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Date: 05/03/2019

Title: Hong Kong’s Virtual Banks: Hype or Game Changer?

Teaser: Virtual banks in Hong Kong are getting all the attention within the industry, but the man on the street is not getting excited yet.

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Hong Kong’s Virtual Banks: Hype or Game Changer?

Virtual banks in Hong Kong are getting all the attention within the industry, but the man on the street is not getting excited yet.

Author: Sean Huang

While virtual banks are exempt from operating an expensive branch network, a range of challenges await them in the customer acquisition journey and on their path to profitability. «Looking at markets that have launched virtual banking initiatives: South Korea, Japan, U.K., usually it takes a couple of years for successful entrants to achieve sustainable scale and profitability,» Sean Huang, head of business innovation at Synpulse, Greater China, says in an interview with

In the U.K., only Revolut (a neobank) and Transferwise (FX platform) were only recently profitable, despite these fintechs starting operations in 2015 and 2011 respectively. In South Korea, internet-only banks were launched two years ago, but they are still struggling to stay afloat, according to a report in the Korea Times. In 2018, Kakaobank recorded a net loss of 21.2 billion won ($18 million) and K-Bank recorded a net loss of 79.7 billion won.

Big Brands Get a Headstart

Unfortunately, not all new virtual banks have big brand names behind them. The fourth player to clinch a Hong Kong virtual banking license last month was WeLab, a home-grown startup. Despite its smaller presence in the autonomous territory as compared to more established banks, the new virtual bank has to be operationally ready within six to nine months.

«That is a very short time-frame to launch a greenfield banking setup,» Huang said. Next, these banks have to go through a few phases to get to profitability.

Stepping Stones

«The first phase is to create the foundation for basic banking services and drive customer acquisition, this is where strong investments are required. In the second phase, the primary goal is to unlock substantial value through launching tailored offerings, through responsive market-testing and fine-tuning the offerings. Expanding existing partnerships to grow the product offering could also be part of this phase,» explains Huang.

The third phase is where the bank has identified its revenue drivers and has to accelerate growth and drive acquisition at-scale and make the switch towards profitability, he adds.

Lukewarm Adoption For Now?

Meanwhile, the man on the street may not have high hopes for the new virtual banking services. The average banking customer in Hong Kong has developed a certain «numbness» to pain points due to the traditional character of the industry which has long prioritized stability and compliance over innovation and customer experience, says Huang.

Some of the common pain points faced by the average customer at Hong Kong’s banks include lack of transparency for products and fees, long application turnaround time, service inconsistencies across digital/non-digital channels.

Pain Points Present Opportunities

Nevertheless, these pain points present opportunities for new players. Moreover, some segments of the market such as SMEs or low-income earners, are also underserved, notes Huang. «Banks have traditionally paid little attention to these customers given the increasing compliance burden and relatively high cost to serve these clients,» he says.

«These are where virtual banks can offer something disruptive to the market. The most efficient virtual banks are able to operate at 25 to 30 percent of the total operating costs of a traditional brick and mortar bank, providing a huge advantage to pass on part of these savings back to the customer,» Huang explains.

Branches Still Very Profitable

Despite high rent and labor costs, bank branches are still good revenue generators and remain highly profitable to the banks, Huang notes. This has prompted banks to maintain their overall branch network, instead of shrinking them.

«The population is still growing with new immigrants. Banks are still keen to invest in their branch network as branches are still considered the main distribution channel for many of the high-margin wealth management or mortgage products,» notes Huang.



Andreas Mettenberger

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