Hong Kong’s HSBC-dominated banking landscape is set for a virtual revolution

The Hong Kong Monetary Authority has begun issuing full banking licences to FinTech challengers

A man takes an escalator at the HSBC building in Hong Kong, Monday, July 31, 2017. HSBC is reporting that pretax profit rose 12 percent in the first half as revenue expanded faster than costs and higher interest rates fattened margins for its Hong Kong lending business. (AP Photo/Kin Cheung)
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In central Hong Kong, anyone can enter HSBC’s headquarters via an escalator. Rising through an opening, visitors will find themselves in the impressive atrium of the Norman Foster-designed building.

The bank, which was founded in 1865, is a legacy of British colonialism in the far east and is a major global financial player. But its history is tied to a 19th century war that pit the Qing Dynasty against Britain’s increasing demand for more trade with the reluctant Chinese.

Britain was granted a 99-year lease for the rocky island following the aftermath of the First Opium War and the Hongkong and Shanghai Banking Corporation (HSBC) was created to provide financing for the British Empire’s growing trade between China and British India.

Since then, HSBC has built a dominant business in Hong Kong, enjoying a market share of more than a third of consumer bankers in a city of 7.5 million, a metric few other major financial institutions can rival anywhere. The city accounted for around 60 per cent of HSBC’s pre-tax profit in 2018 and operates around 100 branches and over 300 express banking centres in Hong Kong. But the morning queues for these bank branches, and the dominance that HSBC enjoys, might become a thing of the past with the rise of a host of virtual banks.

The Hong Kong Monetary Authority (HKMA) has issued full banking licenses to these FinTech challengers in what is seen as the biggest shake-up in the city’s banking market in decades. It is already driving a rare recruitment spree as these new ventures seek to snap up talent.

“It’s very significant,” says James Lloyd, who specialises in FinTech and payments at Ernst & Young in Hong Kong. “Hong Kong is one of the top finance centres and has heavy regional concentration. Issuing new licenses to digital banks is a big deal.”

Digital or virtual banks, as they are known, operate like traditional banks in terms of product offerings like checking and savings accounts, car loans and mortgages, except they forego a physical retail presence such as a bank branch.

“The digitisation of banking has already been happening for a long time,” says Benjamin Wong, who has over 15 years experience in banking and finance in Hong Kong, the UK, Australia and the Middle East. Mr Wong, who also co-chairs the Financial Literacy and Inclusion Committee at the FinTech Association of Hong Kong, says virtual banks are a “no brainer” as the banking customer experience will become all digitised and the need to go to a bank will be dramatically reduced.

“There will be zero human-to-human contact. No more paper, no more branches. It’s an actual step for Hong Kong, which hasn’t had as much [bank] branch shrinkage as elsewhere,” he says.

So far, eight ventures have been granted virtual banking permits, and a few are joint ventures with major firms at the helm. These include SC Digital, a tie-up between Standard Chartered and PCCW, HKT, and Ctrip Hong Kong. PCCW is the owner of HKT, one of the dominant telecommunications companies in Asia, while Ctrip is a Chinese travel services provider.

Livi VB is a joint venture between Bank of China (Hong Kong), JD Digits and Jardines. The resulting company has been valued at HK$2 billion (Dh935 million). JD Digits is a finance-focused digital tech company while Jardines is one of Asia’s biggest conglomerates.

Insight FinTech is a joint venture between AMTD Group, a financial services institution, and Xiaomi, a Chinese tech company best known for its smartphones and IoT.

There will be zero human-to-human contact. No more paper, no more branches.

Infinium was formed by Tencent, Industrial and Commercial Bank of China (ICBC), Hong Kong Exchanges and Clearing which operates the Hong Kong stock exchange, Hillhouse Capital, and local entrepreneur Adrian Cheng. Chinese tech giant Tencent operates e-wallet WeChat Pay in Hong Kong and on mainland China.

Syed Musheer Ahmed, general manager of the FinTech Association of Hong Kong, says virtual banks still have a long way to go before becoming mainstream. People in Hong Kong are still more culturally comfortable with using cash, he says, while Octopus cards, which allow payment for public transportation and in many convenience stores, is also a mainstay of daily life.

“Online purchasing is not big in Hong Kong. Retail is still big in Hong Kong. It’s about trust. Trust is an important issue,” he says.

(FILES) In this file photo taken on June 22, 2016, a general view of the Victoria Harbour and the Hong Kong skyline from the Peak, a popular vantage point for tourists, is seen in Hong Kong. Banking giant HSBC on September 27, 2018 hiked its lending rate in Hong Kong for the first time in 12 years, a move that ends an age of cheap cash and could hit the city's famous red-hot property market. / AFP / Anthony WALLACE

“Hong Kong traditionally has been strong in finance, it is Asia’s largest [financial hub], but it is not a leader in tech yet.”

Mainland China has led in FinTech innovation in the region, as its two giant tech companies Tencent and Alibaba pioneered e-wallets, fusing e-commerce and retail spending in China to the extent that some call China a “cashless society”.

“The leading centre of FinTech innovation is mainland China,” says Mr Lloyd, who also believes cross-border collaboration and cooperation will be very significant, especially in the Greater Bay Area, which is a geographic and economically significant region in southern China very close to Hong Kong.

Big data will play a part in the future of these digital banks, as Mr Ahmed and Mr Lloyd notes. “It’s about touchpoints,” says Mr Ahmed, “understanding of data. The more touchpoints you have, the more understanding you have of customers. Service providers can use the expertise to drive certain products.”

Traditional banks aren't sitting still. HSBC has a peer-to-peer payments service called PayMe that boasts over 1.5m users. Overall, the disruption will be good for consumers, says Mr Lloyd. “We will see greater incorporation of financial services into customers’ everyday life, more offerings of genuinely differentiated services, and all-around better service,” he says.

“Certainly in 10 years time, queuing at a bank will be gone,” says Mr Lloyd, referring to the common sight of morning bank queues in Hong Kong. “Nobody will be expecting to queue. Although bank branches will continue to serve a social function, particularly in outlying areas.”