Hong Kong's first digital bank heralds arrival with 6% interest rate

ZA Bank's offer is over 3 percentage points more than banks such as HSBC and Standard Chartered as competition heats up

This picture taken on August 3, 2019 shows a general view of residential and commercial buildings in the Kowloon district (foreground) with the skyline of Hong Kong Island past Victoria Harbour (C) in the distance. / AFP / ANTHONY WALLACE
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The first of Hong Kong’s new generation of digital banks has announced its arrival with a 6 per cent introductory rate for deposits.

ZA Bank, one of eight firms preparing to start digital-only banks in Hong Kong, has begun a trial run that pays a select group of depositors over 3 percentage points more than banks such as HSBC and Standard Chartered. Though many doubt the new banks will be able to maintain such rates, the offer is a warning of upcoming competition for the city’s $410 billion (Dh1.65 trillion) local currency time-deposit business.

“This is more of a gimmick, which shouldn’t become a norm,” says Terry Siu, treasurer at CMB Wing Lung Bank, which pays 3.8 per cent to new savers for two-month Hong Kong dollar deposits. “But competition for funds is indeed getting higher as eight more banks are coming out.”

ZA began a pilot last month for the city’s first digital-only bank. It’s offering the 6 per cent rate for three-month Hong Kong dollar deposits capped at HK$200,000 (Dh94,593), according to a person with knowledge of the matter. The accounts are set at a 2 per cent rate, but offer a top up of as much as 4 per cent to select clients, the person said. Standard Chartered, HSBC and BOC Hong Kong Holdings pay 1.9 per cent to 2.3 per cent for the maturity.

Groups of companies including Chinese giants Ant Financial and Tencent Holdings were granted licenses to operate virtual banks last year by the Hong Kong Monetary Authority (HKMA).

Currently HSBC largely dominates Hong Kong's financial services landscape. Hong Kong and China together contributed two thirds of HSBC’s adjusted pretax profit in the first three quarters last year. The group has $1.1 trillion of assets across Asia, according to its interim report last year, with a majority concentrated in Hong Kong where it has 21,000 employees.

People walk by a vandalized road sign near a HSBC Bank branch covered by panels after damaged by pro-democracy protesters in Hong Kong, Saturday, Jan. 4, 2020. The months-long pro-democracy movement has extended into 2020 with further mass demonstrations. (AP Photo/Andy Wong)
A HSBC branch was damaged by pro-democracy protesters in Hong Kong earlier this month. The bank became the target of the public’s ire after the police arrested four people linked to a group that helps pro-democracy protesters pay legal fees. Photo: AP

As pro-democracy protests in the former British colony persist, deposit rates could stay elevated amid concerns over money outflows. So far there haven’t been any signs cash is fleeing the city though banks have said some clients are inquiring about opening accounts elsewhere as a precaution. The Monetary Authority — the de facto central bank — steers the economy and maintains stability by pegging the city’s dollar to its US counterpart.

The rates stand in stark contrast to parts of the developed world, where central banks have slashed key rates below zero, forcing banks in some cases to pass negative rates on to retail customers. In Denmark, where rates have been negative the longest, a bevy of banks now charge depositors.

Deposit rates are also lower among other internet banks globally. Monzo in the UK offers deposits of about 1.3 per cent, while Australia’s uniquely named 86400 pays 2.25 per cent on some deposits. In the US, Ally boasts of accounts with a 1.6 per cent rate and three-month CDs at 0.75 per cent, while Goldman Sachs Group Marcus venture offers a savings account with a 1.7 per cent rate.

A spokeswoman for ZA, a unit of ZhongAn Technologies International Group, declined to comment on the rate, but said that it will roll out new offerings in stages. ZA has said it will provide users with a “full suite of services 24/7,” allowing customers to open an account in five minutes with just a Hong Kong identity card.

An HKMA spokeswoman said in a comment to Bloomberg that it “notes” that some banks may offer “promotional” rates to some customers, while emphasising that banking products are commercial decisions.

“While the Monetary Authority will not interfere with the commercial decisions of individual institutions, it would be a concern if a virtual bank planned to aggressively build market share at the expense of recording substantial losses in the initial years of operation without any credible plan for profitability in the medium term,” she said.

Virtual banks are similar to traditional retail banking services in that they will be able to accept deposits and give out loans. But they aren’t expected to set up physical branches, which will keep costs down.

Bloomberg Intelligence anticipates the new banks will find it difficult to make inroads into the city’s loan market, grabbing just a 1.5 per cent share by 2025, since they will be held back by challenges in attracting deposits and high costs for interbank funding.

Hong Kong’s “citizens are less inclined to adopt new FinTech offerings, as they are accustomed to comprehensive services offered by global banks such as HSBC and Citibank," says Bloomberg Intelligence senior analyst Francis Chan. "Online lenders may find it difficult to tap new customers, partly due to the dominance of credit cards and Octopus cards.”

The Octopus card, started in 1997, is a reusable contactless stored value smartcard for making electronic payments in online or offline systems in Hong Kong. It is widely used to pay for public transport in the city.

Alan Yip, a senior foreign-exchange strategist at Bank of East Asia, is also sceptical about the fat rate being offered by ZA becoming a trend.

“Traditional banks are only taking a wait-and-see approach now as the virtual banking business has yet to make a splash,” he says. “The market impact shouldn’t be very significant yet as they will need time to develop, therefore, the higher rate may not become a trend soon.”

Nevertheless, competition is heating up for a rich vein of the financial hub’s banking industry. Goldman Sachs estimated in 2018 that $15bn, or 30 per cent of the city’s total banking revenue, is up for grabs.