Research Overview
- Deposits represent a critical pillar of virtual banks’ operations in Hong Kong, serving as the core foundation of their future growth. However, most players are facing major challenges around their deposit strategies; from needing to broaden and deepen their deposit base, to putting their existing deposits to work.
Summary of Key Challenges
- DEPOSIT BASE (“BREADTH"): Despite amassing a combined 2.1 million customers as of H1 2023, the rate of growth in virtual banks’ customer base has been slowing. Moreover, a significant portion of customer accounts (55% on average) remain dormant, including many with zero-balances. The annualised growth rate in virtual banks’ deposits has slowed even more acutely than their customer count, with all 8 virtual banks capturing HKD 32.2 billion of customer deposits by H1 2023, representing just 0.2% of Hong Kong’s customer deposit base.
- DEPOSIT SIZE (“DEPTH”): Average deposits per virtual bank customer fell by a whopping 47% from HKD 29,300 in 2020 to HKD 15,500 in H1 2023, lagging average customer deposits at traditional banks by a factor of 30x.
- DEPOSIT QUALITY (“STICKINESS”): Due to insufficient capabilities to satisfy diverse customer financial needs, ~70%+ of customer deposits leave virtual banks once their promotion periods end. Furthermore, few virtual banks have positioned themselves as customers’ primary bank accounts, with ~85% of customers reluctant to consider switching their primary bank accounts to virtual banks.
- DEPOSIT USAGE (“MONETISATION”): Hong Kong’s virtual banks lag other APAC jurisdictions in terms of their product and service offerings, hampering their ability to monetise customer deposits. In fact, only a handful of virtual banks offer insurance and wealth management solutions, important fee-based income sources that are fuelled by customer deposits. Moreover, despite rapid growth in their loan books, below-industry average loan-to-deposit ratios (“LDRs”) indicate virtual banks’ balance sheets have yet to be fully optimised.
The Way Forward
- To capture a greater share of deposits, Hong Kong’s virtual banks have been increasing their time deposit rates (especially for longer-tenure time deposits, i.e. 1-year), but competition from local incumbents remains fierce.
- While increasing deposit interest rates is a step in the right direction, we believe virtual banks need to develop more holistic and differentiated deposit acquisition, activation, retention, and monetisation strategies across different customer life stages (e.g. university students, fresh graduates, mid-career professionals) if they are to ultimately succeed in the coming years, especially for younger-generation customers.
