Virtual banking in Hong Kong takes off______

Leo Chen, Managing Director - Head of Asia

In March 2019, a pivotal milestone was reached in Hong Kong’s retail banking market which could have wider implications for the region’s asset management industry.

As of May 2019, the Hong Kong Monetary Authority (HKMA) announced eight recipients of virtual banking licenses, including Livi VB Limited (a joint venture between Bank of China, JD Digits and Jardines); SC Ventures (comprising Standard Chartered, HKT, PCCW, and Ctrip Financial); ZhongAn Virtual Finance (which includes ZhongAn Online and Sinolink); Ant SME Services and Infinium Limited (a joint venture between Tencent, ICBC and HKEx), as part of its drive to reinforce its reputation as an APAC fin-tech leader and hub.

Virtual banking license holders share certain commonalities with their peers who rely on the more traditional banking licenses insofar as they can accept client deposits and issue loans, although they do not have to establish physical branches.[1]

Could virtual banking disrupt the market?

The HKMA has said the licenses would bring about new customer experiences and promote greater financial inclusion. As virtual license holders offer online services only, their cost base relative to the existing incumbents is likely to be far lower. Furthermore, Hong Kong is evidently a market where cheaper, agile and more user friendly digital entrants could generate traction. For instance, a study by Accenture in 2019 found just 53% of consumers in Hong Kong said they liked their bank, a score well below that of the US (88%) and UK (78%) as many users complained providers offered poor customer service, inefficient account opening processes, sub-par online banking capabilities and fee opacity.[2]

Given the antipathy among retail banking clients in Hong Kong, Goldman Sachs estimates virtual banks could capture up to 30% of the city’s total banking revenues, or about $15 billion.[3] While a lot of banks have struggled under the weight of regulation and legacy infrastructure, some providers are making progress, transitioning their core services online by developing mobile-friendly apps, adopting automation and investing into AI-driven chatbots, all of which are helping them to augment client experiences. However, many retail clients still want their traditional banks to provide better digital services, a weakness which the Chinese technology firms may be able to capitalise on by leveraging this new license.

Virtual banking licences are subject to defined minimum capital requirements, set at HK$300 million, which is the same threshold applied to traditional banks. [4] Consequentially, the entities most likely to acquire licenses are either going to be bank owned subsidiaries or companies (i.e. big-tech, e-commerce) with sizeable market caps, as opposed to nimble start-ups. However, existing banks do not require virtual licenses to provide online services although some might choose to acquire one if they want to differentiate themselves from their peers.

Technology companies entering the funds market

The growing interest in virtual banking licenses and potential for new providers to move into financial services has not gone unnoticed by the asset management community. Even though most entrants utilising virtual banking licenses are likely to focus initially on providing fairly traditional, vanilla services (e.g. issuing low value retail loans, mortgage services) to customers, it is possible these organisations could eventually start offering online fund distribution once the scheme is firmly bedded in. In time, some might even make the move directly into asset management activities as well.

Distribution – at present – is incredibly fragmented, intermediated, costly and propped up by manual processes, which can deter digitally astute retail investors from buying mutual funds. Large technology firms such as social media companies (e.g. Facebook, WeChat) and e-commerce groups (Amazon, Alibaba) have an advantage over the current, dominant distributors as they have wider client connectivity (via online platforms or smart devices such as smart phones, tablets, IOT) and are not impeded by ageing technology systems. Again, this disruption risk is something which the funds’ market is beginning to appreciate.

Yu’e Bao, the Chinese money market fund owned by Alibaba’s Alipay subsidiary, became one of the world’s biggest asset managers in less than five years after Alipay gave users the option of channelling spare cash into its high-interest funds [5], enabling for an investment experience that was both straightforward and cost-effective. Calastone research found that 29% of funds’ industry participants believed technology companies like Google or Microsoft were the most likely participants to potentially disrupt the sector, while 22% said the same for online retailers.[6] If these providers acquire virtual banking licenses, and transition into product distribution, the funds’ industry could face some serious challenges.

Funds seek out digital answers

Even if large technology companies decided to widen the number of services offered to clients beyond banking to include online fund distribution, the funds’ market is not without a future. In fact, if the industry introduces some reforms, it could easily remain quite competitive. Most critically, it needs to make it easier for clients to buy funds through digital channels such as robo-advisors or other mobile apps. Active asset managers also need to recognise that investors are now increasingly sensitive about fees and charges, especially as recent performance (collectively) has been disappointing, which in turn is making the industry vulnerable to low cost passive products, a handful of whom have even rolled out funds with zero fees.

In response, the funds industry needs to automate, digitalise and rationalise its operational processes to contain costs. For instance, Deloitte research found inefficiencies in distribution processing alone added EUR 1.3 billion to the frictional costs of trading in Luxembourg each year. [7]  Calastone is taking a lead on this issue. In May 2019, Calastone migrated the technology behind its Transaction Network onto Distributed Ledger Technology or blockchain, in what is set to reduce transactional costs thereby enriching investment returns.

New entrants – empowered by openings like Hong Kong’s virtual banking licenses – will start offering traditional financial services, but may well look to move into online fund distribution in what could prompt a major shake-up of the market. Those within the funds’ industry which embrace innovation and automate existing operational processes will be in a strong position to capitalise on some of these technological changes.


[1] HKMA (May 9, 2019) Granting of virtual banking licenses

[2] Financial Times (February 21, 2019) Hong Kong opens banking market to online competition

[3] Financial Times (March 27, 2019) Hong Kong hands out its first digital banking licenses

[4] Financial Times (February 21, 2019) Hong Kong opens banking market to online competition

[5] GB Times (April 28, 2017) Alibaba’s Yu e’ Bao overtakes JPMorgan as world’s largest money market fund

[6] Calastone (February 5, 2019) The rise of big tech in asset management

[7] Calastone (February 5, 2019) The rise of big tech in asset management

[8] Calastone (May 20, 2019) Calastone goes live with world’s largest financial services community on blockchain

Leo Chen, Managing Director - Head of Asia

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