Hong Kong virtual bank licence will be out of reach for all but a few, says fintech boss
David Rosa, CEO of Neat, says the minimum capital requirement of HK$300 million will rule out all but the biggest applicants
Hong Kong Monetary Authority’s decision to set a minimum capital requirement as high as HK$300 million (US$38 million) to obtain a virtual banking licence is likely to mean only a few applicants meet the criteria and receive approval, according to Neat, a financial technology start-up based in the city.
The rise of fintech start-ups has given birth to innovative technologies that can enhance the customer experience, lower the costs of financial products and facilitate the granting of loans to consumers who might otherwise struggle to borrow from traditional banks because they do not have a credit history.
But many of these businesses will find it difficult to justify the return on such high capital requirements for a virtual banking licence, which is the same amount needed for a full banking licence, said David Rosa, CEO and co-founder of Neat.
In comparison, the UK’s banking regulators have set substantially lower capital criteria for licences – equivalent to just €5 million (US$5.8 million) – that encourage the entry of niche players and start-up banks. This opens the way for new products and more choice to help young companies and consumers, even if they are less profitable, and fosters a more innovative environment, Rosa said.
“Hong Kong is losing out [on the chance] to be the ultra competitive market place that it can be. It’s only good for the big boys,” Rosa said. “What remains to be seen is what solutions the new virtual banks are really going to bring to the market.”
Neat, founded about two years ago in Hong Kong, focuses on providing digital alternatives to traditional banks for individuals, start-ups and small and medium enterprises. It offers business accounts accompanied by Mastercard debit cards, and also features services for payroll, expense management and for receiving global payments.
Seventy companies including Standard Chartered Bank, payment operator Yedpay! and online lenders WeLab and Chong Sing Holdings FinTech have expressed interest in applying ahead of Friday’s deadline for applications. The first batch of licences is expected to be issued around the end of this year or the first quarter of 2019.
The decision to grant a licence or not will depend on whether the applicant has the required financial capital, the backing of a strong parent company, tight compliance processes and whether there is a sound exit plan to claw money back to depositors in case of a collapse.
By becoming a virtual bank, a company would be able to take deposits like a traditional bank, and subsequently use a fraction of the funds to turn them into loans several times bigger. Moreover, virtual banks would not need to maintain any physical branches.
But questions remain as to whether applicants would want to outsource their services or enhance them by partnering with others.
In China the dominant digital payment providers, Tencent Holdings’ WeChat Pay and Ant Financial Services’ Alipay, were able to link up with consumers’ bank accounts, making them the primary platforms to engage retail customers for financial and payment services ranging from cinema ticket purchases to booking taxis.
But the phenomenon has turned the banks themselves into the biggest losers in China’s retail financial services sector, with their profits watered down and having borne the costs of “know your customer” compliance and opening bank accounts for their local customers.