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
- 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.
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
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.