The launch of virtual banks in Hong Kong, Singapore and Taiwan is the most exciting story in fintech, anywhere. Only in these cities will massive internet companies – Alibaba, LINE, Rakuten, Tencent – and large domestic telecoms players square off directly against global banks.
Same license, same capital, same compliance rules, same everything – except the VBs won’t have any physical presence.
Many people in the industry, both among VB backers and incumbent banks, are looking to the U.K. and Continental Europe to understand what may await us in Asia. The likes of N26, Monzo, Revolut and Starling Bank have been in action for years now, successfully winning audiences and wallet.
But the European model, if followed too closely, risks failure in Asia, for two reasons.
Europe v. Asia: the MVP
First, in Europe, challenger –- or neo-banks, as they’re called – got started by being really, really good at one thing, like commission-free foreign-exchange trades, or deposit accounts for millennials. Gradually they added new services. But today none is comprehensive and often lack even basic things like a current (checking) account. Although Asia’s licensed VBs have not revealed their business plans, it is likely that most of them will do the same. If nothing else, the sheer challenge of launching a bank at speed may force VBs to focus on one selling point, on getting to market with a MVP, or minimum viable product.
Regulators, particularly in Singapore and Taiwan, have designed VB licenses to avoid direct competition with traditional banks. In all three markets, the aim of the authorities is for these new banks to meet the needs of underserved consumers and small businesses. So a narrow focus is expected.
But a narrow focus may not work. First of all, the capital requirements in Hong Kong and Singapore are on par with those of traditional banks’. In Europe, neo-banks operated as money operators and graduated to fuller licenses, but Asia’s VBs need to produce returns to match the capital required. That suggests they cannot remain focused on something niche for very long.
Second of all, the narrow approach implies that consumers will be cool with portioning their patronage: using Bank A for, say, primary deposits, Bank B for cross-border transfers, and Bank C for forex trading or a loan.
But in what world to people really want to fragment their financial experience? Especially when traditional banks can offer the whole caboodle online already? Convenience is supposed to be the VB’s ace up the sleeve, but asking consumers to operate across multiple apps is the opposite of convenient.
Moreover, Asian banks have had time to get some of their digital houses in order, in a way British and German banks could not. UOB’s digital bank in Thailand, for example, debuted with all the basic services bundled in. The bar is clearly higher in Asia. This is why European fintechs like Revolut have delayed their Singapore debut: they need to add more stuff to be relevant.
Therefore Asian VBs are going to have to be a lot more comprehensive a lot sooner: instead of launching a minimum viable product, they will need to launch a minimum viable package.
The second difference between the European and the Asian experience is the open- or smart-banking environment is different from place to place. This includes banks’ embrace of open-API standards and the regulation to give this teeth; the existence or not of national digital identity programs; and how local regulations handle data, especially as it pertains to cloud computing and using or storing data overseas.
For this reason, virtual banking is as much a test of a market’s open-banking regime as it is a competition among houses.
This makes it difficult for Asia’s aspiring VBs to blueprint their business models. Open banking is all about allowing tech companies to acquire data from consumer-facing banks and ecosystem partners. Where there’s a government digital identity scheme, some things like e-KYC become easy – if the institution, the customer, and any third parties are all locally domiciled. It gets confusing when borders come into play.
Europe has longer experience with open APIs, but even there rules around gauging customer consent, and how to treat their data, are not understood.
So there are a lot of unknowns around data, and VBs will be testing the limits of what’s kopasetic and what’s commercially necessary. Given there are eight VBs in Hong Kong alone, differentiation could be one area of opportunity and business risk.
Another variable is to what extent open banking rules promote or require compatibility. Bank customers can readily transfer money from an account with, say, DBS to one at Bank of China. But to date that hasn’t been the case among e-wallet providers.
Open banking rules are supposed to enable compatibility, and so far there has been some attention paid to how readily banks are enabling transfers to e-wallets…but to date, no e-wallet ecosystem talks to another.
If VBs must launch a minimum viable package, how are they to gain a toehold and compete? They will be relying on nimbleness to compensate for a lack of breadth. These will be banks run completely on cloud, attempting to engage with customers socially, with databases built around customers rather than products, and a light tech stack that will make it easy to iterate and pivot.
Solutions will vary. The region is short of engineering and cyber-security talent. A traditional bank IT overhaul takes a year to build and test, whereas Asian VBs have six to nine months to build their businesses from scratch. Some may try to cut corners in the race to launch, others may have different ideas about what, beyond security, is mission critical. Who attracts the best tech people married to the right business vision is likely to survive, but with Hong Kong, Singapore and Taiwan together introducing 16 VBs, some failures are inevitable.
The mantra for all VBs is to meet the customer’s need. Traditional banks, although they have layer upon layer of security and compliance, have otherwise done a poor job of this, particularly in those areas such as serving SMEs that VBs are expected to attack.
But what is customer need? Just building a better customer experience for the same product as what HSBC offers will be a quick path to failure.
Winning the customer
The MVP for VBs will likely involve two factors to start with, but will change in fairly short order.