➤ The entry of virtual banks may squeeze some small traditional lenders out of the Hong Kong market.
➤ Small virtual banks may not last in the city's already crowded market.
➤ The shake-up may lead to more bank mergers in the long run.
The Hong Kong government has since March granted eight virtual bank licenses, many of which will begin their operations over the next year or so. Some small brick-and-mortar lenders, which are already struggling in the city's crowded market, will be at risk of being squeezed out, or they merge with others in order to survive, said Jasmine Lee, partner and Virtual Banking Campaign leader at Ernst & Young in Hong Kong. Some virtual banks may not last too, as competition among the newcomers could be brutal, Lee told S&P Global Market Intelligence.
What follows is an edited transcript of that interview.
Jasmine Lee, EY's partner and Virtual Banking Campaign leader
Source: Ernst & Young
S&P Global Market Intelligence: How are virtual banks going to challenge traditional banks?
Jasmine Lee: Virtual banks, especially during the beginning months, might pay more to attract deposits, which itself will also be a branding and marketing exercise. But they won't be able to offer interest rates this high for too long, so we will likely see fluctuations in deposits among traditional banks.
Such impact might be worse for traditional banks that have long relied on non-interest-bearing deposits, or lenders that have been behind in technology and customer service quality. Some of them are a bit scared by the challenges and are playing catch-up. Over the next 12 to 24 months, it will be a very difficult time for traditional banks as they will need to figure out how to improve their technology and customer service to survive a tougher market.
How much of the market share will virtual banks snatch from traditional lenders?
It is too premature to estimate how much market share traditional banks may lose to virtual banks. There are two reasons.
The first question needs to be answered is that, a few years down the road, how many of these virtual banks will survive. The first round of competition will mostly be among the eight virtual banks. The winners will be the actual challengers to traditional banks.
The second question is whether the Chinese government will allow Hong Kong-licensed virtual banks operate in the Greater Bay Area [a megalopolis in southern China that includes Hong Kong, Guangdong and Macau]. If yes, the virtual bank license will be more of a stepping stone to get into the Greater Bay Area where the population is approximately 10 times of Hong Kong, so the business potential will be much bigger. Hong Kong's banking market itself has limited growth prospects. But I think the Chinese government will be very cautious in opening up the market as the policy will also affect the Chinese banking sector.
How exactly are virtual banks going to operate during their beginning months?
My forecast is, during the first 12 months, these virtual banks will have registered offices set up, and customers will start knowing their names. And then we will have a better idea of what will be the core business that they are trying to penetrate into, and what customers will be attracted to them.
At the moment, virtual banks tend to focus on individuals and the retail business. I don't see much focus on the corporate side, especially for the small and medium-sized enterprises. They might do that later, when customers are more familiar with their brand and their management is more stable.
Virtual banks will need to develop very unique specialties to compete in the market. For example, virtual banks in Europe and the U.S. usually focus on only one product.
Is Hong Kong's banking industry at some sort of an inflection point?
I think the industry is being forced into a journey which will get us to an inflection point, and we aren't there yet. Traditional banks will need to get rid of old thinking and focus on improving service quality. Say, around 2025, I won't be surprised if there are fewer traditional banks or virtual banks, maybe one or two banks will change hands, or some of them will merge.