HSBC and Citi make a digital push to fend off competition from Asian virtual banks

Hong Kong is opening its doors to allow entry of eight new digital-only lenders with powerful backers

Pedestrians wear face masks as they walk past HSBC signage outside a branch of the bank in Hong Kong on April 28, 2020. HSBC on April 28 said first quarter pre-tax profits almost halved as the banking giant was battered by the global coronavirus pandemic while it embarked on a major restructuring. / AFP / Anthony WALLACE

Banks in Asia’s financial hubs such as HSBC and Citigroup are finding that the disruption from the coronavirus outbreak is helping them push back on a threat from a new breed of virtual upstarts.

With branches shut, customers social distancing and fearful of tainted cash, the brick-and-mortar giants are seeing a surge in demand for digital services for everything from wealth management to insurance. Now they are rolling out new video services and fresh mobile features for retail and affluent clients, speeding up a transformation to cement customer loyalty and reduce costs, consultants and bankers say.

“Most banks are using this as an opportunity to sharpen their strategy,” said Fergus Gordon, growth markets banking industry lead at Accenture. “There will be a longer-term impact on their balance sheets.”

The heightened digital activity comes just as banks were contemplating how to fend off an onslaught of fresh competition from virtual banks that are being allowed into Hong Kong and Singapore.

For HSBC, which gets about a third of its revenue in Hong Kong, the stakes are high. The city is opening the door to eight new digital-only lenders with powerful backers such as Alibaba Group. The start-ups could capture as much as $15 billion (Dh55.1bn), or 30 per cent, of the city’s banking revenue, Goldman Sachs Group estimated in 2018.

At HSBC, the share of retail transactions in Hong Kong conducted digitally hit 94 per cent in March. Active customers on its mobile app jumped almost 40 per cent from a year earlier, to 1.12 million. Citigroup’s digital wealth management transactions, including stock and foreign exchange, rose 37 per cent in the first two months of the year in Hong Kong. Overall in Asia, its digital brokerage and mutual fund transactions jumped more than 70 per cent in March from January.

“We do anticipate that Covid-19 will lead to an acceleration in customer adoption of digital channels, which will continue,” said Greg Hingston, HSBC head of wealth and personal banking for Asia Pacific.

Citigroup, during the crisis, has added features to its mobile app such as a “Help” function and is working on enabling two-way messaging.

“Our view is [that] customers will continue to embrace digital [banking] once the pandemic is behind us after having experienced first-hand the added convenience and possibilities it offers,” said Gonzalo Luchetti, head of Asia Pacific and Emea Consumer Banking.

Bank of China (Hong Kong), which has the biggest branch network in the city, has accelerated the roll-out of digital services, speeding up its plans by months, said Arnold Chow, an executive in charge of the personal digital banking products unit for investment and insurance.

Singapore’s three largest lenders, led by DBS Group, are reporting huge increases. More than 24,000 online equity-trading accounts were opened at DBS since Singapore tightened its lockdown on April 7. It saw more than 35,000 migrant workers, who are suffering the brunt of the city’s virus outbreak, opening bank accounts in less than two weeks. Oversea-Chinese Banking Corporation and United Overseas Bank are reporting similar digital trends.

Gains for the bottom-line could be significant, absorbing some of the shock from the billions in loan losses provisioned by banks. DBS’s digital customers made up 52 per cent of its retail and small business base in Singapore and Hong Kong last year, up by almost a quarter since 2017. Such clients carry a cost-to-income ratio of 33 per cent, compared with 53 per cent for traditional customers, while delivering twice the income per head.

At the same time, its digital rivals are being stymied in Singapore, where authorities have pushed back plans to issue licences to the second half of the year from June, citing virus restrictions.

Hong Kong’s challengers have been slow out of the gate, largely offering gimmicks to attract customers. The first mover of the new virtual banks, ZA Bank, attracted interest from about 24,000 people in a programme started in January as it offered a 6.8 per cent deposit rate to select clients. WeLab, backed by Alibaba, is seeking to lure customers before the launch of its bank by offering interest-free loans to pay in advance a HK$10,000 (Dh4,738) handout promised to each resident as part of the city’s virus relief measures.

Both banks declined to comment.

Like Singapore, Hong Kong has been playing catch up with other major markets in Asia in financial technology adoption. About 67 per cent of digitally active people in both Asian hubs conducted financial services online last year, far below the reach of 87 per cent seen in China and India, according to a report from EY.

But the biggest potential gains could be seen in other parts of the world, also under lockdown. In the US, digital banking usage is just 46 per cent, while in Europe the rate varies from as high as 82 per cent in Russia to as low as 35 per cent in France.

Lenders are realising that delivering more services digitally makes them more resilient to disruptions in their operations, said Andrew Gilder, Asia-Pacific banking and capital markets leader at EY.

“In the short term, they could defend some of the threat from the virtual banks,” he said.