Insight & Analysis

How Hong Kong is paving the way for a virtual banking revolution in Asia: treasurers take note

Published: Sep 2019
City view of the city of Hong Kong at twilight

European banks have been offering virtual banking services for some time. The Asian market is just picking up, with Hong Kong making a bold effort to get ahead of the game. There will be an indirect but significant effect on treasury operations, says a regional expert.

With the latest statistics showing total China-US export-import value plunged 9% year-on-year, intricate global economic relationships, and the rise of neo-protectionism ideologies, there are few viable measures to support long-term growth of the Greater China economies, so notes Meng Kei Sou, Chief of Staff in the Regional CEO’s Office at Hong Kong-based Chida Estates Limited.

Sou, who’s professional focus is on treasury, transaction and cash management, and strategic asset investment projects management, sees the promulgation of the region’s Greater Bay Area (Guangdong-Hong Kong-Macau) strategy as one to rival Silicon Valley. “We believe more policy deliberations will emerge with an aim to promote growth through closer economic integration and collaboration,” he says.

As part of this plan, the introduction of Hong Kong virtual bank license by the Hong Kong Monetary Authority (HKMA) in mid-2018 is “precisely such an initiative designed to exploit the comparative advantages of Hong Kong and Mainland China in the areas of financial services and technology industries respectively”.

In fact, the new industry arising from the introduction of the Hong Kong virtual bank license is only made possible by closer economic integration amongst GBA partners, and leveraging of the core competences of Hong Kong in the financial services industry and those of Mainland China (particularly Shenzhen) in the technology space.

Globally, the banking industry is undergoing something of a renaissance, comments Sou. “First, there’s been restitution of interest in retail consumer businesses that potentially offer a higher profit margin and more stable operating (ie Basel III-friendly) liquidities,” he says.

“Second, there is a paradigm shift in the role of technology, from being a business peripheral, to being the engine and transmission in the financial services ecosystem.” Indeed, it came as no surprise to Sou that, as one of the biggest banks in the world, J.P. Morgan Chase’s five-year development plan positions financial technology investment and new branch expansion as a core part of its consumer franchise mandate.

Making new ground

With close proximity to China, a robust legal system, and a business-friendly environment (fourth in World Bank’s 2019 ‘ease of doing business’ rankings) fuelling its continued economic growth, Hong Kong’s consumer/retail banking business is considered to be one of the most lucrative in the world. Competition for new virtual banking licenses is, as expected, intense. This is in spite of high market-entry barriers.

Arguably, the new Hong Kong virtual banking model simply creates a new guise for traditional banks. It’s true that as far as industry regulation and governance are concerned, the new banking type is treated much the same as its conventional counterpart. Both require the same minimum capital requirement of HK$300m (€35m), for example.

But HKMA’s ‘one size fits all’ approach is uncommon. In Europe, where the concept of virtual banking first gained ground, there is notable differentiation. “In an up-and-coming and tech-savvy country such as Lithuania, the central bank’s ‘welcoming package’ for new players not only comes with a compliance grace period, but also a notably investor-friendly capital requirement of €1m – only 3% of the amount imposed by HKMA,” observes Sou.

Hong Kong progress

As of June 2019, HKMA had only granted eight licenses out of nearly 50 applications it received. For more effective control and governance, it is expected that only a few more licenses may be allowed in the first year ‘soft launch’ period, says Sou. Taking into account the new banks’ backgrounds, and market development so far, there are several takeaways from this, he believes. He sums them up as follows:

High balance sheet strength

In spite of the high market barrier, each virtual bank on average holds HK$1.6bn (~€185m) capital, a level five times HKMA’s minimum expectation. The exceptional financial strength backed by the ultra-cash-rich Chinese tech unicorns – one pillar of this movement – is pivotal not only for the new ventures’ development needs but also for the long-term stability and sustainability of the new virtual bank ecosystem.

Technology as a critical factor

It comes as no surprise to see that behind every new virtual bank there is always a tech unicorn(s) with impeccable commercial success, technological know-how, and experience gained from the Mainland Chinese market. During the inception period, the role of technology unicorns – such as Ant Financial and Tencent – was critical. Specifically, their achievements and experience in data technology, machine learning and e-commerce allowed the new ecosystem and its underlying infrastructure to take shape with the least time and effort.

