Incumbent lenders rethink business models in race against virtual banks

ZhongAn International, the company behind one of the city's virtual banks, weighs in on the opportunities and challenges ahead.

Dominated by three to four major players, Hong Kong's retail banking sector is set for a major shake-up with the entry of eight virtual upstarts with formidable technological capabilities. To keep the threat at bay, Ken Lo, head of strategic partnerships at ZhongAn International makes a case for the open API business model as a way to level the playing field.

With no need to set up branches, virtual banks can deliver the full suite of retail banking services which can range from extending loans, operating savings account, issuing cards and offering payment services through an app or a website.

Since March, eight virtual banking licenses have been issued by the Hong Kong Monetary Authority (HKMA), leading to renewed interest on how VBs will thrive in the island city. ZhongAn Internationals’ subsidiary ZhongAn Virtual Financial was one of the first three financial institutions to score such license. 

Virtual banks are taking over Asia by storm with regional rival Singapore also seeking to award up to five virtual banking licenses this year. In July, Taiwan granted the first batch of virtual bank licenses in July. South Korea is aiming to receive applications for a third internet-only bank that will compete with kakao bank and K Bank that launched in 2017 and Malaysia is similarly considering joining the virtual banking race.

Also read: Malaysia rides on Asia's virtual banking drive

At the Asian Banking & Finance Digital Payments Summit, Lo argued that an open API business model will allow both traditional banks and virtual players to compete on a higher level enhancing the customer experience, reinforcing security protection, and increasing digital revenue. VBs also stand to benefit from an open model as it is more in-line to the nature of their bundled offering. An API is an interface that allows to synchronise, link and connect the database of service with any application.

Despite the benefits of opening up their data vaults to third party providers, open banking has yet to gain full momentum in Hong Kong. “A lot of the infrastructure is not yet there for them to flourish,” he lamented. “I think that there should be a lot more discussions around how to implement open API in Hong Kong. I think this is something that is still lacking momentum.”

Also read: Lack of regulatory clarity in open banking impedes ASEAN banks

For open API implementation to work successfully, Lo suggests that Hong Kong and even other APAC countries need to set clearer guidelines especially for VBs, as well as have a healthy market player participation. The HKMA has released the Open API Framework in July 2018 as part of its Smart Banking Agenda, with a four-phase implementation approach to open banking.

Despite pulling ahead of the Lion City in issuing virtual bank licenses, Hong Kong lags behind Singapore in terms of open banking readiness, according to a report from Finastra. Although it scored strong marks for its advanced data-based transformation and growing cloud adoption, Hong Kong still “needs to extend efforts on utilisation of APIs for banking networks.” On the other hand, Singapore received an ‘intermediate’ score in data monetisation and ‘advanced’ score in the adoption of APIs, fintech/third-party ecosystem, state of data-based transformation, and state of innovation. 

Lo warns against looking at other banking markets on implementing VB in the city. “Hong Kong is a different ‘animal’ to the other banking markets,” he said, going on to share that a lot of people have been looking towards the United Kingdom (UK) as it had been doing virtual banking for 45 years. “But the landscape is different. If you look at UK, retail banks contribute to around 60% of private banking. In Hong Kong, four or three banks attribute to 86% of retail banking.”

Survival by coopetition
Hong Kong’s VB landscape also carries a lot of non-banking oriented players joining the race, such as fintech company WeLab and insurance firm Ping An. To comply with banking laws, Lo expects more traditional banks to collaborate with fintech firms, or more VBs to partner with technology companies to ensure their longevity in the Hong Kong’s mature and saturated market.

“There are a lot of non-banking oriented players also joining in the race. Either they do a partnership with different traditional banks, or a technology company. Hypothetically, you see that there are a lot of synergies that can be created within different virtual banking vehicles,” said Lo.

“We could expect some coopetition...virtual banks will cooperate with fintech to launch a product in a quicker manner,” he added. “Maybe in some segments they will partner with traditional banks.”

Lo also raised concerns on Hong Kong’s virtual banks’ ability to survive. “Traditional banks are not sitting behind and doing nothing. They keep pumping money, they keep recruiting talents. What can VBs bring up something different that will entice the local market?” he asked.

There is a rise in demand for fintech talent as banks look to digitise their offerings as well as tap into the online banking market. Standard Chartered, who count amongst the eight players in HK’s virtual bank segment, shared plans to boost its headcount by 40 more people. Institutions such as HSBC, Bank of East Asia, Hang Seng Bank and Standard Chartered have also waived or reduced account fees and are expected to continue leading the city’s competitive and mature banking market.

Fintech and virtual banks carry the same DNA or mindset in that they have to launch a product swiftly to the market to test customer feedback. However, unlike fintechs with only one service offering, VBs carry the burden of having several services in one offering--making it harder for online banks to promote or package their product, especially against fintechs whose simplicity has won over a customer base.

“How [do] they rebundle or proposition, how [do] they...not just focus on one specific segment like payment, lending and loans? How do they rebundle all the offering(s)? Do they have one specific product they're going to launch in the market people get it, or they want to rebundle everything as a proposition to have a customer?” asked Lo to punctuate the complexity of launching virtual banks to the market.

In addition to this, whilst there would be no difference in terms of technology deployment across all virtual product, the business operating model would be vastly different: from the shareholder structure, from the management team, and from the technology readiness as well.

In an apparent response to the virtual banking threat, HSBC, Bank of East Asia, Hang Seng Bank and Standard Chartered earlier waived or reduced account fees as part of an effort to adjust their business models. Although banks are on the defensive, analysts believe that the fee move is unlikely to deal ‘any meaningful revenue impact’ on conventional players with diversified income streams like credit cards, securities brokerages, loans commission and insurance.

"[T]his will not significantly dim earnings prospects for the established banks as they are well-positioned for the challenge," Fitch Ratings said in an earlier report.