For Hong Kong’s virtual banks, profitability remains elusive as they struggle to turn a profit, with none of the city’s eight virtual banks having achieved profitability yet, despite being nearly half a decade in operations.
Despite this, these banks are making steady strides by refining their strategies and exploring new revenue streams, according to a new report by the Hong Kong Monetary Authority (HKMA).
The report, released on August 6th 2024, provides a review of the eight virtual banks in Hong Kong, examining their operations, impact on the banking system, and progress towards meeting policy objectives.
It also assesses market acceptance, business and financial performance, and user response to these new digital challengers since their inception.
Hong Kong’s virtual banks’ profitability pathway consistent with global trends, says HKMA
Hong Kong’s virtual banks entered the market in 2020 amid the COVID-19. The pandemic caused delays and disruptions in their operations, marketing, customer acquisition and product launches, resulting in slower-than-expected growth and financial performance challenges, the HKMA says.
These profitability struggles are consistent with global trends, the HKMA says, where digital-only banks have typically taken several years to become profitable.
In the UK, for example, the three leading challenger banks took an average of over six years to achieve profitability, according to the HKMA. In Germany, N26, one of the largest digital banks in the country, projects that it would achieve profitability in H2 2024, taking it eight years to turn a profit.
In the Philippines however, two of the six digital banks have already turned profitable, despite only being in operation for two years.
The HKMA emphasizes that Hong Kong virtual banks’ profitability is on the horizon, as the players actively work towards it by refining their business strategies, enhancing business performances and tapping new revenue streams.
Since 2022, several banks, including Mox, WeLab Bank and ZA Bank, have launched wealth management and insurance intermediary business activities. Although fees and commissions from these activities still account for a small portion of these lenders’ total operating income, their contribution is steadily increasing, the HKMA notes.
In an interview with Fintech News Network, WeLab Group Chief Strategy Office, Jessica Lam revealed that they anticipate to be profitable by 2024. She further explains in the video the impact of virtual banks like WeLab on Hong Kong’s banking scene.
Overall, the HKMA notes that operating performance of virtual banks is improving. In the fiscal year 2023, the aggregate operating income of all virtual banks reached HK$1.26 billion (US$162 million), representing a seven-fold increase from HK$180 million in fiscal year 2021. Accordingly, their total net losses decreased by 15% during the same period.
Despite profitability challenges, Hong Kong virtual banks are witnessing significant growth. By the end of 2023, customer deposits had risen by 23% year-on-year (YoY) to HK$37.5 billion (US$4.8 billion), with the total number of depositors reaching of 2.2 million depositors, representing 8.8% YoY increase.
Total assets reached HK$49.9 billion (US$6.4 billion) and loans and advances totaled HK$19.5 billion (US$2.5 billion), up 23% and 19% YoY, respectively.
Boosting fintech innovation and accessibility
In Hong Kong, virtual banks are driving fintech adoption and innovation in the banking sector. These players are embracing advanced technologies, including remote on-boarding of customers, hosting banking systems and data in cloud computing platforms, advanced data analytics for credit approval and fraud detection, and early exploration of digital assets related initiatives in collaboration with various technology companies. For example, ZA Bank recently announced plans to introduce virtual asset trading services for retail investors.
The HKMA report highlights that virtual banks completed testing of over 100 initiatives under the Fintech Supervisory Sandbox (FSS) between March 2019 and December 2023, representing more than 40% of all the projects under the scheme during the period.
This activity has positively impacted competition in the banking sector, prompting incumbent banks to accelerate their digital transformation. For instance, as of the end of 2023, the number of incumbent banks providing remote account opening option totaled 18, doubling in the span of four years.
The success of virtual banks in launching certain innovative products and experiences have also encouraged incumbent banks to develop more sophisticated fintech solutions for better banking services and customer experience.
Bank of China (Hong Kong), for example, launched in 2020 its BOC Live platform, a digital banking service designed to enhance customer experience by providing a wide range of financial services and products through a convenient, user-friendly online platform. The launch was part of the bank’s broader initiative to enhance its digital banking services and offer customers a more seamless and interactive online banking experience.
Most recently, HSBC Hong Kong launched tokenized gold products for retail clients. The HSBC Gold Token, minted on the bank’s Orion digital assets platform, is available via HSBC Online Banking and HSBC HK Mobile App and allows investors to conveniently invest in gold, the bank said in a press release in March 2024.
Virtual banks are also contributing to financial inclusion by eliminating low-balance fees and minimum balance requirements. These lenders cater to a broader range of customers, including those with lower income levels or limited credit histories, by offering simplified account opening processes, lower fees, and innovative financial products tailored to their needs.
Virtual banks also offer more accessible credit and loan options. They leverage advanced digital technologies and data analytics to assess creditworthiness more inclusively, allowing them to extend loans to customers with limited credit histories.
Featured image credit: edited from freepik
