelines on connecting with the National Database for e-KYC customer service Amendments to Circular No 39/2016/TT-NHNN dated December 30, 2016, by the Governor of the State Bank of Vietnam on lending activities of credit institutions and branches of foreign banks for customers, Circular No 13/2018/TT-NHNN dated May 18, 2018, on internal control systems of commercial banks and branches of foreign banks, and Circular No. 21/2017/TT-NHNN dated December 29, 2017, regulating disbursement methods for credit capital by credit institutions and branches of foreign banks for customers should be made to facilitate the application of automation technology in the credit appraisal and post-lending monitoring processes of commercial banks.

In addition, to create favorable conditions for the development of digital banking, the State Bank of Vietnam needs to study and establish a framework for digital finance, defining the development roadmap for digital banks in line with the National Strategy for Digital Economic and Social Development and theComprehensive National Financial Strategy Digital banks should be considered important participants in the financial market, and the State Bank of Vietnam can refer to the implementation experience in other Asian countries to select an appropriate licensing option for digital banks (separate license or conversion from a traditional bank license) with requirements for minimum capital, risk management, outsourcing, privacy, data protection, etc., corresponding to the risks associated with digital banks A separate license can be applied in cases where the current regulations on credit institutions are difficult to amend to include the activities of new digital banks The regulations on digital banks should consider exemptions for minimum branch requirements, and relax limits on ownership to facilitate participation by different entities in the economy (Fintech, Big Tech, telecommunications companies, etc) Considering that the financial infrastructure is still in the early stages of digital transformation with low digital maturity, limited presence of non-financial organizations in the sector, and significant gaps in the legal framework, the State Bank of Vietnam can consider a phased approach to licensing digital banks

The second aspect is that technology solutions from Fintech play a crucial role in the development of digital banking by providing financial services beyond core services such as cloud computing, compliant KYC, payment systems, foreign exchange, etc., for both traditional and new digital banks. Business models of non-face-to-face digital banking require even closer integration with the Fintech ecosystem Therefore, the coordination mechanism between Fintech and banks needs to be established as a fundamental policy in the State Bank of Vietnam's digital banking development strategy The use of third- party services is relatively complex and requires specific regulations on risk management processes internally The State Bank of Vietnam also needs to study and issue policies and regulations related to outsourcing software development, conditions for partnering with foreign organizations, and relevant tools in RegTech (Regulatory Technology) and SupTech (Supervisory Technology).

The third aspect is that the State Bank of Vietnam needs to collaborate with relevant ministries and agencies to build programs supporting the development of the country's information technology infrastructure, with a focus on upgrading the national payment infrastructure Additionally, the State Bank of Vietnam should closely cooperate with regulatory bodies in the fields of data protection,competition, telecommunications, information technology, and cybersecurity to coordinate the supervision of digital banks The State Bank of Vietnam should actively apply new technology-based management tools (RegTech, SupTech) to effectively and specifically manage digital banks Regarding the national digital economic database, the State Bank of Vietnam should collaborate with relevant ministries and agencies to standardize data and establish standard protocols for data sharing to create favorable conditions for the future development of the digital banking ecosystem.

The future of digital banking holds several exciting possibilities and trends that are expected to shape the industry It is poised to bring convenience, personalization, and innovation to customers while transforming the way financial institutions operate and deliver services.

Digital banking will continue to evolve toward offering highly personalized experiences Banks will leverage customer data and advanced analytics to provide tailored financial products, services, and recommendations based on individual needs and preferences.

Although Artificial Intelligence (AI) and Machine Learning (ML) have different definitions, they both aim to assist humans in automating and improving tasks that are frequently carried out manually While ML refers to the process of letting computing systems learn on their own to get better through repetition, Al is more broadly defined as a computer performing tasks that need human intelligence In self-driving cars, for instance, AI refers to a computer that controls the vehicle, while ML enables a computer to optimize driving through repetition These two technologies complement each other Customer service, provided by chatbots or voice-enabled computer-based customer representatives, would be the most immediate use of AI and ML in the financial services industry.

Distributed Ledger Technology/Blockchain: Distributed Ledger Technology (DLT) is a database of asset transactions that are shared and stored in multiple locations at the same time There is no centralized administrator or storage location When a ledger is updated, each machine in the network votes by consensus to determine which copy is correct, and other machines update their own copy of the ledger The adoption of blockchain technology and cryptocurrencies are expected to increase in the digital banking sector. Blockchain can improve security, transparency, and efficiency in areas such as payments, identity verification, and cross-border transactions Banks may also explore offering cryptocurrency-related services to meet evolving customer demands.

Internet of Things (IoT): The integration of IoT devices with banking services will expand Connected devices, such as wearables and smart home systems, can enable convenient and secure banking interactions, including making payments, monitoring financial health, and managing accounts.

Fintech collaborations with traditional banks are on the rise, as banks seek to leverage fintech's innovation and adaptability Conversely, fintech companies benefit from banks' established customer base and regulatory expertise This synergy allows both parties to enhance their offerings and stay competitive in the rapidly evolving financial landscape.

Financial Inclusion: Digital banking has the potential to enhance financial inclusion by reaching unbanked and underbanked populations Technology- driven solutions like mobile banking, digital wallets, and microfinance platforms can provide financial services to individuals who have limited access to traditional banking.

By applying these lessons learned from the Asian experience, Vietnam can accelerate its digital banking development and reap the benefits of financial inclusion, enhanced efficiency, and economic growth.

In conclusion, Chapter 3 highlights the importance of learning from successful digital banking experiences in Asia and provides valuable insights and recommendations for Vietnam By implementing appropriate strategies, fostering collaboration, and prioritizing customer needs, Vietnam can effectively navigate its digital banking journey and unlock the full potential of digital financial services for its citizens and economy.

In conclusion, this master's thesis has explored the development of digital banking in Asia and the lessons learned that can be applied to Vietnam Through an in-depth analysis of the digital banking landscape in various Asian countries, valuable insights have been gained that can guide Vietnam in its digital banking journey.

The experiences of countries such as China, Singapore, and South Korea have highlighted the importance of embracing digital transformation, enhancing financial inclusion, collaborating with fintech startups, focusing on user experience and security, developing a robust regulatory framework, investing in digital skills and literacy, and promoting public-private partnerships.

By incorporating these lessons learned, Vietnam can pave the way for a successful and sustainable digital banking ecosystem This includes leveraging digital technologies to provide convenient and accessible financial services to all segments of the population, particularly the underserved It also entails fostering collaboration between traditional banks and fintech startups to drive innovation and expand service offerings.