Conspicuous absences

The contribution of China’s tech elite in this new banking business is obvious but so too is that of indigenous HK players and, more significantly, foreign corporates and investors. So the biggest surprise comes from HSBC as the only note-issuing bank in Hong Kong with a clear intention of not going after the virtual bank business. With HSBC’s domination in retail deposits, and its strong foothold in the consumer and SME banking business, it intends to switch into a defensive mode to avoid the risks of cannibalising its existing business. Citi, another key player in Greater China consumer banking, has come to the same conclusion.

Drivers for investment

Besides the belief that there are many opportunities still up for grabs in the new virtual banking business, recent interviews with virtual bank C-level executives carried out by Sou demonstrate that their investment decisions are commonly guided by one or more of the following considerations.

Comparative advantage

There has been a boom of financial technology innovation and startup culture in China. With high-income growth, supporting government policies, and high public adoption in mobile technology, China has successfully created a ‘Chinese Character Silicon Valley’ in Shenzhen – just one hour away from Hong Kong. With Hong Kong’s strength in global financial services integrated with China’s technological forte (especially in data technology such as artificial intelligence (AI) and Big Data), tremendous economic synergy could be generated from the effort to promote regional economic integration.


Through more efficient use of staff and technology, the potential in operating cost savings becomes a major economic consideration. Under the new HKMA rule, a virtual bank is required to operate only one representation office. The biggest advantage to being a virtual bank stems from its lean operating cost structure, enabled by automation and electronic channels. With AI, Big Data and cloud technology maturing, even a customer service department can mostly be taken over by a ‘chat-bot’.


As a sharp contrast with a conventional retail bank, a virtual bank relies heavily on internet technology and mobile technology for the end-to-end customer interface cycle. This includes aspects such as communication, customer on-boarding, compliance checking, account opening, product marketing and sales fulfilment. The operating-cost advantage enjoyed by a single-channel virtual bank could be enormous, considering Hong Kong’s retail site costs are amongst the top three in the world.

Customer deposit

From the perspective of the bank’s balance sheet, liquidity and asset-liability management, not every dollar deposit is valued the same. The rush to tap into ‘sticky’ deposits and operating accounts is best evidenced by J. P. Morgan’s high profile come-back into the retail consumer business. As for Hong Kong, the average profit margin of a retail bank franchise is about 2% to 5% higher than that of a corporate bank. The margin is expected to be even higher for virtual banks.

Customer segmentation

Breakthroughs in the areas of AI, Big Data, and cloud computing offer a strong propellant towards the virtual bank, providing a far more dynamic and practical approach in customer credit-scoring and product variety pricing.

Treasury impact

Although the virtual banks will not be in operation until about late Q3 to Q4 this year, as per HKMA requirements, the direct impact of their arrival will be on the whole Hong Kong banking system, says Sou. An event of this magnitude “has rarely been seen since the HKD-USD peg in the 1980s”, he notes, adding that the timing of this massive shift is “inconvenient”, given the events that have been unfolding of late in Hong Kong.

Indeed, the timing is difficult not least because the eight new virtual banks are mostly unicorns from Mainland China and Sou feels their appetite for capital will be huge. “It is essential to factor in the virtual banks’ needs when they open for business later in the year; the situation is already worrisome and thus we and many bankers are watching very closely,” he says.

Market liquidity, especially for USD would, he feels, be even tighter after the virtual banks officially open. “The HKD/USD peg and Hong Kong and Mainland market liquidities have the qualities to become a Black Swan,” he warns. “With eight more new banks entering the market, the outlook of interest rates is to the north while that of HKD CNH is to the south.”

Herein are the implications of the arrival of the new virtual banks for corporate treasurers – and action should be taken now, urges Sou.

Firstly, treasurers should prepare for sudden and sharp changes in interest rates. Secondly, treasurers should reconsider their asset liability hedging strategy, particularly where they have strong trade flows within Greater China because, as Sou notes, “a good portion of them will have different long-short positions in CNH, USD, and HKD”. Thirdly, he believes treasurers should start planning for the mid- to long-term by factoring in the possibility of a de-peg or re-peg of HKD, with existing treasury strategies and policies taking on board different scenarios and the likely level of risk exposure.

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