Hong Kong virtual banks now a reality

Hong Kong authorities will reportedly soon issue digital banking licenses to six different companies in a bid to shake up the former British crown colony’s financial sector. The lucky six include Chinese internet banking heavyweights Ant Financial and Tenpay, Zhongan Insurance (in a tie-up with Citic), Hong Kong Telecom, smartphone maker Xiaomi, and England’s Standard Chartered Bank.

This move is long overdue for a city that brands itself as a fintech hub but has yet to incorporate fintech into the existing financial system. After all, it’s hard to be a regional fintech center if the same incumbents that dominated the industry a decade ago – before anyone had heard of fintech – still do today.

Data from Goldman Sachs cited by The Financial Times show that HSBC, Standard Chartered, Bank of China and Hang Seng dole out 2/3 of retail banking loans in Hong Kong. Those four banks account for even an even larger piece of the credit card and retail mortgage market.

Hong Kong’s economy has long specialized in cartels – not only in banking, but real estate, logistics, supermarkets, and more. The anti-competitive nature of these industry segments gives one pause about the city’s allegedly ultra-free economy. Yes, it’s easy to set up a business, the tax regime is favorable, and there’s the rule of law. Just don’t try to muscle in on the cartels’ territory.

A lack of competition in Hong Kong’s banking sector has led to low customer satisfaction and a desire for change.  J.D. Power’s 2018 Hong Kong Retail Banking Survey found that 57% of Hong Kongers welcomed virtual banking. 35% of respondents to the survey reported having trouble accessing their bank account online, while 56% had trouble with their mobile banking app. 

Analysts say that the virtual banks have a key advantage over incumbents: As software platforms, they are nimbler. Virtual banks will arrive on the scene without clunky legacy IT systems or costly retail networks. That could result in lower fees for their customers.

Crucially, the virtual banking licenses will allow the new arrivals to engage in the same businesses as traditional banks. By not sheltering incumbents from the upstarts, the Hong Kong Monetary Authority is sending the right message: Free-market competition is the best way to spur innovation in the financial sector and improve customer satisfaction. We don’t expect Hong Kong’s retail banking giants to sit still while virtual banks eat their lunch.