Virtual banks, prevalent overseas, have finally arrived in Hong Kong. For a global financial hub, we have been slow to adapt. Now, the city’s banking sector will have to play catch-up with such places as Japan and Singapore. The new banks, which offer purely digital or online services with no physical branches, will hopefully add impetus to the development of fintech. Ever cautious, the Hong Kong Monetary Authority has so far handed out three licences out of 33 applicants. Two winners, Livi VB and SC Digital Solutions, belong to joint ventures respectively backed by Bank of China (Hong Kong) and Standard Chartered , both money-printing institutions. A third, ZhongAn Virtual Finance, is co-owned by mainland insurer ZhongAn Online. On average, each virtual bank has HK$1.9 billion in capital, much higher than the minimum of HK$300 million. Five other applicants may be approved in coming months, but the first batch will be allowed to operate for a year before new licences are issued. Understandably, the HKMA wants to minimise financial risks and prefers the new entrants to be backed by established financial players. This may offer greater protection to customers, but it also has drawbacks. According to an estimate by Citigroup, about 10 per cent of existing banks’ revenue may be lost to virtual banks over the next decade. The biggest banks are especially exposed. No wonder they want to be the first in the new game, and the HKMA is helping them. By tacitly creating a higher barrier to entry, newer and more innovative players may be screened out. This will not bode well for competition. With the new batch of virtual bank licences, the authority needs to be more open to ensure a level playing field. After all, the idea of virtual banks is that without the need to pay Hong Kong’s high rents and staff overheads, they can cater to less affluent customers and smaller companies as well as reduce service charges. Other than being online-only banking, their business model also has to be different. Qualification for a licence must reflect the need to facilitate smaller players. We don’t want the virtual banks ending up being subsidiaries of the big dominant banks. In the past two years, the HKMA has been busy promoting the development of Hong Kong into a smart banking city. Virtual banks’ ability to operate through mobile and online apps will create new possibilities for fintech with innovative products and services, and preferably at lower costs and with greater convenience to customers. Overseas, for example, people have long used a digital banking system via mobile phone numbers or email addresses to make payments between individuals or companies. The authority must understand that fintech means new talents and innovation, and that means taking a risk with newer and younger players.