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You've applied for a virtual bank license, what's next?


Hong Kong’s first wave of virtual banks (VB) are about to launch in 2019. Will they live up to expectations and challenge the status quo shaped by global and local giants? Our thoughts on how VBs can “walk the talk” of client centricity, carve out a profitable niche and leverage technology as a key enabler. 

Hong Kong is preparing for the arrival of virtual banks (VB) — 
pure digital players that offer banking services solely through 
digital channels without bricks-and-mortar branches. Below 
are the four key drivers behind Hong Kong's Virtual Banking 

The initial batch is expected to enter the market by 2019, after 
the issuance of the first VB licenses. Despite the obvious cost 
benefit for VB, compared to traditional banks that operate 
expensive branch networks, there are significant challenges to 
overcome in order to establish a successful business. 

In this article, we highlight three main considerations for setting 
up a VB and our overall hypothesis of survival and profitability.

What is your differentiating proposition?

With HKMA’s recent announcement of receiving 29 applications 
for VB, competition is expected to be intense. It is crucial 
for new entrants to find their unique foothold and stand out 
in a highly mature market dominated by traditional banking 
giants and limited adoption rates of new banking technologies 
by local customers. 

Focus on Customer Needs 

Customer centricity throughout the customer life cycle is the top 
priority to consider when designing a digital banking offering. 
Basic banking services are about fulfilling three main needs of 
the customer:

  • How do I pay or get paid?
  • How can I borrow?
  • How do I grow or protect my savings?

Green field VBs have the unique opportunity to start fresh and 
do things truly differently for their customers. 

Therefore, a good starting point is to identify existing customer 
pain points in the user journey and propose innovative ways to 
create a delightful digital experience.

Capitalize on strong partnerships


FinTechs have traditionally excelled in one particular area (e.g. 
p2p lending, remittance and FX conversion). 

Instead of competing head-on with other FinTechs, VBs can 
choose a more collaborative model in which the bank acts 
as a marketplace where all kinds of FinTech and consumer 
applications are offered. Similar to a supermarket, its shelves 
are filled with own-brand as well as third-party branded 

In a platform model, a VB will be less focused on developing 
a completely new and disruptive offering, but more on 
the successful bundling of services and their delivery to the 
customers in a way that keeps them coming back. 

The importance of network effects and the power of the 
immediate and indirect feedback loop have been proven by 
many retail loyalty and affiliate programs pioneered by credit 
card companies and others. VBs that only offer basic banking 
products will likely fail to differentiate themselves. We believe 
that VBs must bundle value-adding services with their basic 
products and go beyond the conventional boundaries of 
financial services to stand out.

Avoid a Pure Discount Model


VBs can leverage their lower operating costs to provide lower 
fees, higher deposit rates or other price incentives to attract 
customers. However, without a clear differentiating proposition, 
a pure low-cost play will not be sustainable. 

If the service offering is insufficiently differentiated in the eyes 
of the customers, competition will continuously undercut each 
other by offering a slightly better deal in order to steal each 
other’s customers, triggering a race to the bottom.

How to achieve profitability and business 


One of the HKMA’s key requirements is for VBs to have a credible 
and viable business plan. Growth objectives should be clearly 
defined. The use of predatory business tactics is discouraged 
for the sake of stability in the banking sector. VBs therefore have 
to identify their main profit engines in setting up the business 

Road to Profit Realization


When designing the product portfolio, VBs can take a three-stage 
approach to formulate a profitable product offering. 

To start with, in order to fulfill HKMA’s VB requirements, the minimum service offering has to be incorporated. VBs need to engage 
customers by providing basic account services, such as CASA. 
This builds the first point of contact in which the account serves 
as the foundation for any products that are going to be offered 
in the future. At this stage, customer acquisition happens at 
the expense of profitability as account services generate little 
to no income. VBs must be patient as this is an inevitable stage 
that new entrants face in any market. 

