Impact of virtual banking is debated

The Hong Kong Monetary Authority has received 29 applications for virtual bank licenses, but analysts have different views about the impact of the new system on traditional banks.

Avery Chen and Reuters

Wednesday, September 26, 2018

The Hong Kong Monetary Authority has received 29 applications for virtual bank licenses, but analysts have different views about the impact of the new system on traditional banks.

Upcoming virtual banks will make the market more competitive but the status of existing traditional banks will not be greatly affected, Hong Hao, head of research and strategy at BOCOM International Securities, said.

He explained that traditional banks already have online banking services, which have similar functions of virtual banks.

On the other hand, there are high requirements for running the banking business, such as the capital of the bank, operating history, and their brand effect.

"It is impossible for consumers to put their money casually in a bank that they have never heard of before," Hong said.

The newly granted banks may offer higher interest rates to attract customers, which will make banks earn less profit.

Although the costs of online banking are relatively low, they still have operating expenses. "I don't think new virtual banks will do better than traditional banks. It's going to take some time to improve," Hong said.

"The challenge for the new entrants, however, will be to build up a meaningful customer base quickly and generate return on investments over the next two to three years. It's easy to go off the risk-reward yield curve in this push," said Fergus Gordon, who leads Accenture's Asia-Pacific banking practice.

Neona Wang, chief executive of TransUnion Hong Kong, said that the development of virtual banks would be helped by the high coverage of mobile phones and the young generation's familiarity with the internet, as well as their habit of using online banking rather than going to bank branches.

Wang said virtual banks can help to solve difficulties faced by start-ups and SMEs in opening accounts and financing.

She added that virtual banks would also help reduce operating costs, focus on customer experience, and promote inclusive financing.