Economic uncertainties hinder virtual banking development in Hong Kong
Traditional players unfazed even as digital newcomers offer higher interest rates
20 Nov 2020 | Darryl Yu

Despite all the buzz around the launches of virtual banks (fully digital banks) in Hong Kong, it will take some time before the industry is able to challenge incumbent institutions in the city. In fact, virtual banking competition in Hong Kong is off to a slow start as possible growth prospects are being hindered by economic uncertainties, according to a recent commentary from Fitch Ratings.

“The Hong Kong Monetary Authority granted eight virtual banking licenses in 2019, and most only began operations in recent months as a result of launch delays. This is unsurprising as we believe that new entrants are likely to exercise more prudence under a worsening economic outlook from the coronavirus and trade tensions,” states Fitch Ratings.

Virtual banks have sought to attract new customers by pitching their seamless onboarding process and higher savings interest rates. ZA Bank, Hong Kong’s first virtual bank, is offering a 1% interest rate for all customers, while Fusion Bank had offered a 5% rate for a three-month deposit until end-October 2020.

In the third quarter of 2020 alone, three virtual banks launched, namely Ping An OneConnect Bank (PAOB), Ant Bank and Mox Bank. Incumbents have generally welcomed new entrants into Hong Kong’s competitive banking market, which currently has an estimated 155 lenders.    

“When all the virtual banks launched, I think it was a good stimulus for all the banks in Hong Kong to move faster in all of their digital developments. We ourselves have been focusing a lot on our digital capabilities and aiming to provide a better service to our customers here,” shares a Hong Kong-based banking executive. “We believe that in the digital area, we need to make ourselves competitive, I don’t think virtual banks are bringing in new technology that other traditional banks are not already looking at themselves.”

While better customer experience and higher saving interest rates are attractive qualities for any virtual bank, the key test for the eight virtual banking institutions in Hong Kong is how they can create stickiness for their customers to use other kinds of banking services beyond deposit-taking, e.g., lending and wealth management. Already, the likes of ZA Bank and PAOB are offering lending services to their customers, with PAOB promoting a pre-approved loan offer of up to HK$2 million.

Nevertheless, with Hong Kong still reeling from the prolonged economic effects of social unrest in 2019 and Covid-19 in 2020, the jury is still out on whether the virtual banks will be a force to reckon with in the post-pandemic era.