What is a virtual bank and what does it mean for Hong Kong?
Back in the month of March, Hong Kong’s central bank HKMA started granting and rolling out virtual banking licenses in the city. As of last week, the city has 8 approved virtual banks, which was announced in three separate announcements thus far. The 8 banks are namely Ant SME, Insight Fintech, Infinium, Livi VB, SC Digital, Ping An One Connect, WeLab, and Zhong An Virtual Finance. It is expected that these virtual banks would be launching their services in 6 to 9 months from the time they receive their licenses. With these 8 new virtual banks, it puts the total number of banking licenses granted in Hong Kong today at 160.
This recent development has likewise led neighbouring city state Singapore, to announce that they are studying licenses for virtual banks as well in the near future, in particular whether to admit digital-only banks with non-bank parentage.
What exactly is a virtual bank and what is the fuss all about?
The central identity behind a virtual bank is that it is electronic. Just like traditional banks where customers can deposit, withdraw, and make transactions to others, a virtual bank allows you to do the same, except only via electronic and online channels such as your mobile phone or app, without once having to visit a physical branch at all. Most times, they would issue you a card as well that would deduct from your digital bank wallet, which would allow you to make payments just like any regular bank card out there. As the service is linked via an app, transactions into and out of your virtual bank account will mostly also be reflected on your app account.
While Hong Kong is new to the scene, there are many virtual or digital-only banks around the world already. In Europe and the UK, examples of high profile digital banks include Atom Bank, Starling Bank, Monzo, and N26, while in the US, there is Ally Bank. Closer in Asia, Korea has Kakao Bank, which is operated by the company behind the country’s largest chatting app, while China has some of the highest profile virtual banks, such as WeBank and MyBank, which are sponsored and controlled respectively by Tencent and Alibaba. Even in Latin America, digital-only banks have taken off, with the example of NuBank in Brazil, amongst others.
As can be seen, many of these new challenger banks did not come about solely from financial institutions. Rather, they originated from a technological perspective, whereby non-financial corporations can harness their technical expertise and datasets to varying degrees to offer a service that can conventionally only be provided by pure financial institutions.
In fact, leading up to the eventual granting of the virtual bank license in March this year, HKMA announced in May 2018 a revised set of existing guidelines to allow non-financial firms, including technology companies, to own and operate virtual banks via a locally incorporated holding company. This was a departure from the previous guidelines stating that non-financial corporations cannot own more than 50 percent of the virtual bank.
Therefore, Hong Kong’s virtual banks now are mostly a result of partnerships between tech startups and traditional financial institutions. Insight Fintech, for instance, is a JV between Xiaomi and AMTD Group, while Infinium is a JV between Tencent, ICBC, and Hillhouse Capital. Livi VB and SC Digital, too, are JVs amongst tech and traditional financial institutions.
Why move to virtual banking in the first place?
The move from brick and mortar to digital, along with a focus on customer experience, is at the heart of virtual banking.
Firstly, as they do not have to pay for physical locations, virtual banks more likely than not incur lower overhead expenses. They often provide less complex products with simpler processes, and can host less essential services by working with third-party vendors without having to build everything in-house, making their operations more efficient and cost-friendly. This can trickle down and benefit consumers through higher savings interest rates or lower transaction and customer service fees, as well as exchange rates when they make cross-border payments.
Additionally, unlike traditional banks that have legacy systems in place for almost all processes, such as the verification and opening of accounts that are greatly inconvenient and can take a long time, virtual banks harness technologies to do the same checks that can be processed at a much quicker level. For instance, N26 allows you to open and verify your account by having the individual present his/her national ID or passport through a video call with their staff.
The fact that most functions and processes can be done online through mobile is an especially attractive feature which saves customers lots of hassle. Monzo, for instance, allows you to simply freeze your card through their app, should you lose their card. This is in contrast to conventional banks which would require you to call up the bank and go through a series of verification questions before being able to disable your card. The same goes for re-activating your card.
In essence, the lower cost, simplicity, and customer-centricity of virtual banks make them ideal for the customer, while their entrance will also force traditional banks and financial institutions to become more competitive.
Especially in countries where a large part of the population have fallen through the cracks of the traditional banking infrastructure to remain unbanked or underbanked, virtual and digital-only banks encourage financial inclusion as they can reach out to this untapped group by riding on the wave of increasing internet and mobile phone penetration.
What then does this development mean for Hong Kong?
As mentioned earlier, the passing of the virtual banking licenses would hopefully create a more competitive banking landscape for Hong Kong, by providing more affordable and convenient financial services, while at the same time pushing traditional banks to improve their level of offerings. The development also bodes well for the fintech community in the city, as it provides a signal and is real action step taken by the regulators in becoming more receptive to new entrants and the adoption of new technologies.
However, critics have mentioned that the regulations could be more friendly, as these new entrants are still held to the same regulations as traditional banks and are required to compete on an equal basis to them. They would also need to have a minimum capital requirement of HK$300m (US$38m), which many neobanks and fintech startups would not be able to reach. This creates a huge barrier to entry, and ultimately favours only bigger players, preventing the landscape from becoming more competitive than it could otherwise be.
Nonetheless, as digital-only banks often outsource and work with other partners to cross-sell and offer services that would layer upon their core services, their entrance would possibly create more partnership opportunities and use cases for other fintechs in the city, further boosting Hong Kong’s status as a fintech hub.
At the end of the day, fintech is all about creating better and friendlier experiences that would benefit and impact end users – and that is what technology and innovation is really all about.