Hong Kong approves virtual banks in sector shake-up

HSBC and Standard Chartered Bank are among banks most at risk from the competition posed by virtual banks, according to Goldman Sachs Group. About 30 per cent of Hong Kong's banking revenue is up for grabs.
HSBC (above) and Standard Chartered Bank are among banks most at risk from the competition posed by virtual banks, according to Goldman Sachs Group. About 30 per cent of Hong Kong's banking revenue is up for grabs.PHOTO: AGENCE FRANCE-PRESSE
HSBC and Standard Chartered Bank are among banks most at risk from the competition posed by virtual banks, according to Goldman Sachs Group. About 30 per cent of Hong Kong's banking revenue is up for grabs.
HSBC and Standard Chartered Bank (above) are among banks most at risk from the competition posed by virtual banks, according to Goldman Sachs Group. About 30 per cent of Hong Kong's banking revenue is up for grabs.PHOTO: AGENCE FRANCE-PRESSE

HONG KONG • Hong Kong's traditional banks are set to face one of their biggest challenges yet: a new breed of financial technology firms estimated to snare as much as 30 per cent of their revenue.

The Hong Kong Monetary Authority (HKMA) has granted three virtual bank licences and is processing five more, deputy chief executive Arthur Yuen said in a briefing on Wednesday. Firms that got the permits have partnered with Standard Chartered Bank, BOC Hong Kong Holdings and Zhong-An Online P&C Insurance and they intend to begin operating within nine months, Mr Yuen said.

The city is playing catch-up with regional economies, notably China and India, by allowing fintech to shake up retail banking. A reliance on cash and strong household savings had yielded high profitability for a clutch of lenders and kept the industry concentrated. That could see the sector vulnerable to disruption as competition gets fiercer.

"This will help foster fintech development in Hong Kong and promote financial inclusion," the Hong Kong Association of Banks said in a statement.

"The industry can leverage this opportunity to develop new business models."

Virtual banks are similar to traditional retail banking services in that they will be able to accept deposits and give out loans. They are not expected to set up physical branches. Analysts at Citigroup estimate that around 10 per cent of existing banks' revenue is at risk over the next decade.

Most at risk are HSBC Holdings, Standard Chartered, Hang Seng Bank and BOC Hong Kong Holdings, which account for 66 per cent of the retail loan market and 77 per cent of mortgages, according to Goldman Sachs Group. About US$15 billion (S$20.4 billion), which is 30 per cent of the city's total banking revenue, is up for grabs, Goldman's analysts, led by Mr Gurpreet Singh Sahi, estimated last September.

"There will be some competition, but we think the market can comfortably absorb this kind of competition," Mr Yuen said. "Virtual banks have a different business model, so one could say that, to some extent, they are creating new business opportunities in the market."

The payment space would be the first battle ground between banks and technology firms in the city, the Goldman report said. Hong Kong's value of cash transactions accounted for about 17 per cent of gross domestic product in 2016, leaving the city behind only Japan among major economies, according to a report published by the Bank for International Settlements last year.

Virtual banking was one of the fintech initiatives announced by the HKMA in 2017, which also included a digital payment system that uses mobile numbers and e-mail addresses for payments. The faster payment system had more than two million registrations by the end of last year and handled transactions worth HK$104 billion (S$18 billion) since it started last September, according to the de facto central bank.

Digital wallets - intermediaries between a consumer's phone or tap card and traditional bank account - have also seen a steady increase in use. The transaction value of such accounts increased about 9 per cent to HK$45 billion in the third quarter from three months earlier, HKMA data showed.

"It will be a great, great thing for Hong Kong to have these virtual banks operating," said Mr Sumit Indwar, a partner at Linklaters in Hong Kong. "It's a real statement of intent by the regulators to show that Hong Kong is an innovation-friendly city."

Mr Keith Ng, a relationship manager who works in corporate banking and has been using HSBC for more than 10 years for its deposits, foreign exchange and pension services, said he would love to try and open a virtual bank account, as long as it is secure.

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A version of this article appeared in the print edition of The Straits Times on March 29, 2019, with the headline 'Hong Kong approves virtual banks in sector shake-up'. Print Edition | Subscribe