Hong Kong virtual banks to make up 2-3% of total deposits by 2020: report

They are expected to attract “tens and thousands of customers" each.

Hong Kong’s virtual banks are expected to make up 2-3% of total deposit balances in the market by the end of 2020, and may attract “tens of thousands of customers each,” according to a report by professional services firm KPMG.

The city will witness the first launch of its virtual banks in 2020 following the issuance of eight licenses by the Hong Kong Monetary Authority (HKMA) in March and May earlier this year.

“By the end of 2020, we predict that virtual banks will have attracted tens of thousands of customers each. However, we still expect deposits at virtual banks as a percent of total balances to be relatively minor, at 2-3 percent of the total by year end,” said Tom Jenkins and James Harte, head of financial risk management and director of global strategy group at KPMG China, respectively.

Virtual banks are expected to generate much fanfare on media and online during the first 30 days of release. As this is likely to be the time of intense scrutiny, virtual banks must ensure that their systems are satisfactory, advised Jenkins and Harte.

“Early adopters [will] likely to sign up for multiple virtual banks (account opening is expected to be relatively seamless) to compare their products and services. Virtual banks will therefore have to be ready for this intense scrutiny in terms of the overall look and feel of their platforms, and must use the months ahead to ensure that all their systems are rigorously tested before launch,” the analysts noted.

Amongst banking subsectors, the SME space is expected to experience the most shakeups as small and medium businesses may be tempted to switch to online banking to access more credit.

“[We] do expect to see a greater impact is in the SME space, with many in Hong Kong currently underserved and hungry for credit – around a quarter of SMEs find it difficult to access credit today. SMEs may be tempted to switch their accounts as they will likely start to see an improvement in their ability to open bank accounts (there is currently about a 10% rejection rate) and obtain access to finance through the new virtual banks,” said Jenkins and Harte.

Deposit outflows from traditional bank accounts are also expected, but would not impact the traditional banking sector much during the period.

In response to these changes, many traditional banks will reportedly seek to accelerate their IT and systems transformation, invest in new technologies and upgrade their digital platforms to compete. Banks will likely respond through more aggressive pricing, particularly in term deposits to lock in deposits. They will also likely launch new features throughout the year.

Money lenders and finance companies will also see competition from virtual banks on lending rates, with customers expected to switch their payroll accounts to virtual banks – which will have a more tangible impact on outflows from traditional banks – “but only once they are confident that they have identified the virtual bank that is the best fit for them,” the analysts said.