After accumulating a decent customer base, VBs should experiment 
with different product propositions on a small scale to 
look for the optimal offering through market responsiveness 
tests. Extrapolation of full-scale performance can then be done 
by analyzing data from the tests. Loss may still be incurred at 
this stage, but the potential profit of finding the optimal offering 
outweighs the loss. 

At the final stage, VBs have successfully identified their income 
drivers. Full effort on marketing and sales activities can be 
launched at this stage. However, VBs need to be aware that the 
market landscape is constantly being reshaped by factors such 
as customer preferences, competitors and regulation. Close 
performance monitoring is required to adapt proactively to 

Wealth Management Services — A Lucrative Market 

Being the second largest offshore wealth centre in the world, 
Hong Kong offers the full range services for investors to choose 
from. By December 2017, the Asset & Wealth Management (WM) 
Business in Hong Kong has reached the scale of HKD 24 trillion1, 
with retail investors contributing over 60% of the figure. Retail 
investors hold HKD 0.43 million of liquid assets on average and 
are allocating 45% of it in financial products2. The high profit 
margin associated with WM services makes the opportunity in 
Hong Kong particularly attractive for VBs. 

Among different trading and advisory channels, online platforms 
are gaining popularity among the digitally savvy middle 
class investors. The Securities and Futures Commission (SFC) 
has issued the Guidelines on Online Distri-bution and Advisory 
Platforms (effective April 2019) to facilitate the growth of such 
platforms. Investment advice will be made available to customers 
who until now did not qualify for WM and Private Banking 

How do I create an agile, secure and scalable 

The banking industry in Hong Kong is going through a remarkable 
revolution driven by technological advancement and 
regulatory changes. What has been the realm of banks for 
decades in the past, is all of a sudden challenged by new 
market entrants with completely different business models. 
Such an environment plays to another advantage of VBs over 
incumbents, the need for agile and quickly scalable platforms. 

Modular Structure 

Platforms which are built in a modular structure, enhance the 
agility of VBs. Different functions can be packaged into clearly 
distinguishable modules that allows plug-and-play. For example, 
a VB that only offers CASA can simply plug-in a wealth management module on top of their core platform and start offering such service if the bank wishes to follow a trend in the market. This greatly reduces the complexity of system changes as every module can easily be integrated, thus minimizing implementation time and cost. 

Open Architecture — Open Banking 

Hong Kong has made its first step towards an open banking 
model, in which banking data (product, client…) can be shared 
and accessed by third-party providers. This offers tremendous 
opportunities for VBs. 

Other than for incumbent banks where the establishment 
of an open API platform can be a complex undertaking, VBs 
have the advantageous opportunity to design their platforms 
from beginning for these new possibilities. This should further 
enhance their ability to come up with innovative solutions for 
today’s financial needs of customers. 

Technology and Data Security 

VBs are by their very nature highly exposed to technology risk 
and cyber crime as pure digital channel offerings create large 
attack surfaces. It is crucial for VBs to implement an IT governance 
framework to align their platform architecture with risk 
mitigating strategies. Besides, channels should be hardened 
properly against intrusion and tampering. As required by HKMA, 
VB applicants are expected to engage an independent expert for 
technology assessment on different aspects, such as hardware, 
security policy and protection of data.

How Synpulse can help you? 

Synpulse provides end-to-end support for VB projects. 
Depending on the stage of such a venture, we facilitate business 
strategy and business case definitions, assist in the solution 
assessment and configuration and eventually provide full scale 
implementation of your operating model. 

Synpulse has engaged with pure digital banking players and 
FinTechs in Hong Kong and globally, to help them realize their 
competitive advantage. 

Our expertise in the digital banking area combined with our 
bespoke tool sets , such as Virtual BANKINABOX®, lead to cost 
efficient and short time-to-market solutions. 

This article is authored by Sean Huang and Micheal Benz.


Michael Benz
Topic Expert Digital Banking - Senior Advisor
 Michael Benz
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