Virtual lenders are disrupting Hong Kong’s banking industry

WeLab Bank offers flexible loans and group savings plans that allow users to earn higher interest rates as more users make deposits. (Photo: Bloomberg)

A group of upstart virtual banks have gained a foothold in Hong Kong, enticing consumers from physical lenders in the Asian financial hub with offers such as numberless credit cards that promise more security and mobile games that generate cash prizes.

The eight digital lenders, mostly backed by big banks and other companies, operate only online or via mobile phones and have no physical branches.

They have aggressively expanded into one of Asia’s most banked cities since commencing operations in 2020, leading other traditional banks to follow suit with their own digital offerings.

Kate Leung, a 39-year-old expat in Hong Kong who does legal translation and mediation work with a law firm, opened an account last year at ZA Bank, the city’s largest digital lender in total number of accounts, to take advantage of higher interest rates. and real-time displays of its financial transactions.

A friend won a free lunch for referring her, she says.

Ms Leung says she’s a fan of the bank’s app’s fun features, including one called “PowerDraw” that gives users a chance to earn up to 200% cash back on spending transactions.

The game, inspired by claw machines found in arcades, involves using a digital claw to grab a pool of balls containing discounts.

Ms. Leung once received HK$50 (US$6.41) after spending more than HK$4,000 (US$512.68) in a restaurant.

“The little game is fun,” she says, “considering that I don’t play online games at all.”

Analysts say gamified interfaces encourage user engagement, one of the keys to helping these new banks stand out in a crowded field.

The group competes with more than 150 traditional banks and their 1,200 branches in a city where the likes of HSBC, Bank of China (Hong Kong) and Standard Chartered reign supreme.

“The more screen time you have, the more time you have to engage and monetize your customers,” says Benjamin Quinlan, managing director of Hong Kong-based consulting firm Quinlan & Associates and chairman of the FinTech Association of Hong Kong. . “‘Gamification’ [is] a way to make the online banking experience more attractive.”

Late to game

As of September 30, the eight digital banks collectively had 1.1 million accounts in a city of 7.4 million people, according to the Hong Kong Monetary Authority.

Total deposits at the eight banks are about HK$24 billion (US$3.08 billion), which is only 0.2 percent of the city’s total. This reflects how the average account balance at a digital bank tends to be lower than the average account balance at a traditional consumer bank.

None of the banks is profitable yet. ZA Bank and Mox Bank, which together account for more than two-thirds of the group’s total deposits, aim to break even in 2024 at the earliest.

Hong Kong was late in the digital banking game, giving virtual lenders the green light to start operating more than a decade after winning favor in the United States and other markets.

The slower adoption was partly due to the city’s longstanding banking standards, which have strict regulatory requirements that require a lot of paperwork and favor in-person applications for new bank accounts.

Digital banks have ties to large multinational companies, including large banks.

Mox is backed by Standard Chartered in partnership with online travel agency Trip.com and information and communications technology company PCCW Ltd.

WeLab Bank is a unit of local fintech company WeLab, and Ant Bank is affiliated with Jack Ma’s Chinese fintech giant, Ant Group Co.

ZA Bank, which says it has more than 500,000 users, is run by Chinese insurer ZhongAn Online P&C Insurance Co. Ltd.

Some of the virtual lenders, like WeLab, offer flexible loans and group savings plans that allow users to earn higher interest rates as more users make deposits.

Airstar Bank – whose main backer is Chinese smartphone maker Xiaomi Corp. – recently offered 3.6% annualized interest on the first HK$20,000 (about $2,563) in deposits.

This is more than the 0.001% rate that some traditional banks in the city offer on current accounts. One of the reasons digital banks can offer higher rates is that they don’t have the management fees of physical branches.

Mox Bank, meanwhile, markets a numberless credit card with a unique numeric code that it claims is less likely to be stolen. ZA Bank offers insurance services.

Digital banks say part of their appeal is that their offerings are tailored to a new generation of consumers accustomed to smartphones and high-speed internet.

“We have changed the normal time to open a bank account from weeks and days to minutes and seconds,” Mox Bank chief executive Barbaros Uygun said.

A faster, streamlined enrollment system for credit cards, he adds, helps counter “app fatigue” associated with traditional banks.

Greater flexibility

The ability of some digital banks to cope with a relative shortage of funding for small and medium-sized businesses could also become an advantage in the future, analysts say.

According to a study by Quinlan & Associates, half of Hong Kong businesses of this size have been turned down for loans, in part because lenders struggled to assess their credit risks.

“They are often asked to provide collateral to offset the bank’s credit risk,” says Quinlan. “Many don’t have this guarantee, or for those who do, it’s really expensive.”

Digital banks have greater flexibility in offering loans, he says, because they can have transaction data that offers a window into customer behavior and proprietary credit-scoring algorithms to analyze and assess the ability of customers. borrowers to repay the loans.

Ant Bank launched a loan program for small business owners in January that offers flexible terms such as the ability to repay the loan interest first before settling the principal when the debt comes due.

The city government describes the introduction of virtual banks as a “key pillar” supporting Hong Kong’s entry into the so-called era of smart banking and to help drive the adoption of financial technology in the industry .

There are signs happening.

Winston Yung, managing partner at McKinsey & Co. in Hong Kong, pointed to the continued efforts of traditional banks to keep up with innovations from their digital counterparts, especially over the past two or three years.

Some traditional banks, for example, have launched mobile apps that offer a suite of financial services such as wealth management, while others have started offering digital enhancements to their usual service.

“Listening to customer pain points is vital,” says Yung. “While virtual banks are designed to do this, traditional banks are catching up fast.”

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