The Hong Kong Monetary Authority announced on Thursday, May 9 the final four recipients of a virtual-banking license.
They are: Ant SME Services, Infinium Limited (which consists of Tencent, ICBC Asia, Hillhouse Capital and HKEX), Insight Fintech (AMTD and Xiaomi), and Ping An OneConnect.
They join Livi (Bank of China HK, JD Digits, and Jardines), SC Digital Solutions (Standard Chartered Bank, HKT, PCCW, and Ctrip), WeLab Digital, and Zhong An Virtual Finance (ZhongAn Online and Sinolink).
As none of these businesses will launch until the end of the year (or later), it’s hard from the outside to understand how they will differ – from one another as well as from the incumbents. Executives tend to speak in generalities, saying they are in testing mode. These are full-service banks being created, not mere wallets or European-style digital monolines.
Two types of plays
I wonder if they’re still trying to work out their actual business models. HKMA focused on mature business plans as part of its licensing process, but it would have juggled this with more political judgments (and the need to have a lucky eight recipients – never underestimate Hongkongers’ reliance on numerology).
But most if not all of the Virtual Eight look as though they’re targeting SMEs and/or younger people, especially those with an existing tie or digital connection to mainland China, even if it’s just a WeChat account. Of course, that would be seen as a starting point, not the destination.
My guess is we’ll see two types of business emerge. One is the ecosystem. This is where diverse players connect financial expertise, technology and customers. SC Digital and Infinium come to mind. SC Digital for millennials, and Infinium perhaps for something more institutional, given the stock exchange’s involvement (interesting!). Their challenge: as the Chinese saying goes, same bed but different dreams.
The second type is the focused player, with only one or two main shareholders that allow for a more coordinated business. Ant SME, WeLab and Insight (Xiaomi is a major stakeholder in AMTD) come with a simpler ownership structure. They can start by chasing niche markets and keep things simple before broadening their businesses. Their challenge: how many SMEs are there in Hong Kong?
Gotta have wow
It will take time to learn and absorb the models the Virtual Eight bring. Initially as a group they will be targeting the under-served, but I think they will very quickly start attacking the conventionally banked. Hong Kongers have a reputation for being conservative, and they don’t hate banks like Westerners now do, or so the story goes. We’ll see. I think when people get exposed to the convenience and the notable reduction in bullshit fees versus what the incumbents charge, they will move.
To really make that happen, though, means some of these startups will have to introduce pizzazz. Not corporate P.R. fake cool, but in-the-streets, authentic wow. I have to say, this has not been evident so far in Hong Kong, in any guise. To take a related example, Tencent and Hillhouse’s other digital business here, insurer Blue, is mediocre (presumably Blue will end up fitting into Infinium).
But if some of these startups offer something genuinely exciting, then this will not be like Europe and Japan, where digital challengers plateau with a tiny market share. We’re talking about full service banks here, with plenty of capital and mainland mobile know-how, going after a banking market that has been grossly exploited by fat and complacent incumbents. HSBC was smart to experiment with PayMe.
Jack be nimble
Moreover, these won’t be just standalone businesses. From both a tech-stack and a cultural perspective, they will be able to plug in third parties much more easily. They are using tech stacks centered on the customer, not on a product, that runs nimbly on cloud. No messy integrations via middleware.
Robo advisors, asset managers, insurers, invoice platforms, trade finance networks, retailers, you name it – it will be straightforward to integrate APIs and get on with it. The initial offering may be basic, but the Virtual Eight will be able to adapt and expand at a pace that will leave traditional banks huffing and puffing.
Speaking of which, the HKMA, after years of doing its own huffing and puffing as Singapore dominated the fintech court, has finally returned the serve.