The Hong Kong Monetary Authority (HKMA)’s decision to set up the virtual license is often seen as a strategic move, if a tad overdue. Reportedly, the regulator saw over 29 applications, which rumour has it, includes companies like Ant Financial, Tencent, Standard Chartered, Xiaomi, Hong Kong Telecom, Zhong An with Citic Bank as its partner.

Neat, a Hong Kong-based virtual bank targeted towards SMEs, is not one of these 29 banks.

Despite expressing intentions last May to apply for the virtual bank license, Neat has changed their tune recently, apparently once Neat co-founder David Rosa realised that “it was going to be a licensing regime that would favor very large brands”.

“It was a hard decision [to not apply], but I’m glad we didn’t get distracted,” he said in a Digifin report.

The Barrier of Entry Will Make Servicing SMEs Unprofitable

Neat’s point of contention is this: to attain the license, virtual banks would be subject to the same requirements as conventional banks. The problem? The stipulated requirements includes a minimum capital of HK$300 million, along with what Neat characterises as “high-profile board members” to satisfy corporate governance standards, and “even stricter IT security structure than conventional banks”.

Our own foray into HKMA’s Supervisory Policy Manual reveals that HKMA expects the board to have “a range of knowledge and experience in relevant areas”. With a goal of ensuring holistic collective knowledge amongst board members, HKMA stipulates that boards should consider international experience where relevant.

Meanwhile the stricter IT security requirements may refer to HKMA wanting regulatory “[adaptation] to suit the business models of virtual banks”— on top of usual corporate governance standards as conventional banks.

Neat’s specific niche focuses on startups and SMEs, which is characterised as “not a profitable segment for traditional banks”.  Neat offers these underserved segments access to credit and traditional banking services that used to preclude them, along with other startup-catered offerings.

Their virtual bank allows technologically-forward solutions to be developed from scratch, instead of having to worry about backwards compatibility with legacy systems.

Security at the Cost of Innovation

“Hong Kong is losing out [on the chance] to be the ultra competitive marketplace that it can be. It’s only good for the big boys,” said David to SCMP. “What remains to be seen is what solutions the new virtual banks are really going to bring to the market.”

In contrast, David Rosa references the UK’s approach to virtual banks.

UK’s banking regulators only require €5 million (approximately HK$ 52 million) in minimum capital for a license in a bid to encourage entry of niche players and neo-banks. The move, to David, fosters a more innovative environment even if the firms are less profitable for it.

Meanwhile, many existing banking players in Hong Kong like HSBC and DBS are reportedly eschewing the virtual bank license in favour of operating online with their existing license. Between that, and the rumoured interest from all the top fintech giants in China with presumably, enough money to burn, it does seem like Neat’s concerns hold some water.

Featured image via Neat