The first batch of licensees were granted to applicants with experience in running a deposit-taking and lending business.
When Hong Kong officially granted the first batch of virtual banking licenses to Livi VB, SC Digital Solutions and ZhongAn Virtual Finance, it signalled a long overdue step to bring the city’s traditional financial services industry into the digital age.
Two of the approved players in the first batch are backed by major banking players that forged strategic partnerships with established merchandising and telcos to cash in on first-mover advantage. Livi VB is a co-owned entity by Bank of China (Hong Kong) whilst SC Digital Solutions is the result of a joint venture between Standard Chartered, HKT, PCCW and Ctrip. The collaboration will allow new virtual banks to offer e-commerce related services and customer experiences different from their parent incumbent banks, Sonny Hsu, VP-senior credit officer, financial institutions group at Moody’s Investors Service said in a note.
Bank-backed virtual banks can also reap the benefits of an already significant customer base and the associated savings of a branchless retail network especially since Hong Kong has some of the priciest commercial and retail rents in the world.
“With the cost efficiency of running a totally branchless business, they should also be able to offer extremely good rates to attract new customers and retain their existing base. They will also have the advantage of knowing first—hand what traditional banking is doing right and what are the existing customer pain-points,” Anthony Chiam, regional practice leader, global business intelligence - Asia & Australia at J.D. Power, said.
Only ZhongAn Virtual Finance has no backing from a big banking player although it can count on the formidable support of securities company Sinolink and online P&C insurer ZhongAn Online which has extensive experience in running a web-only business.
“This venture will enhance ZhongAn’s franchise and accelerate its expansion outside of China. However, it will also put pressure on its capital because of the potential capital needs associated with supporting the virtual bank’s growth and infrastructure investments. Additionally, ZhongAn has a limited operating track record in the banking industry, which indicates there could be a higher execution risk compared with the other two virtual banks,” said Moody's Hsu.
Other virtual banking applicants include online lending platform WeLab, a consortium led by CASH Financial Services Group, a joint venture by Bank of East Asia, Airwallex, and Sequoia Capital China.
Despite the massive disruptive potential of virtual banking, the first batch of applicants signified that Hong Kong is treading carefully by opting for big banking players that have a track record of robust risk management and compliance controls and experience in deposit-taking and lending.
“In the journey to increase competition, for the benefit of the customer, they do not want to create disarray in the banking sector by granting a license to an inexperienced operator,” said Chiam. “Although these new players will have a part to play in enhancing competition in the industry, they must focus first on adding value to customers instead of disruption for disruption’s sake.”
The market is also waiting with bated breath to see how the public reacts to the three players that will be launching their virtual offerings within the next six to nine months before opening the floodgates to fintechs, telcos and stored value facility (SVF) holders seeking to capture the highly-banked Hong Kong market.
“There will be a period of test and learn. With a population of just over 7 million, time will tell if there is room for more players in the industry,” said Chiam.
The prize is a market that has expressed growing dissatisfaction with existing retail banks with 57% of customers in Hong Kong ready to try out virtual banks as they lament growing problems with their existing e-banking platforms, according to a survey from J.D. Power.
Virtual banking storm
With no need to set up branches, virtual banks can deliver the full suite of retail banking services like loans, deposits and payment services to individuals and small businesses through an app or a website.
The Hong Kong Monetary Authority (HKMA) subjects virtual banks to the same prudential regulatory requirements with minimum capitalisation of HK$300m and deposit insurance capped at HK$500,000 per eligible account. Virtual banks are also required to produce an exit plan in the case of shutdown so they can unwind their business and seamlessly turn over customers without causing much disruption to the financial system.
The HKMA Is processing five other virtual banking applications in addition to the three new virtual banks that have already been issued. The virtual banking initiative is only one of seven efforts spearheaded by the HKMA to transition to a new era of Smart Banking. This includes the launch of real-time fund transfer system called Faster Payment System, enhanced Fintech Supervisory Sandbox and the rollout of a policy framework on open API. The regulator is also strengthening closer cross-border fintech collaboration and enhancing research and talent development.
“We expect to see more inclusion across the financial services customer base. Consumers will undoubtedly be the winner as they will be more empowered than ever before,” concluded Harjeet Baura, PwC Hong Kong Financial Services Consulting Leader.
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