BRANCHING OFF THE OUTLOOK FOR HONG KONG’S VIRTUAL BANKS THE AUTHORS BENJAMIN QUINLAN CEO & MANAGING PARTNER BCom (Hons 1) / LLB (Hons), Macquarie University EASHAN TREHAN CONSULTANT BEng (Computer Science and Finance) (Hons), University of Hong Kong SPECIAL THANKS We would like to extend a special thanks to the Executive Team and the Board of Directors at the FinTech Association of Hong Kong (“FTAHK”) for their support and guidance in the development of this report. CONTENTS FOREWORD 4 EXECUTIVE SUMMARY 5 SECTION 1: HONG KONG BANKING LANDSCAPE 7 SECTION 2: HONG KONG VIRTUAL BANKS 20 SECTION 3: CHALLENGES AHEAD 27 SECTION 4: NAVIGATING THROUGH UNCERTAINTY 36 SECTION 5: CASE STUDY – REVOLUT 63 SECTION 6: CASE STUDY – TINKOFF BANK 68 SECTION 7: INTERVIEWS WITH VIRTUAL BANKS 71 SECTION 8: EMERGENCE ACROSS SOUTHEAST ASIA 76 SECTION 9: VIRTUAL BANK SET-UP AND LICENSING 79 SECTION 10: CONCLUSION 84 SECTION 11: HOW CAN QUINLAN & ASSOCIATES HELP? 86 ABOUT FTAHK 88 FOREWORD As we approach the anniversary on 24th March1 with new innovations, such as HSBC’s fully of the launch of the first of eight new virtual online IPO (MTRC) in 2000; the IDEO designed banks offering convenience, competition, and Standard Chartered Breeze Mobile Banking innovation to individuals and small businesses, application in early 2010’s, and Bank of China’s The FinTech Association of Hong Kong would BoCPay application allowing QR payment in the like to thank Quinlan & Associates and welcome Greater Bay Area. These “incumbents” have this timely report focused on the outlook for proved remarkably nimble in launching PayMe, Hong Kong’s virtual banks. Mox Bank, and livi respectively to counter the new entrants from such TechFin leaders as Ant Hong Kong has been fortunate that a forward- Financial, Tencent, Ping An, and ZhongAn. looking regulator, the Hong Kong Monetary Authority, has facilitated a series of policy The combination of a forward-looking regulator (Smart Banking Initiatives – September 2017), and a culture of professionalism and innovation infrastructure (Faster Payments – September has nurtured Hong Kong’s retail and small 2018) and regulatory initiatives (new Stored business FinTech start-ups, with one ‘unicorn’ Value Facility Licences from August 2016 and (a privately held start-up worth over USD 1 Virtual Banking Licences) benefiting both new billion), WeLab. The WeLab Group sets a entrants and existing financial services notable precedent of expanding from Hong providers. Kong to Mainland China and into the region. Hong Kong is uniquely positioned as a global Following HKMA’s issuance of first the new financial centre bridging Mainland China (the Stored Value Facility Licences and then the world’s largest and most innovative TechFin eight Virtual Banking Licences, Hong Kong market) with the rest of the world’s well individuals and small businesses have established financial services organisations and benefited from new financial service providers global FinTechs. and improved existing banks’ offerings, heralding, just as the Hong Kong Monetary Hong Kong has a tradition of digital innovation Authority had hoped, a ‘New Era of Smart in financial services to support the community, Banking’. including the homegrown Octopus card, which has pioneered world-leading ease of use across In welcoming this report on the anniversary of transport payment and low value payments the arrival of virtual banks, the FinTech since the late 1990s. Octopus exported its Association of Hong Kong looks forward with system and expertise around the world, positive anticipation to further innovation, including the Netherlands, Dubai, and New collaboration, and benefits that such a vibrant Zealand. and dynamic FinTech community will bring. The three note issuing banks – HSBC, Standard Chartered, and Bank of China – have Board of Directors each responded to the rise of digital services FTAHK 1 ZA Bank, ‘Against the tide: ZA Bank launches ZA Savings Go recreating value for savings’, 24 Mar 2020, available at: https://www.hkma.gov.hk/media/eng/doc/other-information/ac-opening/20200323e1.pdf THE OUTLOOK FOR HONG KONG’S VIRTUAL BANKS 4 EXECUTIVE SUMMARY In today’s world, with a plethora of products and products and services and delivering an services being available at home at the touch of unrivalled customer experience. Given the a button, stretching from e-commerce to suppressed Net Interest Margin (“NIM”) streaming services, the banking industry has environment and challenges around limited been comparatively slow to innovate. In scale in the short term, we believe that a fee- addition to lengthy onboarding times, queuing in based income model that leverages customer long lines, and completing reams of paperwork data across various touchpoints is critical; both to