Regulators around the region are licensing online-only virtual banks to force competition on incumbent, brick-and-mortar banks. In Hong Kong and Singapore, top-tier banks will adapt and extend their leadership. In Taiwan, though, new digital competitors will make the traditional players sweat.
In Hong Kong, the awarding of eight virtual-banking licenses is a direct challenge to HSBC, as well as to the likes of Standard Chartered and Bank of China. Analysts at Goldman Sachs and Citi have in recent months opined that large chunks of HSBC’s Hong Kong business are at risk.
Indeed, since then, HSBC was first to scrap monthly fees for depositors with less than HK$5,000 in their account. About 3 million people in a city of 7.8 million have been paying such fees because they need banking services; the bank regulator, HKMA, had preemptively banned virtual banks from levying such charges. It’s a good example of how cartelized the city’s retail bank sector had become, and why virtual banks are bringing much-needed competition.
But HSBC and other large banks are less dependent on time deposits for funding than small- and medium-sized banks, of which there are plenty in Hong Kong, notes Moody’s Investor Services research. They also have large enough balance sheets to keep corporate lending to themselves.
HSBC is using its PayMe digital wallet to blunt the payment advantages of fintech competitors, and its PayMe for Business to defend its relations with merchants – and therefore its lucrative credit card business. HSBC has also launched other initiatives to defend its ties to smaller merchants, such as Serai. Stan Chart and BoC, meanwhile, have taken stakes in virtual banks.
Of course margins will remain under threat. Banks must invest more heavily in technology to mitigate the costs of their physical networks. The uniquely lucrative nature of Hong Kong retail banking cannot last. But the biggest lenders have the presence, operational experience and capital to remain competitive – and profitable.
The Monetary Authority of Singapore is licensing three virtual banks dedicated to serving small businesses, and two more for high-street consumer banking.
The story is similar: the three leading banks, DBS, OCBC and UOB, have the capital and the brand to defend their positions; smaller banks do not.
But the biggest difference to Hong Kong is that these three banks have been aggressively digitizing their businesses. Whereas HSBC has been on the path of digital transformation for two or three years, DBS has been at it for ten years.
All three have their own mobile-only banks. To be sure, these digital initiatives are largely carried out in other countries, not in their home market, but those experiences can be imported back.
Finally, MAS is approaching virtual banks more conservatively than HKMA, by imposing even higher capital requirements and limiting the scope of businesses that virtual banks can enter.
Taiwan’s Financial Supervisory Commission awarded three virtual-banking licenses on July 30. Its approach has been even more conservative than Singapore’s, requiring each allot substantial ownership to traditional banks. For those lenders able to secure a role in an approved VB, this is fortunate. For others – it’s trouble.
Moody’s has declared the entry of internet-only banks as credit negative for Taiwan’s incumbents.
Taiwan doesn’t have the equivalent of obviously dominant trios of commercial banks. The top five banks have only 36% of total system assets, says Moody’s analyst Sonny Hsu, writing on August 5. There are 38 banks duking it out over the island’s 24 million people. Half the system’s deposits are held by creaky state-owned banks.
As the chart below shows, the profitability among Taiwan’s banks has been in modest decline and is notably less than those in other North Asian markets.
“Intense competition and ample liquidity have weighed on banks’ net interest margins and profitability,” Hsu wrote, “and the arrival of new competitors will likely further pressure banks’ profitability.”
Three new virtual banks
In all three markets, virtual banks are expected to face roadblocks to market share, but especially in Taiwan: the three virtual banks in Taiwan may not amass more than 1% of deposits in the $1.6 trillion banking system. That’s because the regulators are ensuring, through capital requirements and other constraints, that they start out small.
But in Taiwan, these new players have parents with deep pockets and, more importantly, big, existing customer pools.
First is Next Bank, whose major shareholder is Chunghwa Telecom (with Mega Financial, which includes Mega Bank, as junior partner). Telecom companies have a long track record around the world of launching successful financial businesses to cater to their existing customers.
Second is Rakuten International Commercial Bank, whose parents include Japanese e-commerce company Rakuten and its financial arms in banking and cards, and local IBF Financial. In Japan, Rakuten also operates a bank and a securities broker online, and it specializes in loyalty points and other incentives.
Third and possibly most dangerous is LINE Bank. Not only is it owned by the country’s biggest social media platform, Japan-owned LINE, but it has four large banks in the mix: Taipei Fubon Comercial Bank, CTBC Bank, Union Bank of Taiwan and Standard Chartered, the only foreign entity with a stake in a Taiwanese virtual bank. Its real edge is its messaging app, which now has the potential to become a “super app” as WeChat has become in China.
All three newcomers will struggle if they remain fixated on retail lending. They will be capital-constrained in their ability to pay higher interest on deposits. Chasing millennials is good for the long run but might not pay the bills in the next two or three years.
But if they leverage their tech platforms to break in to credit cards and robo-driven wealth management, they will not only secure a beachhead in the market, but heavily impact incumbents.
Incumbents in trouble
Taiwan’s existing banks don’t have the deep pockets and access to international tech expertise that HSBC and DBS boast. The industry is too fragmented for any one firm to fund such a counterattack.
Nor is Taiwan positioned to vie for the kind of global talent that banks in Hong Kong and Singapore routinely leverage. Its banks can’t pay the salaries, the lack of English is a barrier for hiring from overseas, and the island’s prodigious homegrown talent is always tempted to work in Shenzhen or Shanghai.
Some banks may hope that “virtual banking” will be quickly commoditized. After all, every bank now offers online service. And customers use these for only basic needs: only 35% of depositors use online banking, and mostly for routine things like checking balances and transferring funds, according to an August 1 report by Taiwan Ratings, an arm of S&P Global.
But is this because Taiwanese customers aren’t interested in banking online, or because the offerings online have been mediocre? Chances are, there’s a world of difference between what a bank can come up with, versus what a LINE or Rakuten can deliver. Singapore’s banks show that traditional players can indeed become pretty good at digital offerings – but they have a decade’s head start against Taiwan’s banks. That’s a steep learning curve even for fast learners.
“Virtual players with widely adopted, user-friendly technology platforms could embed banking services in customers’ daily routines with greater ease than their traditional bank counterparts,” said the Taiwan Ratings report.
Incumbent banks must now invest tens of millions of dollars into their own fintech initiatives, over multiple years. They have already been backing projects in e-payments, blockchain and automation, but these projects will have to accelerate. For many, perhaps most of Taiwan’s banks, it will be a strain.
There are a few rays of hope for traditional lenders, but they don’t have much to do with their own actions.
They can hope a cyber attack sours appetites for relying on internet-only banks (not a very nice prospect).
Or they can hope offerings by virtual banks (burdened by heavy shareholders in the traditional world) turn out to be mediocre.
Most likely they can hope the FSC panics over the idea of mass job losses in the traditional bank sector, and throws sand in the gears of virtual banks.
This last expectation seems reasonable, considering that (unlike the HKMA or MAS) the FSC hasn’t allowed fintech companies the chance to fully control a virtual bank.