Virtual banking (VB) was all the rage in Hong Kong this summer. To the uninitiated, VB is a purely digital, mobile only banking proposition. It’s been well received in Europe with start-ups such as Monzo, Starling Bank, Revolut and N26. To capitalize on the momentum and foster financial inclusion, the Hong Kong Monetary Authority (HKMA) fine tuned and re-released guidelines which were collecting dust. The reception was positive as the press reported major interest from roughly 50 domestic and foreign companies, including one backed by legendary investor Jim Rogers. By the end of the August deadline, 29 companies submitted applications for a VB license.
As part of Standard Chartered’s VB project, I was asked to speak at the Hong Kong Institute of Bankers (HKIB) annual conference. The turnout to the panel reflected the interest in the market as the large room was packed with nary an empty seat. One of the best questions was the prospects for success in VB. I highlighted three points that will contribute to this:
1 - Regulation as a competitive advantage: advancements in technology bring both benefits and uncertainty. In the banking sector, the latter can be a major a concern when regulation predates innovation; imagine explaining to a time traveler that your face is the password to your account. Regulatory sandboxes have been one solution to address potential gray zones. Customized regulation is another. The HKMA’s effort to tailor guidelines specific to virtual banking will not only provide clarity to potential applicants but also demonstrate its willingness to assist in their success. This support can be very useful; in the UK where a number of challenger banks continue to grow, a “New Bank Start-Up Unit”, a hand holding service for new entrants offers assistance navigating the regulatory process and a dedicated help line. Think of it as the best tutor you can hire for a major test.
2 - Technology costs: it’s no secret that the technology banks rely on is dated. Listen to enough pundits and the term “legacy infrastructure” will be brandished ad nauseam. It’s so bad that the skills required to maintain banking systems are exceedingly rare as those qualified retire or expire. The pipes were laid in a different time and simply cannot support where the industry is going. Thankfully, a new breed of fintech start-ups offer cutting edge, cloud-based core banking platforms. More importantly, they cost less than what was on offer just a decade ago. The investment required today to start a new bank is therefore considerably less. This will surely support the growth of VB in Hong Kong by reducing financial barriers to entry and allowing resources to be deployed more strategically.
3 - Changing attitudes: branch traffic is down. As an employee of a bank, I rarely deal with a teller, preferring to conduct my business through a phone. I am not alone in this as the vast majority of those I associate with also adopt the same approach. This is not only borne from technological advancements but also changing attitudes about how we bank and more generally, how we consume. The public now accepts the digital medium as the predominant channel for banking, shunning human interaction in favour of instant gratification. Consumers are primed to adopt this new wave of banking just as they have moved from bricks and mortar to e-commerce site
The journey won’t be without challenges. Some may insist on speaking to tellers while others may doubt the security of these platforms. Nevertheless, these concerns will be mitigated once customers become more comfortable with this new approach to banking.