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Friday, July 05, 2019, 10:52
Traditional, virtual banks square off in battle for tech-savvy customers
By Oswald Chan
Friday, July 05, 2019, 10:52 By Oswald Chan

Hong Kong is seeing a new competition emerge in the banking industry, as up-and-coming virtual banks try to lure customers with lower costs and fewer fees. Traditional banks are responding by promoting the advantages inherent in established, brick-and-mortar businesses. Oswald Chan reports on the changing local banking landscape

As the Hong Kong banking industry heralds the new epoch of virtual banking, traditional banks and virtual banks are employing different digitalization strategies with the same vision: winning back customers in the technology-savvy era.

Infinium — the virtual-bank joint venture whose shareholders include Tencent Holdings, Industrial and Commercial Bank of China (Asia), and Hong Kong Exchanges and Clearing Ltd — told China Daily it will provide small-value deposit services with no minimum account-balance requirement nor low-balance fees.

The move is aimed at the city’s local customers, and small- and midsized enterprises.

The virtual bank’s shareholders will provide their respective fields of expertise to make the new company stand out in the fierce virtual-banking market. Tencent will provide Infinium’s virtual-banking services with a solid technology foundation; ICBC (Asia) can contribute professional advice in terms of banking operation and management; and HKEx will provide guidance as a leading global financial market operator.

Emergence of virtual banking will bring forth a new dimension of competition for traditional banks. It is important for traditional banks to embrace digital transformation in the way it engages customers and also in terms of internal operations in order to fulfill end-to-end customer service

Na Wu Beng, CEO at OCBC Wing Hang Bank

“We believe constructive competition will lead us to keep learning and improving. We hope to work together with other operators in fostering financial technology development in Hong Kong so as to build Hong Kong into a world-class smart city,” an Infinium spokesman told China Daily.

Infinium expects virtual-bank players to enjoy lower operation costs with a faster workflow, a higher efficiency and more convenience than conventional banks.

Infinium obtained one of the eight virtual-bank licenses awarded by the Hong Kong Monetary Authority. These virtual banks are mostly subsidiaries of major local incumbent banks, existing large financial firms, or technology enterprises with established market positions.

Bank of China (Hong Kong), Standard Chartered Bank (Hong Kong) and ICBC (Asia) are among the city’s incorporated banks that have partnered with different shareholders to obtain virtual-bank licenses successfully.

Livi VB, the new virtual-banking arm of BOC (Hong Kong) and other technology companies, is betting big on its technology-driven, data-propelled advantages as it prepares to launch its business based on a light-asset model. The new virtual-bank player will roll out its business within six to nine months with a team of 100 to 200 people.

“With the offering of small loans and other innovative products, we make inclusive finance possible for the city’s unbanked and underbanked population and SMEs who have long been excluded from the traditional brick-and-mortar banking services,” Livi CEO Michael Wang Lan said at a news conference in May.

In its initial years of operation, Livi will focus on providing basic deposit and lending services. Later on, more personalized and tailor-made money-management products will be made available to capitalize on the bank’s technological advantages.

The virtual bank’s competitive edge still lies in its unique financial technology that enables it to offer services in a faster, more-convenient way, and appeals to tech-savvy consumers, while Livi also enjoys lower operating costs because it does not have bricks-and-mortar branches.

Wong said he believes “virtual banks have many opportunities to make a difference in terms of production innovation and service improvement.”

Virtual an added value 

Deloitte China Consulting Partner Paul Sin echoed Wong’s sentiments in an interview with China Daily. “It is unlikely that virtual banks will start a price war to take business from traditional banks, but they will differentiate themselves through scenarios and compete with traditional banks through partnerships,” he said. The protection of customer information privacy is one of the competitive edges that traditional banks have versus virtual banks, he added.

Sin said traditional banks in turn must learn how to innovate in the new age of virtual banking. “Traditional banks will think first about how to collaborate with partners, identifying those that can develop meaningful customer journeys and scenarios. They will then think about how to use technology to enable the journey and scenarios.”

As a business strategist, Sin advised virtual banks to tap the market potential offered by “long tail” customers. 

