In today’s world, with a plethora of products and services being available at home at the touch of a button, stretching from e-commerce to streaming services, the banking industry has been comparatively slow to innovate. In addition to lengthy onboarding times, queuing in long lines, and completing reams of paperwork to access financial services and products, customers have long had to contend with poor remote servicing and a profound lack of personalisation.
In recent years we have witnessed the emergence of branchless banks, termed “virtual banks”, aimed at accelerating innovation, improving customer experience, and making banking more inclusive. In 2020, Hong Kong saw the launch of eight virtual banks vying for a slice of the city’s HKD 373.9 billion annual retail, commercial, and corporate banking revenue pool, which is currently being dominated by four leading banks with a combined 62% and 54% market share of deposits and lending, respectively.
The virtual banks have wasted no time in trying to appeal to local residents and businesses, including offering attractive deposit and savings interest rates, lucrative reward schemes, and a seamless onboarding experience. While most of the virtual banks have deployed innovative forms of technology across the customer value chain, we see a number of key challenges to their ability to disrupt brick-and-mortar incumbents, including a trust deficit felt by customers, profitability concerns, cybersecurity and data privacy risks, talent management shortfalls, and heightened competition from both the new market entrants and incumbents.
These challenges cannot be underestimated. To ultimately succeed, the virtual banks will need to put in place a clear strategy to win over customer hearts and minds – from creating maximum brand impact through well-targeted marketing campaigns to providing unique
products and services and delivering an unrivalled customer experience. Given the suppressed Net Interest Margin (“NIM”) environment and challenges around limited scale in the short term, we believe that a fee- based income model that leverages customer data across various touchpoints is critical; both in terms of enhancing product personalisation and driving cross-selling opportunities.
This “data advantage” held by the virtual banks may further be pressed home through the formation of third-party partnerships with financial and non-financial service providers, allowing them to carve out a powerful closed ecosystem that delivers end-to-end banking and lifestyle solutions for their customers. In the longer term, the Greater Bay Area may also open up considerable opportunities to tap into China’s growing wealth pool, though the accessibility of this opportunity will ultimately depend on the evolution of the regulatory landscape between Hong Kong and Mainland China.
In addition to appealing to customers on the front end, the importance of data privacy and cybersecurity for the virtual banks cannot be underestimated in building credibility with customers. An appropriate cloud strategy – be it private, public, or hybrid – will also be critical in driving scalability and platform stability, as well as accelerating product launches. In addition, the virtual banks will need to double down their efforts on delivering an effective talent management proposition, given some early warning signs form current and former employees in relation to staff retention issues, challenges around double- or triple-hatting, and the absence of a clearly defined career path.