Virtual banks in Hong Kong are eyeing expansion into wealth management business for the mass market, a move that analysts say could help turn their first profits.
Like many online-only banks around the world, some of Hong Kong's eight licensed virtual banks are venturing into more lucrative businesses such as wealth management after building their customer base from scratch through lower-margin services such as deposit accounts, loans and money transfers.
ZA Bank Ltd., the city's first virtual bank that started operation in March 2020, is applying for licenses from the Securities and Futures Commission to manage assets and engage in securities dealing and advisory, after having received another license to sell insurance products on its platform. WeLab Holdings Ltd., another virtual bank that debuted in July 2020, has partnered with a digital investment unit of Allianz SE to develop digital wealth management products since March. Other virtual banks such as Livi Bank Ltd. and Standard Chartered PLC-backed Mox Bank Ltd. also said they are preparing for similar forays.
"It makes sense to monetize [bank] balances for depositors seeking yield enhancement, given the high initial deposit rates the virtual banks offered have since come down [as] it is too expensive to keep [the rates] so high indefinitely," said Benjamin Quinlan, Hong Kong-based CEO of consultancy Quinlan & Associates. The banks "need to work out how to keep the client money on their books, so wealth management makes sense as a product push."
For both virtual and brick-and-mortar banks, fee income has become a source to grow overall earnings more quickly while their lending businesses are constrained by market interest rates hovering around low levels amid global accommodative monetary conditions.
It is common for virtual banks to remain unprofitable during their first few years of operation due to up-front investments in product development and customer acquisition. In addition, their funding costs are often higher than that of traditional banks, as they have a much smaller deposit base and usually offer higher interest rates to attract deposits. Xiaomi Corp.-backed Airstar, for example, is offering a 3.6% deposit rate to customers, compared to less than 1% for most major banks in the city.
"The next logical thing for them to look into is things with higher profit margin. Hence, it does not surprise me that all these banks are looking at wealth management as part of their roadmap of becoming larger," said Leo Chen, Hong Kong-based managing director and head of Asia at Calastone, a company that builds digital transaction processes for mutual funds.
Hong Kong could see the first wealth management product launched by a virtual bank early next year, according to said Julie Chan, a Hong Kong-based partner with consultancy PwC. "Virtual banks will continue to differentiate themselves from traditional banks based on enhanced customer experience and providing end-to-end digital solutions for access to wealth products, ease of interaction, client servicing, trading, account management," said Chan.
Mass and young
While larger traditional banks, such as HSBC Holdings PLC and Citigroup Inc., are targeting high net worth individuals in their wealth management expansion in Asia, the virtual banks are likely to focus on the mass market as well as younger customers who are already using their services.
"High net worth individuals are served by the private banks, and the mass affluent are likely to be served by the big retail banks which can provide slightly more complex products that this segment needs and which virtual banks will be unlikely to provide at present," said Paul McSheaffrey, a Hong Kong-based financial services partner at KPMG. He added that virtual banks will likely attract younger customers.
According to consultancy Quinlan & Associates, the average deposit per customer at Mox was more than HK$70,000 as of December 2020, compared with HK$460,000 estimated for HSBC.
As of end-2020, deposits at the eight virtual banks totaled HK$15.77 billion, according to company filings. That was equivalent to 0.1% of the HK$14.514 trillion of deposits in Hong Kong's entire banking system, according to the Hong Kong Monetary Authority.
"Individually, the people in this generation may not have a lot to save or invest but in aggregate [it] represents a market opportunity. To access this in a profitable manner requires a digital, straight-through processing model which the virtual banks have," McSheaffrey said.
As virtual banks have a fully digital customer interface and back-end operations, they have a comparative advantage in user experience and overhead-cost control over traditional banks, experts say.
Quinlan said virtual banks could consider products similar to exchange-traded funds that allow customers to automatically transfer a certain amount of savings into the funds in regular intervals. Robo-advisers might also be on the table.
"A lot of these should be automated and allow [customers] to have more meaningful conversation about how to generate a bit more return than leaving as deposits," Quinlan said, adding that virtual banks’ capability of attracting sizable customers within a short period of time is an advantage for them to push these products.
ZA Bank, for example, attracted 300,000 customers in the year ended March 31, equal to roughly 4% of the population in the city. Quinlan said by 2025, about 24.9% of the people in Hong Kong will likely have an account with virtual banks.
Steve Cheung, another partner from KPMG, added: "A lower cost to serve could allow them to offer more attractive commission rates to attract volume."
ZA Bank CEO Rockson Hsu cited opening deposit accounts as an example. The Zhong An Group Ltd.-backed virtual bank takes five minutes, instead of hours or days at traditional banks, by asking clients to submit materials digitally and by streamlining some steps, he said.
"We think through every step [and click] more thoroughly and carefully. The same logic applies to wealth management products. I can't share what exactly we will do with the wealth management products yet, but at least that’s the direction," Hsu said.