Hong Kong’s push for digital banking will transform the retail banking sector

HONG KONG’S finance regulator, the Hong Kong Monetary Authority (HKMA), is giving out online-only banking licenses. This gives fintechs and other smaller firms an opportunity to gain access to the territory’s retail small business banking market.

With the new licenses, small and medium enterprises (SMEs) who often face difficulties in opening bank accounts in Hong Kong, will have more options of banking with firms operating under a different model.

Services such as small loans, foreign exchange, and payment services will be more readily on offer for the smaller businesses.

This move is expected to challenge the dominance of banking conglomerates in the territory. For perspective, HSBC, one of Hong Kong’s dominant banks, made US$1.4 billion from retail banking and wealth management operations in the second quarter alone. That accounts for 80 percent of its global retail banking revenue.

The challenge for the new digital banks will be to build a loyal customer base quickly and to generate a profit in the next few years. This can prove difficult, especially as they work to build out product offerings while coping with high compliance costs.

HKMA said it would be supervising the virtual banks in the same way as incumbent players. Tech companies would thus have to be in a habit of thinking about capital and liquidity requirements, as traditional lenders do.

In Hong Kong, the financial markets are dominated by HSBC, Bank of China (Hong Kong), Standard Chartered, China’s Ant Financial, Tencent, and Ping An Insurance.

Standard Chartered is joining in the bid for a digital banking license under a separate entity. The new platform will move away from its global and legacy technology systems, allowing the bank to explore new avenues, work with startups and tap new clients.

There is no news on HSBC applying for the license in Hong Kong, as the bank is said to be focusing on building up its core services with digital technology.

Over 70 companies have expressed interest in applying for licenses. This includes telco operator HKT Trust and HKT, as well as fintech companies WeLab and TNG Wallet, according to Reuters. Bank of China (Hong Kong), smartphone maker Xiaomi and online insurer ZhongAn were also rumored to have applied.

Currently, it is unknown how many licenses would be granted. Although, the number is not expected to be more than three to ensure a constant rollout. The first licenses are expected to be awarded by end of this year or Q1 of next year.

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