Hong Kong Decides to License Virtual Banks

Traditional Banks in Hong Kong will soon be faced by a different breed of competition. This will be as a result of the rise of virtual financial firms.  The new technologically driven banks are expected to take up to 30% of the revenue that is currently being enjoyed by the brick and mortar financial institutions.

According to recent reports, the Hong Kong Monetary Authority finally agreed to license three virtual banks, and it is said that there are 5 more in the pipeline. This was confirmed on Wednesday by the institution’s deputy chief executive officer, Mr Arthur Yuen.

The firms that have managed to successfully obtain the licenses intends to be operational in about 9 months. They have also partnered with BOC Hong Kong Holdings, ZhongAn Online P&C Insurance Co as well as Standard Chartered.

As Hong Kong begins to embrace the idea of virtual banking, its other regional counterparts, which include India and China are steps ahead, mainly due to their earlier efforts towards opening doors for Fintech in their respective retail banking.

The Hong Kong Association of Banks applauded the move to license virtual banking by saying that it would help to promote the overall financial inclusion and stimulate Fintech development in Hong Kong. In their statement, the association further indicated that the industry could leverage this opportunity to come up with new business models.

Virtual banks are not much different from traditional banks. In fact, they offer retail services that are quite similar; these include accepting deposits and giving out loans to their customers. However, they will not be expected to possess physical bank branches.

Experts at Citigroup weighed in on the emerging issue and pointed out that about 10 % of the total revenue that traditional banks are currently generating will be at risk for at least the next decade.

The banks that are exposed to the most risk will include Standard Chartered, BOC Hong Kong Holdings, and Hang Seng Bank. These institutions are said to as of now, account for 66% of the entire retail market in Hong Kong as well as an astonishing 77% of mortgages. This is according to statistics from Goldman Sachs Group.

In September last year, Goldman Sachs analysts under the stewardship of Gurpreet Sigh Sahi estimated that 15 billion US dollars, which are equivalent to 30% of the city’s total revenue were at stake for the traditional banking sector.

As much as there will be immense competition, Yuen said that Hong Kong city has the capacity to absorb it. He also stated that virtual banks will bring different dynamics in the banking sector due to their unique business model. However, this kind of dynamism will end up creating new business opportunities in the market.

The Goldman Sachs report proceeded to point out that the payment scene is likely to be the first ground for competition between the virtual and traditional banks. The value of transactions accounted for around 17% of Hong Kong’s G.D.P in 2016, thus leaving the city lagging slightly behind Japan, among other large Asian economies. This was according to research that had been carried out by the Bank of International Settlements in 2018.

Virtual banking was one of the outstanding Fintech ingenuities promulgated in the year 2017 by the HKMA. This initiative also involved a digital payment system that uses email addresses and mobile phone numbers for the transactions. The response to this service was enormous, with over 2 million registrations having been done by 2018. In addition, the payment system carried out transactions that amounted to over HK $100 billion since its inception in September last year. This was according to statistics released by the de facto central bank.

Sumit Indwar, who is a partner at the Linklaters in Hong Kong, commended the initiative to license virtual banking. In his statement, he said that this kind of banking was an exemplary addition to the city. He also argued that the regulators made a great decision to show that Hong Kong is indeed an innovation-friendly city.

As plans to license more virtual banks continue to be laid out, people are expressing their desire to be part of the digital banking experience. Mr Keith NG, who has been working in corporate banking for quite a while is among those who can’t wait to open a virtual account as long as it will be safe.