The Hong Kong Monetary Authority has issued licenses for eight virtual banks thus far. Since the minimum capital requirement to be eligible for a license is US$38.2 million, the banks are all made up of big companies rather than scrappy upstarts. They include joint ventures led by Standard Chartered and Bank of China, a joint venture led by online insurer ZhongAn, a consortium that includes internet giant Tencent as a main investor and one backed by Ant Financial.
Analysts do not foresee virtual banks immediately winning away deposit share from HSBC or other incumbents, but the Hong Kong-based lender's profit margins could fall if it must slash fees to remain competitive with the digital upstarts. Lacking physical branches with their large headcount and in Hong Kong, high rental costs, virtual banks can charge customers lower fees than traditional banks or in some cases waive them altogether.
Data from Goldman Sachs cited by The Financial Times show that HSBC's retail business is its most profitable division. HSBC and its subsidiary Hang Seng make a return on equity of 21% and 24% in retail, respectively, more than twice what the bank generates overall.
In a move to gird itself for the arrival of virtual banks, HSBC in June said it would go back to providing free basic banking services to 3 million of its retail customers. It is the first Hong Kong bank to make such a move, and almost certainly not the last. HSBC will also jettison the counter transaction fees it charges to small depositors.
HSBC's retail customers will be pleased. Since 2001, the bank has been charging small depositors HK$50 a month if their balances fall below HK$5000. Analysts say the monthly charge has been seen as a penalty on some of HSBC's most loyal customers.
HSBC is even waiving fees for wealthier clients, such as its popular HSBC Advance accounts, which currently charge HK$120 a month if the total deposit and trading volume falls below HK$200,000 (US$25,550).
In an interview with The Financial Times, Kevin Martin, HSBC's Asia head of retail and wealth, said that the bank was prepared for the arrival of virtual competition, and the decision to preemptively scrap unpopular fees before the eight internet banks enter the market - it could happen as early as November or not until the first quarter of 2020 - is a wise one.
Martin pointed out that in 2017 HSBC strengthened its digital offerings with the digital wallet PayMe, which allows consumers in Hong Kong to send money to each other in small amounts. PayMe has since built up a user base of about 1.5 million.
Is PayMe likely to be sufficient to stave off competition from virtual banks backed by Ant Financial and Tencent? Perhaps. Such entities will not hold quite the same appeal in Hong Kong as on the mainland, where the Chinese internet giants capitalized on a perfect storm of a sustained economic boom - and thus consistently solid consumer spending - the ascent of the mobile internet and a lack of other cashless options tied in with retail bank accounts. It's not as if any of China's leading traditional banks pre-empted Alipay and WeChat Pay with a handy digital wallet. HSBC is much quicker on the draw than any of the mainland banks.
Where the virtual banks will have an advantage in Hong Kong is with young, connected consumers. This market segment in Hong Kong will be less tentative about doing all of its banking with a startup that has no retail branches. HSBC would be wise to invest more in developing mobile banking services and consider establishing partnerships with fintechs who can help the banking giant strengthen its digital offerings.