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Virtual bank licenses: enter the dragons

Can China export its “techfin”?



This week, DigFin is all about smart banking in Hong Kong, and the new business models it is enabling. Today we look at the arrival of virtual banks. Tomorrow we track how HSBC is leveraging faster payments. Earlier this week we looked at API infrastructure and one fintech’s ambition to leverage them. You can also check out our introductory video here.

China has the world’s most advanced fintech, or “techfin”, as Jack Ma describes its brand of giant internet-company led disruption. But techfin hasn’t traveled well. AliPay and WeChat Pay have failed to grow much beyond serving mainland tourists in Hong Kong or other markets. Ditto for financial services from Ping An and Zhong An, despite their awesome technological prowess and ample funding.

That may be about to change, thanks to the Hong Kong Monetary Authority. As part of its smart-banking agenda, the HKMA will soon hand out seven or eight virtual banking licenses (VBLs), enabling retail banking services via digital channels, not physical branches. 

Recipients will include banks, fintechs, corporations and technology companies. The HKMA is doing this to force the city’s financial sector to innovate and stay relevant and provide a better service to the city’s consumers.

But, intentionally or not, the HKMA is also opening the door to China’s internet giants, which appear poised to win an outsized number of VBLs. This will let mainland China’s tech companies compete against traditional banks on a level playing field, in regulatory terms. This is techfin’s first real opportunity to crack an important international market – and this time, these challengers will be armed with a deposit base.

Expand – or else

As of this week, we don’t yet know exactly which companies will receive VBLs. According to local media Apple Daily, winners include Ant Financial, Ping An Insurance and Tencent. Other techfins rumored to be on the shortlist include Xiaomi Technologies (and we told you to expect this) and Zhong An (in a joint bid with China Citic Bank).

Of the 29 applications submitted to HKMA, the regulator rejected 10 as unsuitable. A HKMA spokesperson told DigFin it has shortlisted about one-third of around 20 substantially complete applications deemed able to introduce “the promotion of fintech development, new customer experience and financial inclusion.”

So that’s seven or eight licenses that are shortlisted, and maybe awarded, be it in one or two batches. Apple Daily’s list of other shoo-ins includes Standard Chartered Bank and Hong Kong Telecom, with market whispers suggesting Bank of China could have a shot. The only other expected winner is local fintech WeLab, which has more or less told the market that its VBL is in the bag.

The license is just the beginning. Can techfins, used to amassing data from hundreds of millions of users, bring a compelling online banking model to a single city that is well-served by banks, ATMs and credit-card companies?

We don’t know. Initial attempts have failed to impress: look at Blue, an insurer backed by Tencent. It has a glossy front end but a look at its claims process reveals a very paper-based business.

But China’s techfins need to make this work. Jeremy Choi, managing director at investment bank China Renaissance, says the slowdown in the domestic economy means China tech companies have to go abroad to maintain their growth metrics – and their valuations. Given global trade tensions, tech companies will have to switch from splashy acquisitions to organic growth abroad, he said at a conference this week.

In fintech terms, then, the HKMA’s smart-banking agenda now takes on even greater importance. China’s internet companies must succeed in Hong Kong, which means they are more likely to go all-out to win.

Hong Kong is a leading global financial center. If they can make it here (channeling fintech connoisseur Frank Sinatra), they can make it anywhere.

The banks

Beyond Chinese internet companies, there are banks and fintechs in the running.

Among the banks, applicants include Bank of Asia (an offshore confection engineered by a Hong Kong financier) and, more seriously, Bank of China, Bank of East Asia, China Citic Bank (no slouch on I.T.) and Standard Chartered, the last of which is among the expected recipients.

The serious competitors are only applying in league with tech or other partners. StanChart’s chief information officer, Michael Gorriz, told DigFin the bank is applying in partnership with companies he didn’t name. BEA is applying with Airwallex, a tech company, and China Citic Bank is supporting Zhong An’s bid.

Without partners, there’s no need for a bank to seek a VBL: it can already do everything the license would confer, be it online or off. DigFin’s own attempts to secure a tax loan, which involved canvassing five banks, made clear that retail banking is far more convenient online than in the branch already.

“There is no reason to apply for a separate VBL just to be able to offer banking services virtually,” said Jolyon Ellwood-Russell, a partner at Simmons & Simmons.

Big players such as HSBC and DBS never bothered to apply. They are competing instead with peer-to-peer mobile wallets that are building separate ecosystems, taking a page from the AliPay and WeChat playbooks.

For banks that want a VBL, says Ellwood-Russell, the idea is to create a separate legal entity with other shareholders to create an independent, innovative business freed from the parent bank’s legacy I.T. stack.

The fintechs

Among Hong Kong corporations, Hong Kong Telecom, or HKT, seems the most likely to win, building upon an existing mobile payment solution for merchants.

But it’s notable that among the city’s fintechs, only WeLab is tipped to get a VBL.

WeLab is the establishment fintech: its Hong Kong arm, WeLend, offers crowdfunding loans for professional (not retail) investors. Its backers include Li Ka-shing (via not one, but two, investment vehicles), along with Sequoia Capital, Khazanah Nasional, ING, and the Guangdong provincial government. WeLab also has a mainland China business in Shenzhen called Wolaidai – making it the poster child for fintech in the Greater Bay Area.

Other fintechs, such as MoneySQ and TNG, hope to win a license. For all of these players, the prize is to lower their cost of funding by attracting deposits, instead of relying on charging lenders using their P2P platforms. Steve Lee, founder of MoneySQ, said the cost of capital for a business such as his runs at 5.5%, far higher than paying depositors, despite rising interest rates.

The license will also let these fintechs compete with banks for depositors at a much lower operational cost: one-third of a brick-and-mortar bank’s, according to Simon Loong, WeLab’s co-founder, speaking to local media HK01.

The current rumor-mill betting is against MoneySQ and TNG (which didn’t respond to our interview requests).

HKMA drew its shortlist based on due diligence on applicants’ capital, stability, controls, and what they could bring Hongkongers. Its team has been working very hard: handing out seven or eight licenses all at once, in an unproven category, is a huge undertaking.

It is notable, however, that companies such as TNG aren’t expected to win a virtual-banking license. WeLab is a successful business with a strong Greater Bay Area profile. But HKMA’s own criteria include financial inclusion, and no company has done a better job of this in Hong Kong than TNG, whose business model is designed to serve the unbanked (such as foreign maids).

At this writing, then, it seems likely that homegrown finclusion plays such as TNG won’t make the cut. Financial inclusion is to be the domain of techfins such as Alibaba, Tencent, Ping An and Xiaomi. They have, indeed, helped improve the lives of hundreds of millions of mainland Chinese.

But does that model apply to Hong Kong? Will it apply to other markets with relatively functional financial sectors? Thanks to HKMA’s smart-banking agenda, we’re about to find out.

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