“Many small and midsize enterprises face difficulties in opening a bank account or obtaining financing. This is especially true for trading companies, where only one of five loan applications is approved. We therefore look forward to virtual banks supporting SMEs to achieve financial inclusion. This could also drive large banks to reconsider serving ‘long tail’ customer segments,” Sin said.

Citibank Hong Kong is one of the locally incorporated banks that did not apply for a virtual-bank license, betting on its digitalization program and open application programming interface (API) partnership to cope with intensified market competition brought by virtual banks.

Digitalization in full swing

Regarding digitalization, the lender has launched its mobile applications to enable customers to do foreign-currency exchanges, trade stock and redeem credit card rewards. At Citibank Hong Kong, one in three new credit cards and over 60 percent of personal loans come from online applications, and over 80 percent of reward redemptions are performed through digital channels. About 90 percent of the bank’s stock brokerage clients adopt digital channels for stock trading.

The bank also relies on API to foster a digital ecosystem to satisfy customers’ various banking and financing needs. It is the first bank in the city to launch its API portal that allows the application developer community to build innovative solutions for banking and financing clients. An open API lets third parties access banks’ internal data and systems so product comparisons and consolidated account information kept in several banks may be available through third-party apps or websites to customers.

Up to now, the lender has fortified nearly 10 API partnership agreements with household brands such as EGL Tours, Fortress, Watsons, ParknShop, HKTVmall, Octopus App, AIA Hong Kong, and Zurich Insurance Hong Kong to create a lifestyle ecosystem to cater to customers’ all-around banking and financing needs. The bank expects the number of partnerships will increase within this year.

For example, cardholders of Citi points-bearing credit cards can now offset their online purchases conveniently and instantly upon checkout at HKTVmall using their reward points without ever exiting the shopping platform. Citibank Hong Kong’s stock brokerage clients who are checking a stock price quote on the aastocks.com platform can directly connect to the bank’s equity trading interface if they want to trade shares without leaving the stock website.

“As a local incorporated bank without extensive branch network and mainly focus on wealth management services, the deployment of digitalization and open API helps attracting younger-generation customers,” Citibank Hong Kong Consumer Business Manager Lawrence Lam told China Daily. “The approximately 70 percent increase in new customers in recent days is mainly from the young people.”

Looking forward, the bank will continue to invest in digitalization not only at the front-end level but also at the back-end level to streamline operational efficiency and enhance worker productivity.

Go digital!

OCBC Wing Hang Bank, controlled by Singaporean lender OCBC Bank, is another locally incorporated bank that has not applied for a virtual banking license but is actively pursuing digital transformation.

“Emergence of virtual banking will bring forth a new dimension of competition for traditional banks. It is important for traditional banks to embrace digital transformation in the way it engages customers and also in terms of internal operations in order to fulfill end-to-end customer service,” OCBC Wing Hang CEO Na Wu Beng told China Daily.

“By doing so, traditional banks will be able to leverage on the strengths embedded in the banking business that they know well and at the same time meet expectations brought forth by the digital age,” Na added.

A HSBC spokesman told China Daily that the bank will simultaneously invest in digital technology and branch network to offer new digital solutions and experiences for customers.

“We are focused on delivering a blended digital-and-people-based service experience. We have all the benefits of a virtual banking license plus the capability to deliver against the entire spectrum of our customers’ needs across the channels of their choice. HSBC is already a digital bank,” the HSBC spokesman added.

HSBC offers mobile and online banking service mode as well as PayMe. Over 80 percent of the bank’s retail banking transactions are conducted through digital channels. 

US-based credit rating agency Moody’s Investors Service said payments, deposit gathering, SME lending and consumer loans will be the niches of virtual banks, while wealth management and corporate banking business will still be the hurdles for virtual banks.

The agency also expects virtual banks, with their strong data analytical capabilities, will exert pressure on incumbent banks to improve their branch and staff operating efficiency.

“The commercial viability of the new virtual banks in Hong Kong is supported by the strong regulatory environment, a large population of tech-savvy customers and potential cost savings from branchless operations,” said Sonny Hsu, vice president and senior credit officer at Moody’s Investors Service.

“We expect the growth of virtual banks will come will come at the expanse especially of midsize and small banks that focus on serving small businesses and individual retail customers,” he added.

Contact the writer at oswald@chinadailyhk.com

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