A Skeptical Look at HK’s 8 New Virtual Banks*
By: Sukrit Khatri
Tags: Fintech, Banks, Hong Kong, Digital Transformation, Finance

The New Entrants

Given this landscape, it was intriguing when HKMA invited applicants for virtual banks with a two pronged goal — “to promote fintech and innovation in Hong Kong to offer a new kind of customer experience” and “to promote financial inclusion to target retail segments and SMEs”. While the former is an obvious area of expertise for FinTech-oriented virtual banks (VBs), the latter seems a bit harder to understand, or breach, in this author’s opinion, given the hold of licensed banks on SMEs and retail banking.

Nonetheless, below are the Fab 8 that will look to challenge the domination of the 22 pre-existing banking behemoths.

Ant SME Services (shareholders: Ant Financial)

Infinium Limited (Tencent, ICBC Asia, Hillhouse Capital and HKEX)

Insight Fintech (AMTD and Xiaomi)

Ping An OneConnect (Ping An Group)

Livi (Bank of China HK, JD Digits, and Jardines)

SC Digital Solutions (Standard Chartered Bank, HKT, PCCW, and Ctrip)

WeLab Digital (WeLab)

Zhong An Virtual Finance (ZhongAn Online and Sinolink)

Many of these are collaborations between financial firms and technology firms, eg, Livi, SC Digital and Infinium, while others firms are going solo (eg, PingAn, Insight, Ant SME and WeLab). Though none of these VBs have announced their business models yet, this author feels a sense of cautious optimism about this whole scenario.

First, the Optimism

1. Let there will be innovation

If you are a customer, it is a time to rejoice. The next few months are likely to see new banks lining up to offer customers easier account opening, cash giveaways to restaurants and supermarkets, probably new credit card deals with other startups or more miles (and cash back), and maybe more favourable credit lines to acquire assets (houses/cars etc.)

In short, happy days!

This innovation might not be restricted to the VBs alone — as incumbent banks will also compete to hold on to their customer base. This will necessitate spending on their digital banking prowess (‘digital transformation’ for those into buzzwords)— to compete with the new entrants. In essence, HK’s 7 million+ bank customers can expect the next 12–24 months to see improvement in customer experience, and hopefully a host of new goodies. And that, is a huge positive.

2. More hiring

Branch-based retail banking has been notoriously constrained by high staff costs, even though banks’ profit margins have outweighed costs (especially for the bigger banks). However, as part of a new norm, one can expect many medium-to-senior level retail bankers will be joining the new VBs — setting up their middle and back-end operations (including KYC / Compliance / AML practices), helping with product expertise and client base.

Some, like WeLab, have publicly announced plans to hire 100 more people in 12 months, while SC Digital (65% owned by Standard Chartered) also plans to hire 40 more bankers. Interestingly, hiring could go the other way as well, as established banks spruce up their digital banking.

This hiring spree will depend a lot on banks’ focus — from product (eg, SME, or retail banking) or technology (eg, FinTech, Digital transformation) to geography (eg, Greater Bay Area).

With a decade of lay-offs behind us, this offers an unexpected bright spot for HK’s financial landscape, and its FinTech-savvy university graduates.

3. The opportunity set

Despite averaging about 2.5 mobile phones per capita, Hong Kong ranks very low in daily mobile banking penetration of 14% vs. 20% for global average. While some of it is due to demographics and mindset (more on that later), other reasons have to do with the poor mobile banking experiences thrust on the customers.

That said, this author has noted a significant improvement in HK banks’ app and mobile user experience over the past two years, especially for HSBC, DBS and Standard Chartered, all of whom have invested heavily to offer on-demand banking solutions to its demanding customer-base.

That said, branchless banking remains quite a challenge in HK. While digital and branchless banking is common in many parts of the world, HK remains a serious laggard due to legacy issues, customer demand for high-touch banking and an over-dependence on paper-based workflow. Even a behemoth like JP Morgan mentioned in their annual investor day report (in February 2019) it has the ability to shut down 75% of its US branches in 5 years or keep them open for decades. But, HK banks have not shown that sort of flexibility.

That is about to change.

With VBs offering a new business model to run operations and service customers, one can expect brick-n-mortar banks to follow suit (albeit in a few years), and hopefully, utilise their advanced digital banking prowess to reduce costs of running a branch, without sacrificing on service quality.

4. Better customer understanding

One of the first questions I used to ask bank CEOs (in my avatar as a banks research analyst) was, “How much do you know your customer?”, and they would often answer in numbers — we have x% product cross-selling rate, or we help y% of businesses in Pearl River Delta, etc . Many of these were top-down data sets, with clear limitations on how much they actually ‘knew’ their customers.

To a mildly tech-enabled banks analyst this seemed like a missed opportunity! Established banks’ analytics arms have so much information they can concur from just one part of their customers’ lives — finances. Think about it, what information can a financial report tell about your life ?

When and where you eat/drink/shop,

How much you spend on travel, clothes, necessities and education,

When do you get your salary and how it track against peers,

What are your recurring expenditures say on school tuition, rents, travel etc.

If brick-n-mortar banks wanted, or were allowed to (by regulators), or had the right technology to do it, they could have harnessed the power of ‘big data’ before the foray of tech firms in the space! Think of all the great products a bank could have created for its customers — differentiated service for differentiated pricing— at the click of a button!

And that is the opportunity that VBs will try to explore, at least the tech-enabled ones, eg, Ant SME and Infinium. These companies know their customers inside-out, from their habits, to their movements and behaviour patterns. That is a massive boon for VBs that can harness knowledge of customers’ lifestyles — from social media, P2P payment patterns and taxi or supermarket spendings — while cross-selling financial products.

In essence, adding a financial engine on top of all this data set is a gold mine of opportunity. And curiously, this opportunity is welcomed by both sides of the market, with consumers happy to bank with tech firms, even though their privacy is usually tossed out of the window.