Hong Kong’s appeal as a virtual banking hub is about to be put to the test as first online lenders arrive

Hong Kong’s appeal as a virtual banking hub will soon be put to the test, as the first round of licence approvals – due by the end of the year – will enable new competition in a city that ranks as one of the most heavily saturated for banking services globally.

Analysts say virtual banks are likely to look beyond Hong Kong’s borders for customers, a move that could see expanded banking services regionally, and overseas.

The Hong Kong Monetary Authority will issue the first batch of virtual bank licences by the end of this year. This is one of the seven measures announced by the HKMA in September last year to boost smart banking in the city.

Virtual banks operate purely online and do not require a physical branch network.

Of the 29 virtual bank licence applications before the HKMA, submissions have been made by WeLab, HKT, Standard Chartered Bank, as well as an alliance between Australia’s Airwallex, Bank of East Asia (BEA), and mainland firm Sequoia Capital China.

Tencent-backed Airwallex shifted its headquarters to Hong Kong from Melbourne in August.

If approved the banks will compete in a crowded market as Hong Kong has 187 traditional banks, including some of the biggest players globally such as HSBC Holdings.

There are 21.43 bank branches and 50.09 ATMs for every 100,000 residents in Hong Kong, higher than the global city average of 12.6 and 47.55 respectively in 2016, according to World Bank data.

“Hong Kong is already a heavily-banked market, with a large number of players relative to the size of the population,” said James Lloyd, partner and Asia-Pacific fintech leader at EY.

“We’ll see some of the more ambitious virtual bank applicants focus not just on the local market but also on using Hong Kong as a base from which to build a regional or even global proposition. The Greater Bay Area is a huge opportunity for those applicants with the resources to address it – as are the growing markets of Southeast Asia,” he said.

The bay area scheme is a plan by Beijing to link 11 southern cities into an integrated economic and business hub.

During its move to Hong Kong, Airwallex co-founder and chief executive Jack Zhang said the city was an ideal location for its headquarters.

“Hong Kong is an international financial centre where we can serve our clients worldwide. It is close to all Asian countries while it has many international companies operating here,” Zhang said.

Another applicant, online lender WeLab, is focused on the bay area, according to co-founder and chief executive ­Simon Loong.

“WeLab has accumulated over 32 million users and around 20 per cent of which are from the Greater Bay Area,” Loong said.

“Virtual banks have the benefit of being built with a digital strategy and implementation for the digital consumer and we see great potential in Hong Kong and the Greater Bay Area,” he said.

Nevertheless, Lloyd warned of challenges for certain applicants.

“Even if only a small number of applicants are ultimately approved, that still means the introduction of a range of new competitors. Moreover, the first batch of virtual banks are likely to come to market around the same time – perhaps mid to late next year,” Lloyd said.

“The competition among the new players is likely to be intense,” he said. “At the same time new players will need to compete with traditional banks who are increasingly gearing up their digital offerings,” he said.

“To win in this market these new players will need to offer a truly differentiated proposition – perhaps through strategic partnerships with key technology and distribution players.”