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Will HK's new virtual banks deliver what customers really want?
As the Hong Kong Monetary Authority gives the green light for virtual banks to operate, what do these banks need to do to succeed in the territory's highly competitive market?

Anthony Chiam
--> July 04, 2018 | Anthony Chiam
  • While virtual banks have made major inroads in recent years, especially in China and the USA, they still have not figured out how to dominate the industry
  • One of the lesser discussed issues when it comes to virtual banking revolves around making sure that the channels deployed for the services are inclusive and more age-agnostic
  • Virtual banks must ensure that the services they provide will reduce, and not induce friction for the sector and their customer base

The pace of innovation in the banking sector is ramping up. As part of a series of initiatives to propel Hong Kong into the new era of smart banking, the Hong Kong Monetary Authority (HKMA) shared that it would begin to issue licences to virtual banks this year. These “virtual banks” have no required physical presence, except the need to have at least one physical branch to handle complaints, before entering the City’s established banking ecosystem. They primarily deliver banking services through the internet or other digital channels. With over 50 companies having expressed their interest in applying for licences, this new regulation will be a major game changer for Hong Kong.

Amidst all the hype around financial technology (fintech) disruption in the banking sector, many customers in Hong Kong are ready to embrace branchless banking with their main financial institutions. But what exactly are they hoping to embrace and are virtual banks ready to offer it? To truly win over the Hong Kong market, virtual banks must first understand a key issue that even traditional banks have to confront constantly – recognising and addressing the customer’s evolving needs in all that they do. 

Looking to traditional banks to establish the right foundation

While virtual banks have made major inroads in recent years, they still have not figured out how to dominate the industry. For instance, in China, two of the most dominant mobile payment players, Alibaba’s MyBank and Tencent’s WeBank, still fall behind when compared with the five largest banks who have assets worth at least 100 times of their digital counterparts. In the west, the First Internet Bank and Bank of Internet USA – with respective assets of $8.5 billion and $2.4 billion – are considered much smaller when placed next to the trillion-dollar asset size of larger players like Bank of America and Citi.­

To earn a seat at the table, virtual banks should begin by looking at what the incumbent has been doing right. Despite the need to innovate and improve inefficiencies, traditional banks have done well when it comes to building trust amongst customers while offering a wide range of services. For this reason, it will be some time before virtual banks come close to encroaching on traditional players as complex financial products will be difficult to completely digitise and will rely on the human touch.

The challenge for the challenger banks

One of the lesser discussed issues when it comes to virtual banking revolves around making sure that the channels deployed for the services are inclusive and more specifically, age-agnostic. Although they save a lot from not having physical branches, virtual banks may not be as successful when it comes to winning over Baby boomers and Generation X as many of them still find technology difficult to use and trust. Virtual banks must figure out how they can connect with these customers to build customer loyalty in the long term.

Cybersecurity is another key concern for people who view mobile apps as not being secure enough to conduct their mobile banking. For this reason, these individuals conduct banking on personal computers or even prefer a bank’s Internet browser. Balancing the need to explain risks and contractual terms with a mobile app’s UX and ease of use will be another area virtual banks must also learn to manage.

Virtual banks must focus on adding value to customers instead of market disruption

To ensure that Hong Kong continues to have a healthy and thriving financial ecosystem, traditional and virtual banks must carve out their spaces and create new value for customers. To do so, they must first come back to what matters – understanding customer pain points and putting customers at the centre of all they do.

Across the board, customers are also used to having all their banking services housed under one roof. As virtual banks may only be able to offer some of the services covered by traditional banks, others are concerned that banking overall may become more fragmented. To avoid this, virtual banks must ensure that the services they provide will reduce, and not induce friction for the sector and their customer base.

When it comes to crossing the chasm to embrace innovation, there will always be the early adopters, late majority, and laggards across the spectrum that financial institutions need to address at pace. Ultimately, customers must be empowered to make their choices.  With more education and efforts to build trust, more people will eventually ease into their digital banking journey.

Anthony Chiam is former general manager and head of international insurance services at American Express, and is currently the head of financial services at market research firm, JD Power. The views expressed herein are strictly of the author.




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Keywords: virtual banks, fintech, technology, KYC