Hong Kong’s financial sector had long been dominated by traditional institutions, but in recent years the city has seen a rising number of fintech startups trying to push their way into the market on the back of innovation and technology development.
One such entity is Neat, a startup that provides an alternative to a traditional bank account, offering services to individuals and SMEs that have often been neglected by big banks.
According to the fintech firm’s co-founders, David Rosa and Igor Wos, Neat intends to apply to the Hong Kong Monetary Authority (HKMA) for a “Virtual Bank” license to challenge the monopoly of traditional banks in the city.
In recent years, many small and medium-sized companies in Hong Kong have complained about difficulties they faced in opening accounts with traditional banks, especially when it came to the needs of startups.
Meanwhile, some foreign firms had also suggested that Hong Kong banks were being unfriendly.
Neat aims to take advantage of such shortcomings in the market and promote its service.
For the “unbanked” population, Neat provides a remote account opening service. After the user completes the account opening and verification of the identity on the smartphone, individual customers can receive a MasterCard prepaid card provided by Neat within a few days, and it can be used after topping value in it.
For enterprises completing the process, they will be given a “virtual account” within a week, which can be used for payment and transfer purposes.
“What we basically do for every service that a bank offers, we improve it, in a much more user-friendly way”, said Wos.
There is no charge for customers opening an account and spending using the Neat card. Also, the Neat account does not have a minimum balance requirement. Corporate customers use their “virtual accounts” for local transfers with a fee of HK$30 per transaction.
And Neat has partnered with a licensed provider to launch cross-border transfer service very soon, according to Rosa.
The Neat prepaid card can be used to access MasterCard’s credit card terminals, and the Neat app will record and analyze user expenditures in real time, allowing users to instantly access data. Neat is also developing new features that allow companies to automatically connect their virtual accounts to their cloud accounting software system for book-keeping and analysis.
Neat’s current source of income is the bank transfer service charges. And in addition, for each transaction, the user does with a Neat card, Neat shares in the fee equivalent to 1.25 percent that merchants pay to the MasterCard network.
Rosa said the company is able to avoid the burden of a huge staff team and branch expenses. Thus, the operating cost is much lower than traditional banks, and the profit space is relatively abundant.
He pointed out that more than 50 percent of Neat’s customers are entrepreneurs and that the median age of the customers overall is 32. He emphasized that the target customer base is large, because there are many overseas companies or individuals who want to open bank accounts in Hong Kong, but most of them are not “welcomed” by traditional banks, and Neat is able to replace the bank’s role.
In recent years, traditional banks in the city have started to actively push into fintech and develop online services. However, Rosa bluntly stated, “I myself worked 16 years in a very large bank, I know full well how difficult it is for them to implement this kind of solutions (NEAT provides).”
He criticized traditional banks for the “legacy systems, legacy processes, and legacy people”, saying that banks have been moving too slowly amid a wave of disruptive digital technology.
In response to the fast-growing technological innovation, Hong Kong authorities have finally ramped up the pace to introduce “Virtual Banking” services in the city. In March this year, a public consultation was completed on revision of the “Guideline on Authorization of Virtual Banks”. It is expected that revised guidelines will be introduced this month, allowing technology firms that meet capital and operational requirements to apply for the virtual bank license.
In the proposed amendment, the virtual bank licensee needs to be a locally registered company with a minimum capital requirement of HK$300 million, which is in line with that of current licensed banks, and virtual banks are required to comply with the principles and main rules applicable to traditional banks.
Neat itself does not have a Stored Value Facilities (SVF) license, but its partner ePayLinks holds the above-mentioned license issued by the HKMA. Rosa indicated that Neat intends to apply for the virtual bank license. “Our ambition is to become a bank one day,” he said.
He pointed out that if a virtual bank license is obtained, Neat will be able to receive deposits from the public and operate a loan business after storing a smaller percentage of the capital as the reserve. Neat would also be eligible to establish direct foreign exchange lines with other banks, which is extremely helpful for the development of foreign exchange and cross-border transfer services.
The HKMA said earlier that several entities have expressed interest in participating in the virtual bank program. Reports have said that Tencent-backed WeBank, Ping An Technology, and local e-wallet service TNG, among others, have indicated their intention to apply.
Rosa said that Neat was focused on entrepreneurs and small and medium-sized companies that were neglected by traditional banks, and the firm had no fear of competing with tech peers. “Large companies don’t always understand the pain points that need to be solved,” he said.
He also emphasized that Neat can meet most of the regulatory principles applicable to traditional banks. But on the HKMA’s capital requirements for virtual banks, as high as HK$300 million, he is worried that it will lead to a market landscape where virtual banks will only rely on their capital strength to burn money, without efficient capital strategy and business model.
And the whole pilot scheme could become a “Big Boys’ game”, where small and medium-sized startups such as Neat are not allowed to get in.
“We are lobbying very hard (about the capital requirements),” Rosa said. For virtual banks to succeed in promoting “financial inclusion” in Hong Kong, a lot will depend on the regulatory regime, he said, warning that undue rules and restrictions will hamper business development of the new players.
This article appeared in the Hong Kong Economic Journal on May 21
Translation by Ben Ng
[Chinese version 中文版]
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