Virtually ready: Digital-only banks set to open in Hong Kong

Hong Kong, China – Kaki Law lives in Shanghai, but has bills to pay in his native Hong Kong. Like many people in his situation, he pays them online.

“I do all my banking remotely and I hate wasting time in bank branches,” Law, a director at design and technology consultancy R/GA, told Al Jazeera. He uses a combination of digital banking services and mobile apps.

As most Hong Kongers do, Law relies on one of the territory’s top financial institutions. Until recently, all mobile banking services in Hong Kong were provided by established lenders with large branch networks. That is now changing.

Last month, Hong Kong’s main financial regulator, the Hong Kong Monetary Authority (HKMA), issued the territory’s first four licences for so called virtual banks – financial service providers with no physical branches. It issued another four in May.

These developments are part of a global trend that is giving consumers new ways to carry out financial transactions, something that has until recently been dominated by large banks, and in the process forcing those institutions to reconsider their plans for future growth.

In Hong Kong, these new services offer customers the ability to transfer money to one another and make payments to shops and restaurants through smartphones using square barcodes known as QR codes. But the licences also allow these companies to take deposits and make loans.

The nearly universal usage of smartphones and Hong Kong’s fast mobile internet connections give virtual bank operators the ability to offer financial services without having to run expensive branch and ATM networks.

In the process, they want to break the stranglehold that big banks, cash and ubiquitous Octopus stored value cards have on the market for everyday transactions.

Banking on the internet

But doing so could prove tough for them; almost all of Hong Kong’s residents already have bank accounts and are wary of the risks associated with smartphone-based payment systems now becoming more common across the border in mainland China.

“For person-to-merchant transactions, there is the Octopus card. Bank auto transfers also take care of all the utility bill payments. So, I guess all in all, there hasn’t been an urgent need from the user side in Hong Kong for other institutions or products,” said Law.

The HKMA handed the first batch of licences to online lending platform WeLab and joint ventures involving Bank of China (Hong Kong), Standard Chartered Bank and mainland Chinese insurer ZhongAn Online. Many more could be coming; the regulator received 33 applications.

Meanwhile, a relatively small but growing proportion of Hong Kongers is using services provided by the giants of mobile payment on the mainland: AliPay and WeChat Pay.

For many in the financial services industry, the HKMA’s move to licence local mobile financial service providers is a welcome move. They have long complained that Hong Kong’s regulators have been too slow to take advantage of a rapidly growing sector, especially compared to neighbouring mainland China.

“The concept of virtual banks only started to take off in Asia recently as a booming [financial technology] sector and an increasingly tech-savvy customer base led authorities to ease ownership requirements for virtual banks,” said Carrie Leung, CEO of the Hong Kong Institute of Bankers. 

“In Hong Kong specifically, the emergence of virtual banks will further enhance the development of fintech and create more job opportunities for fintech specialists,” Leung told Al Jazeera.

On the mainland, mobile payment services AliPay, owned by Alibaba affiliate Ant Financial, and Tencent’s WeChat Pay dominate the sector, which recorded 120.3 trillion yuan ($17.6 trillion) in transactions in 2017, more than double the amount of the previous year, according to Chinese online audience measurement firm iResearch.

These services are also available in Hong Kong. But people have been slower to take to them here than on the mainland.

Only 30 percent of people in Hong Kong used mobile banking services last year compared to 78 percent in mainland China, according to the 2018 Hong Kong Retail Banking Satisfaction Study by marketing information services provider JD Power. But attitudes appear to be slowly changing. The firm’s 2019 survey shows 43 percent of Hong Kongers used their phones to carry out financial transactions.

One of the main reasons for this relative reluctance is that Hong Kong, unlike the mainland, has long had one of the most reliable retail banking systems in the world. Cash, credit cards and cheques remain the most popular payment options for many.

Financial services are a big part of Hong Kong’s economy. They accounted for 13 percent of the territory’s gross domestic product (GDP) in 2004, rising to nearly 19 percent in 2017 .

And a glance out over the city’s skyline gives even a casual observer an indication of the importance of banks in Hong Kong; the offices of HSBC, Standard Chartered and Bank of China dwarf everything around them.

Down on the ground, banks and ATMs also seem to be everywhere, with HSBC one of the most visible brands.

The World Bank ranks Hong Kong among the top 20 places in the world with the greatest access to financial services. More than 95 percent of the population had an account at a bank of some kind in 2017. In China, the percentage was 80 percent. In Indonesia, it was less than 50 percent.

