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Neat: why a virtual banking license is not for us

David Rosa of fintech Neat explains why he didn’t go for a virtual banking license – and what this means for banks, virtual and otherwise.



David Rosa, Neat

The Hong Kong rumor mill says next week the Monetary Authority will announce the first batch of awardees of a virtual-banking license. Most banks, including HSBC and DBS, are sitting it out, preferring to rely on their existing license to operate online.

And some fintechs challenging the status quo have also decided the VBL isn’t for them. Their reasoning says a lot about what to expect from virtual banks once they get up and running.

Neat, which uses the tagline of building tomorrow’s bank, has been operating in the city for several years – but it hasn’t attempted to get a vitual banking license.

“We realized it was going to be a licensing regime that would favor very large brands,” said David Rosa, co-founder of Neat. “It was a hard decision [to not apply], but I’m glad we didn’t get distracted.”

Cost of customer acquisition

The reason Neat didn’t bother was because the licence would increase its cost of customer acquisition beyond what Rosa deemed viable.

Virtual banks are subject to the same set of requirements as conventional banks. This includes capital of at least HK$300 million ($38 million), as well as high-profile board members to satisfy the corporate governance standard and an even stricter IT security structure than conventional banks (which is reasonable considering the cloud-based business model).

The result [of having a license] is to become unprofitable

David Rosa, Neat

Neat caters to startups and young SMEs, which is not a profitable segment for traditional banks. It wouldn’t be profitable for Neat, either, were it to take on the cost base of a licensed bank.

“The result [of having a license] is to become unprofitable,” Rosa said.

A living will

There are other barriers to fintechs getting VBLs.

Most candidates involving existing banks are joint ventures with fintechs and mainland Chinese internet giants. Rosa says part of the VBL approval process is to show HKMA a “living will”, with the virtual business backstopped by the bank in case of a bankruptcy or a hack that shuts it down. The bank partner would be expected to take over the virtual bank’s customer base.

This makes sense from the HKMA’s perspective, as the regulator wants to instill consumer confidence in virtual banks. But it also means banks are only partnering with fintechs that already have an attractive customer base.

“Traditional banks don’t find our customers attractive, because they don’t make them good enough money” Rosa said.

So partners will be internet companies with existing retail customers.

A Goldman Sachs research report issued last September echoes Rosa’s view, saying the retail banking sector has more to lose from VBLs than corporate banks. VBLs are going to make payments, foreign exchange and credit card-related income much more competitive, and consumer banks will see their margins hurt.

A neat position

But niche fintechs like Neat may not be put under similar pressure. No VBL is likely to target Neat’s customers because of their own high cost base; Neat survives on volumes and Rosa says it is growing new customers by more than 30 percent each month. But these users wouldn’t be profitable to a VBL.

A virtual bank will have to meet its capital costs, but it can at least compete against traditional banks with a flexible, cutting-edge tech stack. But the incumbent banks will struggle to reduce their very high cost base, which is based on legacy tech as well as business culture, not to mention the high rents for branches.

“HK is a very hard market and there is a lot of very conservative attitudes.” Rosa said.

HKMA has promoted virtual banking because it sees Hong Kong’s financial services industry falling behind rivals such as Singapore, London and New York. VBL is a wake-up call for incumbent banks.

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