Hong Kong is set to witness the launch of its first virtual banks following the recent issuance of eight licences by the Hong Kong Monetary Authority (HKMA). These new players are expected to broaden the selection of banking options, foster innovation and enhance customer experience in the city. Moreover, the new entrants will be vying to increase their market share and customer base, while the incumbent traditional banks will seek to maintain their standing in the market.
The unbundling and rebundling of banking services
In the longer term, the development of virtual banking in Hong Kong forms part of a larger ‘unbundling’ story in the banking sector. Many new fintech firms – and now the virtual banks – focus on discrete functions and services along the value chain that traditional banks offer, for example in payments, lending or money transfers. Focusing on an individual segment enables them to exploit the pricing and customer experience gaps left by the traditional banks.
James Harte, Director, KPMG China, said, “Our view is that this unbundling will eventually lead to a ‘rebundling’ of services in new and innovative ways as customers will ultimately prefer to use a single efficient interface for all of their banking needs. This rebundling will lead to a smaller number of winners in the market, likely comprising the few traditional banks that are able to adapt to digital technologies and open banking, new virtual banks and fintechs that are able to knit together seamless services through APIs and other technologies, or some form of hybrid.”
In the medium term, virtual banks are likely to win over a considerable number of customers, but only a minor share of banking assets. Nonetheless, it is certain that the road ahead will be fiercely competitive, and both traditional banks and the new virtual bank entrants will need to develop a strategy for success in Hong Kong, which will include a mix of offence and defence. Overall, customers stand to be the real winners.
What it will take to win: Traditional banks
Traditional banks could take either a defensive approach by looking at where they are vulnerable to disruption – as well as what their customers think about their existing processes – and focus resources on developing appropriate countermeasures; or adopt an offensive strategy involving understanding and exploiting the areas where they might have a competitive advantage over their virtual bank peers. This could involve building completely new platforms or looking to deliver consistent and seamless experience across physical and online channels.
Bank branches are still valuable to customers, especially for high-value transactions, and according to KPMG China’s Customer Experience Excellence Survey, customers do still value human interaction. Success for traditional banks will depend on better understanding customers and adopting a more customer-centric approach, which will require rapid IT and systems transformation. For example, more banks will continue to offer electronic onboarding and customise their digital banking user experience.
What it will take to win: Virtual banks
In order to be successful, virtual banks will need to effectively recruit the right people, put in place the necessary systems, processes and controls, and quickly plug into the local ecosystem all within the next six to nine months. Meeting regulatory requirements and ensuring cybersecurity will also be crucial.
Compared with traditional banks, virtual banks are likely to enjoy cost and operating efficiencies in the KYC process, particularly through digital onboarding. They are also not constrained by legacy systems and infrastructure.
Cultivating an environment for digital banking
Tom Jenkins, Partner, KPMG China, said, “Hong Kong’s digital banking landscape could follow a similar path to other jurisdictions like the UK, where virtual banks have been steadily building their customer base over time. Furthermore, the HKMA’s initiatives to usher in a new era of Smart Banking, coupled with the opportunity to enhance customer experience in the banking sector, are creating an environment for digital banking to thrive in Hong Kong.”
The Faster Payment System (FPS) – which was launched by the HKMA in September 2018 – could be a game changer. It will be interesting to see to what extent the further adoption of FPS for retail payments shifts Hong Kong towards a more cashless society over time, and the extent to which it opens opportunities for virtual banks and traditional banks alike to enhance more direct competition with e-wallets.