26 June 2019
Despite being one of the leading virtual banks in the US,  Bank of Internet USA remains far smaller than traditional lenders like JP Morgan, Citi and Bank of America. Photo: YouTube
Despite being one of the leading virtual banks in the US, Bank of Internet USA remains far smaller than traditional lenders like JP Morgan, Citi and Bank of America. Photo: YouTube

Why virtual banking is far from being a disruptive force

The development of financial technology in Hong Kong has accelerated recently. Among others, local telecom giant CK Hutchison has teamed up with Alibaba-affiliated Ant Financial to operate the AlipayHK service.

Also, the Hong Kong Monetary Authority said it will consult the industry to review the guidelines for virtual banks.

Virtual banks refer to companies which deliver banking services primarily through the internet or other electronic channels.

In theory, virtual banks are able to improve efficiency and cut costs, and they are supposed to be very appealing to the millennials.

Some analysts have expected them to pose some serious threat to the traditional banking industry. Nevertheless, none of the existing virtual banks has been able to challenge the dominance of traditional big banks so far.

Let’s look at some examples.

In the US, First Internet Bank and Bank of Internet USA are two leading virtual banks. They were established in 1996 and 1999, respectively.

Now they have respective assets of US$8.5 billion and US$2.4 billion, nothing compared with trillion-dollar asset size typical among traditional big American lenders like JP Morgan, Citi, Bank of America, etc.

Mainland virtual banks have made huge inroads in recent years, with MyBank and WeBank taking the lead.

MyBank was set up in June 2015, and it had more than 3.5 million small and medium-sized corporate customers as of last year. It has total assets of 61.5 billion yuan and outstanding loans of 32.9 billion yuan. The bank reported a net profit of 316 million yuan last year.

Meanwhile, Tencent’s WeBank now has over 15 million users since its inception in July 2014. It has assets of 52 billion yuan and outstanding loans of 32.8 billion yuan. WeBank posted a net profit of 400 million yuan.

Despite their rapid growth and decent profitability, the two still trail far behind China’s five largest banks, which on average command assets worth more than 100 times that of MyBank and WeBank.

Despite all the merits of virtual banking, the fact that they are still not disrupting the traditional banking industry may come down to a few issues.

First of all, the main target of virtual banks, the millennials, account for a small fraction of the total population, and they are not the group with the most financial wealth.

As they save a lot by not having any physical branches, virtual banks may be less competitive in winning older customers, of whom many still prefer face to face contacts.

Second, virtual banks are not that hassle free as they claim to be.

For instance, Chinese customers still need a banking account with traditional banks in order to open one with a virtual bank, due to the difficulty of online identity verification.

Customers also need to verify their identity when making bank transfers or other transactions through their virtual banks, meaning a virtual bank account is not a lot simpler than e-banking accounts offered by traditional banks.

This article appeared in the Hong Kong Economic Journal on Oct. 4

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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