Digital-only-banks likely to have an impact, but not in the short term, experts said

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The Hong Kong Monetary Authority (HKMA) has issued an update on guidelines related to the authorization of virtual banks in Hong Kong and commenced a public consultation process earlier this year. The final regulations would be issued in May, while non-financial and traditional banks can apply for the licenses now, according to a statement from the HKMA.

Virtual banks, sometimes referred to digital-only-banks, deliver retail banking services primarily, if not entirely, through the internet or other forms of electronic channels instead of physical branches.

Some institutions, both local and overseas, have already expressed interest in applying for licenses to set up virtual banks in Hong Kong.

In a city where few care about creative ideas beyond property prices and collecting rent, Hong Kong is often seen as struggling with creativity drought, and the move by the HKMA is perhaps an important step to take the city into a new era of smart banking.

“Overseas experience has shown some successful virtual bank operations, while small and medium enterprises could get better banking services and lending,” Arthur Yuen, the deputy chief executive of the authority, said during a media briefing earlier this year.

Ricky Knox, founder and CEO of Europe-based digital bank Tandem, agreed that virtual banks can move faster on innovation than traditional banks, and that adaptability and agility represent the main strengths of virtual banks.

However, the launch of such digital banks could potentially send a disruptive wave to the traditional banking industry which could in turn impact customers in Hong Kong, according to Ivan Lee, director of the Hong Kong-based Fame Key Management Service and former big data and business analytics director at Oracle.

“On one hand, customers are offered alternatives to revisit relationship with their banks and what works best to them. This is probably good news to the millennials, who seem to be more willing to accept new technologies such as all the new features in the cyber world in recent years and things like online shopping. On the other hand, in the incumbent banks’ perspective, virtual banks could pose an unprecedented challenge to them on their bottom line and impact their efficiencies to run the business so as to reduce cost or differentiate themselves from these potential game-changers,” Lee told Harbour Times, adding that while it is likely digital-only-banks could have an impact on the banking industry in the future, he does not expect these newcomers to challenge the traditional market leaders right away in the short term.

“Take the U.S. as an example. The First Internet Bank and Bank of Internet USA are the two leading virtual banks at the moment. As of now their assets amounted to US$8.5 billion and US$2.4 billion respectively, compared to the trillions of assets processed by traditional banking leaders like JP Morgan, Citi and Bank of America.”

Some also criticize the requirement set by HKMA to apply for the licenses. In particular, the authority demands local virtual banks to main a minimum levels of paid-in share capital of HK$300 million, a figure some said is “impossible” for most new fintech companies, as most of their capital would be directed into product developments.

“It’s hard to tell when the license award will be realized, with considerations of the legislative and administrative procedures involved,” Lee added.

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