VIRTUAL BANKS: Autonomous Research's report fleshes out the upcoming battle between virtual banks and HSBC in Hong Kong

This week Autonomous Research published a deep dive report regarding the introduction of eight new virtual banks in Hong Kong. The report specifically details the impact such a move will make on Hong Kong's lucrative banking sector, and the extent to which these virtual banks pose a long term threat to the dominant player HSBC.

For some context, The Hong Kong Monetary Authority (HKMA) launched its seven Smart Banking Initiatives back in 2017. One of the more prioritized initiatives was the facilitation of new virtual banks, in which eight new licences were awarded to vrtual banks between March and May of 2019. The recipients of these licences included Livi VB, SC Digital Solutions, ZhongAn VF, WeLab Digital, Ant SME, Fusion Bank, Insight Fintech, and OneConnect. All of whom are expected to launch in late 2019/early 2020. Interestingly, each of these virtual banks has backing from major players in the world of finance, technology and telecoms. Most virtual banks in other geographies such as Revolut, N26, Monzo, and Banco Inter have not enjoyed such backing; certainly, there has never been such a confluence of players simultaneously vying for new market share.

Historically, HSBC has been successful to respond to the influx of virtual banks in the markets it operates. A good example of this is the launch of a digitally native mobile payment platform called PAYM, which is a collaboration between HSBC and 14 other banks and building societies within the UK. Additionally, HSBC's latest mobile peer-to-peer payments system PayMe, has already attracted over 1.5 million Hong Kong-based customers since its inception, and seeks to challenge the likes of Tencent's WeChat Pay and Ant Financial's AliPay, among others. Whilst the HKMA is said to not expect the virtual banks to take a significant share of deposits from HSBC or other established lenders in the short term, the bank is still taking necessary measures to counter the enhanced competition these virtual banks will bring to the market. Such measures include (1) scrapping the monthly fee for customers with deposits below HK$5,000, as well as (2) scrapping the associated charges faced by some smaller depositors, such as counter transaction fees.

We can speculate how the throw of the dice will lie for Hong Kong's banking future, however, one thing that we are certain about is that the goal of these virtual banks (at least initially) should be to understand how to market to and serve the next generation of customers (underbanked) i.e., Millennials in relation to their competitors, then customer acquisition costs are likely to rise and the digital model will become more competitive as servicing costs commoditize at a cheaper price point. We have already seen what happens when incumbent bank-backed neobanks use apps as digital channels in an attempt to capture a broader and younger client base through edgy and innovative user experiences tied to traditional financial products -- JP Morgan's Finn became a victim of this approach which eventually resulted in its demise. Wells Fargo's Greenhouse, RBS's Mettle, and any of the eight listed virtual banks could face a similar fate, should their incumbent parent institutions fail to acknowledge digital as more of a transformation strategy than a channel. This is why the immediate threat of these virtual banks in relation to a large incumbent like HSBC is concluded to be insignificant Autonomous' report.

If you wish to get access to the Autonomous Research report, please drop an email to Amy Davies (adavies@autonomous.com).

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