Hong Kong's virtual banks have their work cut out for them

Written by Kapronasia || February 09 2021

Two years ago, Hong Kong made fintech history in Asia as the region's first major economy to greenlight digital banks. As of the end of 2020, all eight of the banks were finally live. Political and covid-related disruptions had delayed their launch. Judging by the digibanks' marketing literature, they are poised to redefine banking in Hong Kong as we know it. The reality is more nuanced.

At first blush, Hong Kong is an ideal market for digital banks. A handful of big incumbents have long dominated the market. They have profited handsomely while not always providing stellar service. Customers want more choice, better service and digital convenience.

The virtual banks can provide those things, but that will not be enough to convince well-banked people like Hongkongers to switch over to the digital upstarts en masse. Firstly, it hard to distinguish what differentiates Hong Kong's virtual banks from one another. Chinese investors figure prominently in all eight, so if the goal is to tap the China market, take your pick. For instance, Xiaomi and AMTD back Airstar Bank; Ant Group owns Ant Bank; Tencent is invested in Fusion Bank; ZhongAn Insurance backs ZA Bank and so on.

Further, as China's fintech crackdown accelerates, it is unclear how virtual banks in Hong Kong will proceed with business on the mainland. Some are hoping to build networks in mainland cities part of the Greater Bay Area. At a minimum, they will have to proceed with caution until new regulations are finalized. 

It is possible that Hong Kong's virtual banks will attract customers who are already part of their respective ecosystems, such as ZhongAn Insurance or Tencent customers. The former might want to open an account with ZA Bank, the latter with Fusion Bank. Yet will enough customers want to bank primarily with the virtual banks? That seems like a tough sell once the high deposit interest rates and other promotional tactics die down. With that type of approach, the ecosystem must be extraordinarily sticky - like that of Kakao Bank - and the products must be strong revenue generators in order for the digital bank to grow sustainably. 

Meanwhile, Hong Kong's incumbent banks are moving to address the challenge from the upstarts, even if it means accepting lower margins. In November 2020, HSBC said it would scrap fees on 26 general banking and transaction services for 4 million account holders in Hong Kong, citing the pandemic-induced downturn. HSBC aims to "help customers who have been hit hard by Covid-19’s economic fallout," the bank said in a statement. That move follows its decision last year to waive minimum balance fees.

Hong Kong's incumbent banks also are feeling pressure to enhance their digital agility. While that may not be essential for older customers, it is for the highly connected youth market. HSBC is well aware of that point, which may explain why one of its executives recently told Nikkei Asian Review that "we already think of ourselves as a digital bank" from the perspective of retail transactions, as 95% of those are done online.

Smaller incumbent lenders, with comparably fewer resources, may struggle to execute their digital transformations. They could end up ceding market share to virtual banks.