access financial services and products, in terms of enhancing product personalisation customers have long had to contend with poor and driving cross-selling opportunities. remote servicing and a profound lack of personalisation. This “data advantage” held by the virtual banks may further be pressed home through the In recent years we have witnessed the formation of third-party partnerships with emergence of branchless banks, termed “virtual financial and non-financial service providers, banks”, aimed at accelerating innovation, allowing them to carve out a powerful closed improving customer experience, and making ecosystem that delivers end-to-end banking banking more inclusive. In 2020, Hong Kong and lifestyle solutions for their customers. In the saw the launch of eight virtual banks vying for a longer term, the Greater Bay Area may also slice of the city’s HKD 373.9 billion annual retail, open up considerable opportunities to tap into commercial, and corporate banking revenue China’s growing wealth pool, though the pool, which is currently being dominated by four accessibility of this opportunity will ultimately leading banks with a combined 62% and 54% depend on the evolution of the regulatory market share of deposits and lending, landscape between Hong Kong and Mainland respectively. China. The virtual banks have wasted no time in trying In addition to appealing to customers on the to appeal to local residents and businesses, front end, the importance of data privacy and including offering attractive deposit and savings cybersecurity for the virtual banks cannot be interest rates, lucrative reward schemes, and a underestimated in building credibility with seamless onboarding experience. While most customers. An appropriate cloud strategy – be of the virtual banks have deployed innovative it private, public, or hybrid – will also be critical forms of technology across the customer value in driving scalability and platform stability, as chain, we see a number of key challenges to well as accelerating product launches. In their ability to disrupt brick-and-mortar addition, the virtual banks will need to double incumbents, including a trust deficit felt by down their efforts on delivering an effective customers, profitability concerns, cybersecurity talent management proposition, given some and data privacy risks, talent management early warning signs form current and former shortfalls, and heightened competition from employees in relation to staff retention issues, both the new market entrants and incumbents. challenges around double- or triple-hatting, and the absence of a clearly defined career path. These challenges cannot be underestimated. To ultimately succeed, the virtual banks will need to put in place a clear strategy to win over customer hearts and minds – from creating maximum brand impact through well-targeted marketing campaigns to providing unique 5 BRANCHING OFF I © COPYRIGHT QUINLAN & ASSOCIATES As part of their build-out efforts, it will be Speaking with all eight of the virtual bank CEOs, important for the virtual banks to draw relevant it is clear that rapid customer acquisition and lessons from the success stories and failures in differentiated product development are key the West, especially Europe. Revolut, for priorities in coming years. Moreover, the use of example, serves as an exemplar of a bank that innovative technologies and the ability to has built out a non-interest income-driven leverage customer data will be critical in service proposition underpinned by a building a path to success. We believe that to subscription pricing model, while Tinkoff Bank ultimately win, Hong Kong’s virtual banks must may serve as a success story of a virtual bank craft a digital innovation strategy that provides that has created an end-to-end lifestyle customers with a distinctive value proposition ecosystem that goes beyond financial services focused on capturing a foothold in specific offerings alone. However, it won’t be as niches. By functioning as a more convenient straightforward as a carbon copy approach, and easier-to-use alternative than their brick- given the need to consider local market and-mortar rivals, we see a clear opportunity for dynamics in detail. the virtual banks to drive greater user activity and engagement, gradually winning over Looking closer to home, the virtual bank customer trust and, ultimately, wallet share. ecosystem in Southeast Asia is set to explode. In 2020, Singapore gave the green light for four While there may be lingering doubts around the virtual banks to launch in the city. A number of prospects of the virtual banks in Hong Kong in rapidly growing Asian economies, ranging from the long-term, we see a meaningful opportunity Malaysia to Indonesia and Vietnam,