UK lessons for Hong Kong's upcoming virtual banks

Ben Ng December 04, 2019 09:39

In a significant move that is expected to shake up the city’s financial sector, the Hong Kong Monetary Authority announced in May that it has granted virtual banking licenses to eight entities, with an objective to promote financial inclusion.

Following the award of licenses, the parties have been scrambling to get their act together and carve out a niche for themselves in the local financial landscape.

A challenger bank, or a virtual bank, is defined as a bank that primarily delivers retail banking services through the internet or other electronic channels instead of having physical branches.

Amid rising anti-Chinese sentiment and months-long protests in Hong Kong, the eight financial technology firms and consortiums that won the licenses -- seven among the parties were either mainland Chinese entities or joint ventures involving a Chinese partner -- are reportedly stuck in a “test mode” as far as their launch in Hong Kong is concerned, the Financial Times reported recently.

Well, what are the things that need to be kept in mind while setting up such operations? And what are the pitfalls that should be avoided in the new ventures?

Dan Jones, head of digital for Asia-Pacific at global business and technology management consultancy Capco, says the launch of the eight new banks in a short time-frame is likely to intensify competition in the Hong Kong banking market, and “delivering the product on time and going to the market really fast” will be the key to success.

Jones, who watched closely the creation of Royal Bank of Scotland’s UK-based digital bank Mettle, said the lessons learnt in building the virtual bank in Europe are worth paying attention.

The UK was an early adopter of digital banking and it has become a cradle for upstart challenger banks, also known as “neobanks.”

After years of rapid growth in the UK, leading players like Revolut, Monzo, Atom Bank, Tandem, and Starling, among others, have brought in more competition in the banking space, making deep inroads into the traditional banks' customer bases, with some of them expanding to overseas markets.

Comparing the challenger bank market development in Hong Kong and the UK, Jones said one major difference is that the UK authorities did not grant multiple licenses at one time, so the time for challenger banks to enter the market was different, which gave more time for the players to build up their respective market positions and unique product offerings.

While the eight Hong Kong licensees are going to launch their services to the market around the same time, within six to nine months after the license announcement, the new entities "will have to struggle in how to differentiate from each other,” said Jones.

"Challenger banks in the UK and the European market tend to focus on delivering a very clearly defined proposition rather than offering a wide variety of services all at once,” he said.

Monzo, Revolut and Starling, for example, offer customers app-based current accounts for personal payments and bills, as well as spending analysis and cheaper overseas services. On the other hand, Tandem and Starling Bank focus on savings account services and lending products.

As for Mettle, Dan said it focuses on meeting the specific needs of small and medium-sized businesses, with the mission to provide a current account that proactively helps small businesses to stay on top of their finances.

New challenger banks have attracted millions of predominantly young customers in recent years in the UK. However, in Hong Kong’s case, Jones said young consumers in the city are likely to have a trust issue towards mainland Chinese capital and brands.

Seven of the licensees are backed by Chinese companies -- Alibaba affiliate Ant Financial, internet behemoth Tencent (00700.HK), smartphone maker Xiaomi (01810.HK), financial services titan Bank of China (Hong Kong) (02388.HK), online travel services giant Ctrip, e-commerce major JD, and insurance firm Ping An (02318.HK).

Offering a full and rich usability application, communicating a youthful style to make the brand cult-like will also be the main challenge for a virtual bank in Hong Kong, according to Jones.

One strategy the UK challenger banks have used to create the “coolness” factor of the brand and generate market excitement was putting registered people on a “waitlist” before inviting them to sign up and gain full access to the banks’ products, he said.

As challenger banks disrupt the banking sector, the larger incumbent banks have restructured themselves and revamped their digital banking services.

Launched in 2018, Mettle is a unique initiative in the UK financial services industry, being one of the first neobanks developed by a traditional banking giant, the Royal Bank of Scotland.

RBS launched Mettle as a separate entity, with the unit operating under a different IT system, distinct from the core RBS brand.

“With trust from the public towards the brands, incumbent banks in Europe are launching their own neobanks as a defensive play against the upcoming threat, to provide easier, new user experiences targeting new customers,” said Jones.

The trust and impression customers have for the traditional brand is an important factor in choosing new banking services, especially in the case of startups and small and medium-sized businesses, he noted.

Digital banks developed by an incumbent will appeal to customers who may be wary about trusting digital-only banks launched by an unknown entity.

In addition, Jones said such new digital banks can count on the heft of its parent incumbent banks, say, when it comes to financing and capital injection.

That could help make the startups' business model more sustainable compared to venture capital-backed entities, as the latter often face undue pressure to meet revenue and profitability targets.

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Ben Ng

EJ Insight writer