23 October 2016
Hong Kong lags behind the mainland and other Asian markets in internet finance. Photo: Bloomberg
Hong Kong lags behind the mainland and other Asian markets in internet finance. Photo: Bloomberg

How HK banks can develop internet finance businesses

Surging online shopping transactions provide nourishment to Alibaba’s internet finance business.

Starting from the third-party payment system Alipay, the company has extended its financial service business to credit cards, small loans, investment products, etc. It even secured a bank license in 2014.

As a result, the role of traditional banks, as an intermediary, is under threat of being replaced.

Mainland banks are forced to allocate more resources to internet finance.

However, it’s a trial-and-error business, and only time can tell if it will be successful.

Hong Kong’s financial system is more prudent. In internet finance, the city has lagged behind the mainland and even other Asian countries like South Korea, Japan and Singapore.

In recent years, Alipay, among other mainland internet finance service providers, has expanded into Hong Kong. The move could have an impact on local financial services.

If Hong Kong doesn’t step up innovation in the finance sector, local banks will lose a lot of their competitiveness in the long term. Government should play a crucial role in bolstering innovation in the business.

The Legislative Council has passed a law requiring third-party payment companies, like Paypal, Alipay and Octopus, to apply for relevant licenses from the Hong Kong Monetary Authority and adopt clear business standards.

In addition, the establishment of the Innovation and Technology Bureau is also expected to fuel the development of internet finance in the city.

Customers welcome innovative services as long as they don’t pay extra money. This means banks will have to assume huge extra costs for the new services.

Based on the experience of mainland peers, simply applying high technology to traditional bank businesses doesn’t work. The key is to tap information technologies to break existing boundaries.

I believe there are three factors that contribute to the success of internet finance.

One, economy of scale. Alipay can handle over three million transactions per minute during the Double 11 global shopping festival. If it were to be done in physical stores, the manpower and resources required would be overwhelming.

Two, client-oriented. Internet finance service providers use data analysis to know the clients’ needs, credit conditions and lifestyles, then push the precise marketing information to them which would largely improve the effectiveness of their marketing efforts. Moreover, technologies can accelerate the loan application process and improve risk management.

Three, Blue ocean strategy. Due to cost restrictions, traditional banking services focus on high net value clients while neglecting the small ones. Internet finance can provide the underserved small and low-end customers better services at low costs, thereby creating new growth points for the banks.

For example, Yu’E Bao, a money market fund sold via Alipay, has an investment threshold as low as one yuan. However, it attracted a lot of retail investors and made fund manager Tianhong Asset Management the top of its category.

Hong Kong banks should make these three points their strategy in exploring internet finance businesses.

This article appeared in the Hong Kong Economic Journal on Jan. 6.

Translation by Myssie You

[Chinese version 中文版]

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Senior strategist at Bank of China (Hong Kong)

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