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Analysis : Hong Kong’s digital banking push pits tech newcomers against old-guard lenders

At least a dozen banks, fintechs and telecom firms are lining up to get a piece of Hong Kong’s retail and small business banking market as the regulator prepares to award the former British colony’s first online-only banking licences.

Bidders hoping to challenge the dominance of HSBC and its local rivals, Bank of China (Hong Kong) and Standard Chartered, include China’s Ant Financial, Tencent, and Ping An Insurance, several people familiar with the process said.

StanChart has announced it will be applying, as have the Hong Kong telecoms operator HKT Trust and HKT, and fintech companies like WeLab Holdings and TNG Wallet.

The deadline for the first batch of applications is Friday, and others expected to apply include Bank of China (Hong Kong), Chinese smartphone maker Xiaomi and online insurer ZhongAn, said the people and local media reports.

On offer is access to a rich banking market where many consumers are unhappy with their current options, according to research last year from Accenture. The research showed that only 53 percent of consumers in Hong Kong are satisfied with their banks, compared to 88 percent in the United States, and 72 percent in Australia.

Small firms, who have long complained about the difficulties of opening bank accounts in Hong Kong, will be one target of the new online lenders, with small loans, foreign exchange and payment services among those on offer, the people said.

The potential prize is enormous. HSBC alone made profits of $1.4 billion from its Hong Kong retail banking and wealth management operations in the second quarter, accounting for 80 percent of its global retail banking revenue.

HSBC is not expected to apply for a separate digital banking license in Hong Kong, as the bank is focussing on bolstering its core services using digital technology, two of the people said.

In contrast, StanChart has decided that a separate digital banking platform will help it break away from its global and legacy technology systems and allow it work with start-ups to tap new clients, they said.

The established banks’ entrenched position in Hong Kong is a major challenge for the new licensees, whose road to profitability could be long as they work to build out their product offerings and cope with high compliance costs.

“There is a large majority of customers in major markets who are willing to do banking with different models, and digital banks have a great opportunity to tap into that,” said Fergus Gordon, who leads Accenture’s Asia-Pacific banking practice.

“The challenge for the new entrants, however, will be to build up a meaningful customer base quickly and generate return on investments over the next two to three years. It’s easy to go off the risk-reward yield curve in this push.”


While a virtual bank, as the digital lenders are to be called, must have a capital base of HK$300 million, it will need to make large investments in customer background and anti-money laundering checks, as well as cyber security, Gordon said.

The new applicants will also have to get used to a different scale of regulation.

“For tech companies, being within the HKMA’s reach and having to think about capital and liquidity requirements is something with which they’ll need to get comfortable,” said Hannah Cassidy, a partner at law firm Herbert Smith Freehills, referring to the Hong Kong Monetary Authority.

The HKMA says it has received expressions of interest from more than 70 companies, some of which have put in applications. It did not mention any names.

The regulator hopes to start giving licences towards the end of this year or the first quarter of next year, it told Reuters, adding that it would supervise virtual banks in the same way as conventional lenders.

While the HKMA did not comment on how many licenses it was likely to grant in the first phase, three of the sources said it was not expected to give more than three in the near-term to ensure an orderly roll-out.

All the people declined to be named as they were not allowed to speak to the media on the subject.

Ant Financial, Ping An, Xiaomi, and ZhongAn declined to comment on their virtual banking plans. Tencent did not respond to requests for comment.

A Bank of China (Hong Kong) spokesperson referred Reuters to a comment from Zhong Xiangqun, the bank’s chief operating officer, at a press conference Wednesday: “BOCHK is actively studying the development of virtual banking. There is no information to be disclosed at this stage.”

HSBC said digital delivery had been an integral part of its strategy, and it continued to invest in those areas. StanChart did not immediately respond to request for comment.

“It is a little early to say, but with some significant names in the tech industry reputed to be applying this could transform Hong Kong’s retail banking sector,” said Charlotte Robins a partner at Allen & Overy.


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