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Virtual banks set to go live in Hong Kong

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As part of the Hong Kong Monetary Authority’s (HKMA) initiative to usher in a new era of Smart Banking, the next 12 months will see the first batch of virtual banks receive licences and commence operations in the city, with traditional banks using this window to consolidate their own position in the market.

Since the finalisation of revisions to the Guideline on Authorization of Virtual Banks in May, the HKMA has received 29 applications, with the first set of licences expected to be issued in the first quarter of 2019. This means that the first virtual banks – which deliver retail banking services through the internet or other electronic channels instead of physical branches – in Hong Kong will be up and running by the end of 2019.

The year ahead will therefore be essential for successful virtual bank applicants to operationalise and put the necessary systems, processes and controls in place in order to go live. This will in turn help broaden the selection of banking options for customers, promote financial inclusion, foster innovation and enhance customer experience.

While the advent of virtual banks will further increase competition in Hong Kong, it also provides a timely shot in the arm for the traditional banking industry. With the first batch of virtual banks expected to commence operations at the end of 2019, it is essential for existing banks to use this 12 month window to invest in new technology and upgrade their digital platforms to effectively compete with the new market entrants. For example, we will continue to see more banks implement the Faster Payment System, introduce electronic onboarding and enhance and customise their digital banking user experience.

We may also see more partnerships between traditional and virtual banks, combining and leveraging the former’s experience, regulatory knowledge and managerial capabilities with the innovative technologies of the new entrants.

Some traditional banks might adopt a different approach by applying for a virtual bank licence on their own, while others could choose to upgrade and refresh their existing digital banking platforms without creating a new entity and applying for a licence.

As interest in the virtual banking initiative increases in 2019, we will continue to see a wide range of applicants apply for – and receive – licences from the HKMA. Importantly, those selected from the first batch may offer insight into the HKMA’s expectations for future applicants, and will also impact how existing banks adapt their digital business models to remain competitive.