You may be familiar with this banking experience: people jostling one another, snakelike queues moving slowly and staff unhurriedly handling paper documents. For most people, this probably won’t be a pleasant experience. But have you ever wondered why we have to go to a branch banking in person, hand over stacks of paper documents and wait for the enduring review process? Is this practice incompatible with the long-held motion “Time is Money”? And have you wondered why banks impose high service charges, low saving rates but high lending rates despite their profitable and competitive nature?

Let’s go further. Would you believe the banks bear the social corporate responsibility and will not deprive you of your interests? Would you truly trust the bank manager recommending you the best product catered to your needs? Hold on. We’re not saying banks discriminate against the poor, but it does appear that the loan approval is more dependent on candidates’ ability to pay, instead of their borrowing needs. Here is an authentic life-example. In light of the worsening economy, although the Hong Kong government has advised commercial banks to ease their lending standards, many SMEs are still turned away because of their dropping sales and lowering creditworthiness. Apparently, the bank do not offer fuel in snowy weather but doing business as icing on the cake.

To our relief, technology can be a solution to the aforementioned deep-rooted banking pain points. Big data, artificial intelligence and blockchain can instantly compare different banks’ interest rates and analyze the working performance and patterns of different banking managers. This year, the Hong Kong Monetary Authority has issued eight virtual banking licenses to Livi VB (Bank of China, Jardine & JD Digits), SC Digital Solutions (Standard Chartered, PCCW and Ctrip), ZhongAn ( ZhongAn & Sinolink), WeLab, Ant (Alibaba), Infinium (Tencent), Insight Fintech HK Limited (Xiaomi & AMTD) and Ping An (Ping An Insurance). The first three licensed virtual banks told the media in early September that they expect to open by the end of the year. It was thought that the virtual bank war was ready to start, yet so far no horn sound has been heard.

There is the worrying trend that the virtual banks may get off to a bad start, given Hong Kong’s vigorous social movements, political turmoil and economic downturn. Interestingly, except Standard Chartered’s virtual bank, the rest are all Chinese-linked companies. As to speak, the banks may be lucky to run away from the wave of destruction, but can they survive the “Yellow Economic Circle”, where some people boycott Chinese-linked companies? Meanwhile, would the older generation, who have already tried hard to use e-banking, be willing to adopt virtual banks, another new banking system?

As the name implies, virtual banks are banks without entities. Unlike traditional banks with branches, virtual banks mainly provide retail banking services such as deposits, loan, investment and insurance purchases through the Internet, mobile application programs and other electronic platforms. Its deposit protection policy is the same as that of traditional banks, with a maximum guarantee of HK$500,000. Good news for users! They can open accounts and enjoy services in few minutes by uploading their personal information.

Virtual banks have been popular in Europe. The First Internet Bank in the United States was founded in 1999; UK’s virtual banks, also known as the “Challenger Banks”, has already offered a variety of services, including automatic quick approval for loans and account opening within few seconds. MyBank, a virtual bank in Mainland China, only takes 3 minutes for clients to apply for a loan where Artificial Intelligence approves it in 1 second with 0 staff required during the process.

With the rapid development of electronic technology, Hong Kong, as the leading financial center in Asia, is yet lag behind in FinTech innovation. Hong Kong ranks 11th on the Global FinTech Index in the 2020 report. Singapore, on the other hand, ranks fourth in the world and first in Asia. As always, the US and the UK lead in technology, with San Francisco Bay Area, London and New York listed respectively in the top three. It seems that there is no correlation between the International Financial Center and the advancement in science and technology. Hong Kong’s banking system inevitably has its strengths. But to lead in the global competition, its policy and execution must keep pace with the times.

The introduction of virtual banks to be on par with foreign countries will undoubtedly help Hong Kong consolidate its position as an IFC. The “smart city” will be created if Hong Kong  takes advantage of virtual banks to combine FinTech such as artificial intelligence, big data and blockchain with smart technologies such as mobile payment and online platforms. According to HKMA, virtual banks mainly serve retail customers and SMEs. Hong Kong FinTech development will be facilitated with the provision of more pleasant and cost-efficient experiences for customers. To our luxuries, service quality and competitiveness will also be enhanced. 

However, to some scholars’ worries, the cost of a virtual bank to attract a single customer may be up to HK $1,500. Unlike foreign countries, Hong Kong’s market is narrow with numerous bank branches which are adjacent to residential buildings. It is highly likely that existing virtual banks will merge to 2 or 3 large ones to hold core customers while the rest fade out of the market. Also, some bankers argue Hong Kong’s e-banks are already mature and huge. The investment of capital and time into developing virtual banks for the sake of reducing rent and labor costs is unnecessary. Another question to HK FinTech ecosystem, will it be difficult for Hong Kong’s FinTech startups to compete with Chinese technology giants? At the end of the day, what we should be asking, or what the market should be telling us would be — what problems are virtual banking trying to solve?

Jump to next article: Virtual banks: To be or not be? （Part II）

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