HK Grants First Three Virtual Bank Licenses

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The Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, announced Wednesday that it is handing out virtual bank licenses to three companies.

After years of preparation, three companies were granted virtual banking licenses on March 27 and could start operating this year. Another five licenses are on the way, said the HKMA. The eventual target could be more than 150.

Hong Kong is no leader in this area. Elsewhere in Asia, Japan opened its first virtual bank, the Japan Net Bank, in 2000. Mainland China has issued five virtual bank licenses since 2014, with half of them reporting profits just one year after the start of their operations.

The winners of Hong Kong’s first licenses are Livi VB Ltd., (a company co-owned by Bank of China (Hong Kong), JD Digits and Jardines); SC Digital Solutions Ltd. (founded by Standard Chartered Bank, HKT, PCCW and Ctrip); and Zhongan Virtual Finance Ltd (a joint venture between ZhongAn Online and Sinolink). The bank licences were granted on March 27.

The three companies will start testing their systems in the coming months and are expected to launch digital banks before the end of the year.
The advent of digital banks is much anticipated but may prove to be a double edge sword. The launch of virtual banking services could mark a new era for banking in the city but it could also disrupt traditional banking and impact customers, said Ivan Lee, Sales Director at Tata Consultancy Services.

“Customers are offered alternatives to revisit the 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,” Lee told Harbour Times.

Lee added that such change in culture could bring new and fresh energy to the industry. “The PAYME apps from HSBC, remote accounting-opening services from various China-based banks, or and virtual credit card program from China Citic Bank are some of the examples of new innovations from traditional banks.”

“On the other hand, virtual banks could pose an unprecedented challenge to traditional banks on their bottom line and impact their efficiencies to run the business because they now might have to reduce costs or try to differentiate themselves from these potential game-changers,” Lee said.

His comments were echoed by Arthur Yuen, HKMA’s deputy chief executive, who said there would be competition between traditional banks and digital banks.

For his part, HKMA Chief Executive Norman Chan believes virtual banks could help drive fintech and innovation in Hong Kong while promoting financial inclusion.

“The introduction of virtual banks in Hong Kong is a key pillar supporting Hong Kong’s entry into the Smart Banking Era,” he said.

Lee, from Tata Consultancy, said any impact on traditional banks might not appear until later due to the relatively small sizes of virtual bank assets.

“Take the U.S. as an example. The First Internet Bank is one of the leading virtual banks at the moment. As of now, their assets amount to US$3.1 billion. That is a lot less than the trillions of assets processed by traditional banking leaders like JP Morgan, Citi and Bank of America.”

“I do believe the introduction of virtual bank licenses could help fill the expanding gap in the market,” he added.

The HKMA has received 33 applications and shortlisted eight. It is “making good progress” in the processing of the remaining five other virtual bank applications, according to a statement out on Wednesday.

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