The International Monetary Fund says there were more than 20 commercial bank branches for every 100,000 people in Hong Kong that year compared to less than 9 in China, although less than other developed markets – the U.S. has more than 31.

Standard Chartered, one of the lenders involved in the first batch of virtual banks, believes such services will become an integral part of Hong Kong’s financial landscape. It has teamed up with telecommunications companies PCCW and HKT, and travel services provider CTrip to form a joint venture called SC Digital.

Standard Chartered’s managing director and regional head of retail banking in greater China and North Asia, Samir Subberwal, says the new venture will open up new opportunities for the lender.

‘A new ecosystem’

“The partnership will enable us to create a new ecosystem across banking, telecom, entertainment and travel and seamlessly offer products and services that are personalised to customers’ circumstances, interests and needs,” Subberwal told Al Jazeera.

“We see this as an opportunity to explore new business models, and provide more appropriate and innovative services to different types of customers,” Subberwal said.

Virtual banks aren’t new. Among the first banks with no physical branches was the UK’s First Direct, which began operations in 1989 (when the Internet didn’t exist for most people) and is now owned by HSBC. It gave users the then-novel experience of being able to carry out financial transactions over the phone, day or night.

Another British pioneer in the field was Egg, an online-only institution launched by British insurance giant Prudential in 1998. It was sold off to Citigroup in 2007.

Today, companies like N26, Hello bank!, Monzo , and Revolut are growing rapidly across Europe where regulators are keen to allow startups to shake up an ossifying financial sector.

A thicket of state and federal regulations in the United States has slowed the growth of financial innovation there compared to Europe. But a report last year by the Treasury Department shows the government wants to help US financial startups catch up.

Among the more successful financial technology (fintech) ventures in Asia have been Japan’s SBI Sumishin Net Bank, which began operations in 2007, and South Korea’s nearly two-year-old Kakao Bank, which is reportedly considering a public listing next year.

In Hong Kong, the upcoming crop of virtual banks is hoping to take advantage of 5G mobile phone networks which promise to deliver vast amounts of data to (and from) smartphones and a galaxy of other connected devices.

Analysts say the new services will be popular among millennials and, worryingly, those who may not have been able to raise credit with more traditional banks, potentially raising the risk of customers defaulting on their loans.

“Evidence has shown that online finance platforms, such as peer-to-peer lending, have in some cases attracted a different type of customer, and in some cases customers with higher risk profiles,” David Broadstock, deputy director at Hong Kong Polytechnic University’s Center for Economic Sustainability and Entrepreneurial Finance, told Al Jazeera.

Mainland China is still trying to rein in so-called shadow banks, small, unlicenced companies that offer credit at frequently exorbitant rates.

Virtual bank heists

Another factor keeping many Hong Kong consumers from embracing virtual banking is security. Executing financial transactions online carries the risk of cyberattacks, for both institutions and their clients.

Virtual banks work by getting consumers to share their financial data with them and third parties using so-called open application programming interfaces.

A survey published last August by the Hong Kong Internet Registration Corporation showed that 53 percent of respondents “expressed apprehension about mobile payments, especially regarding cybersecurity and personal privacy issues,”

But that survey and others, such as one carried out by consultancy firm Accenture earlier this year, also show that a majority of consumers in Hong Kong are keen to embrace virtual banking if it can be made reliable and safe.

In fact, the Accenture poll shows Hong Kongers are more willing to share their financial data with tech firms providing financial services than people in Australia or the United Kingdom.

Analysts say the risks for these startup institutions can be huge.

“While a successful cyberattack is a serious matter for an established traditional bank, it could strike a fatal blow to the reputation of a virtual bank,” KPMG, another large consultancy firm, said in a report last year on Hong Kong’s emerging financial sector.

Despite the risks, tech firms and financial service providers have smelled the potential for major rewards in Hong Kong as it opens the door to virtual banking and are piling in.

There are similar moves underway elsewhere in Asia too.

Central bank officials in Singapore and Malaysia have recently told media that they are studying whether to issue licences for virtual banks.

But already companies like ride hailing firms Grab, based in Singapore, and Indonesia’s GoJek offer mobile payment services that are accepted by a growing number of shops, restaurants and other vendors around Southeast Asia. Malaysia-based Fave, an online and mobile retail discount service, now also has its own electronic wallet that’s becoming more widely accepted.

While Hong Kong’s physical landscape, dominated as it is by the offices of big banks, is unlikely to change much in the coming years, its financial scene could look very different.