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Tech Disruption In Retail Banking: Hong Kong's Large Banks Are Pioneering The City's Fintech Development

Hong Kong's fintech development was set in motion in 2017 by the city's regulator and de facto central bank, the Hong Kong Monetary Authority with a seven-part smart banking plan. This has propelled the industry to adopt new technologies and helped to foster a more level playing field where niche entrants could take root.

S&P Global Ratings believes that the incumbent banks in Hong Kong will continue to lead the city's digitalization. First, the banks are well resourced to upgrade their existing platforms and apply new technologies like cloud computing and artificial intelligence. Second, their dominant market share, vast financial resources, and far-reaching client networks mean that any innovation could be applied quickly with wide impact. The incumbent banks also enjoy brand recognition resulting from the trust they have built over their long operating history. The aging demographics of Hong Kong also provides some cushion to the incumbent banks as older customers prefer human interaction and bricks-and-mortar banks rather than going online.

HKMA's initiatives such as Open Application Programming Interface (API) and virtual banks could introduce mild disruption to the sector. New entrants will likely target niche markets or customer groups that are underserved by the large players.

The COVID-19 outbreak in 2020 has also accelerated the pace of digitalization to drive more traffic and volume to digital channels and contactless payment. Measures such as social distancing and branch closures have driven more customers to turn to mobile and online banking. Also, following the temporary changes in regulations, certain insurance products can now be offered on digital platforms instead of mandatory face-to-face distribution. We believe this could pave the way for more permanent regulatory changes later.

TRIP Analysis For The Hong Kong Banking Industry

We are illustrating our views of disruption risk with our four-factor analysis of the Hong Kong banking system's technology, regulation, industry, and preferences (TRIP; see chart 1).

Chart 1


Technology: Disruption Risk | Low (2)

Never mind the slow start, giant banks can catch up in just one step

In our view, Hong Kong had a slow start in the fintech game but they have, thus far, proven their abilities to adapt to and address new technological needs.

Fintech in Hong Kong may not have generated as much bang compared with other markets in the region like China or Singapore, but the top banks in Hong Kong have spearheaded a respectable wave of technological upgrade over the past two years. In many instances, the incumbent banks in Hong Kong have leveraged their vast customer base, business scale, and financial resources to explore meaningful uses of new technologies. A striking example is the launch of Faster Payment System (FPS), one of HKMA's seven smart banking initiatives (see table 1 for details). After its launch in September 2018, many incumbent banks had taken the opportunity to enhance the capabilities of their own mobile banking apps when incorporating FPS' frictionless and swift payment function. These enhancements range from simplified verification and logon process to enabling a wider scope of services such as easy foreign exchange or securities transactions. As the banks upgrade the capabilities of their mobile banking apps, the industry as a whole is reducing its reliance on bricks-and-mortar branches, which could provide substantial cost savings, given Hong Kong's very high property prices. Hong Kong banks have also been quick to incorporate artificial intelligence (AI) into their customer services operations, transaction processing, as well as fraud and risk management. As of 2019, all the incumbent banks have introduced AI Chatbox to some aspects of their customer services.

Cloud computing has also started to play a part in banks' infrastructure and day-to-day operations. The banking industry generates a large volume of data and the management of data at such a scale remains a key challenge to banks' IT capabilities. The largest among the incumbent banks, HSBC, now uses cloud solutions provided by a third-party and is reported to have reduced some of its report generation time to three hours from 14 hours. It was also reported that usage analytics reports for PayMe, the bank's proprietary payment platform in Hong Kong, used to take six hours; with cloud solutions provided by third-parties, the process now finishes in two minutes.

We do not view the overall infrastructure to be a roadblock to Hong Kong banks' digitalization. Hong Kong has some of the best IT infrastructure in the world. Based on data from Speedtest and OpenSignal, Hong Kong ranked third on average fixed broadband internet speed and fourth in terms of 4G accessibility in 2019 globally (tables 2 and 3). And Hong Kong has consistently ranked among the top for the past decade. Hong Kong's Office of the Communication Authority, which is in charge of the city's telecommunications regulations, is expecting 5G services to be fully launched in 2020.

Chart 2


Chart 3


Chart 4


Regulation: Disruption Risk | High (4)

HKMA is at the wheel in the drive to smart banking

We see HKMA's proactive regulatory approach to be conducive to fintech development in the banking industry and could intensify the competition.

HKMA's fintech ambition was laid out in seven initiatives announced in September 2017 (table 1), which aimed to propel fintech development in the city. HKMA has taken a more forceful approach than the Singapore financial regulator, Monetary Authority of Singapore (MAS) in pushing forward the city's fintech agenda. For example, HKMA, has created a framework and timeline requirements for Open API. In Singapore, MAS has adopted a progressive but even-handed approach. MAS was among the first in the region to formulate open banking policies but is not yet requiring banks to divulge data. It has thus been encouraging banks in Singapore to openly develop and share APIs ahead of the license application deadline, creating resources like the Financial Industry API Register and co-developing guidelines in partnership with the Association of Banks in Singapore (ABS). The business scope for virtual banking licenses in Hong Kong is also less restrictive compared with similar licenses issued by MAS.

The Hong Kong banking industry quickly responded to the regulator's call. In 2018 and 2019, all seven measures have started to be implemented with varying degrees of progress. Whether these measures will leave a lasting impact on the Hong Kong banking industry remains unclear, but surely they have led to disruption of the banking industry in both the short and long term.

The most apparent among the seven is FPS. The launch of FPS has torn down the barrier, which inconvenienced users trying to make payments across different banks. It also allows payment to be done on a real-time basis 24/7. Following FPS' launch in September 2018, individual banks in Hong Kong quickly introduced their own payment systems (customer to customer and customer to business) on the foundation of FPS. This has heightened the competition in payment services since banks have to compete against one another in addition to other payment service providers like AliPay, WeChat, Google, and Apple.

Table 1

Hong Kong Monetary Authority's Seven Initiatives
i Faster Payment System (FPS) - Supports the use of mobile phone numbers/email addresses for HKD and CNY payment
- Available 24hx7
- Launched in September 2018
ii Fintech Supervisory Sandbox (FSS) 2.0 - Speedy feedback to respond to banks and tech firms on fintech projects
- Provide tech firms direct access to sandbox
- Single point of entry to pilot trials involving HKMA, SFC, and Insurance Authority
iii Virtual Banking - Granted eight licenses for virtual banks in Hong Kong
- One launched services in January 2020, with a second one targeting to launch before end-2020
iv Banking Made Easy Initiative - Minimize regulatory frictions in digital experience (e.g. remote onbording, online finance and wealth management)
v Open Application Programming Interface (API) - 4-Phase implementation to encourage wide adoption of API by banking sector
- Encourage collaboration between banks and tech firms
vi Closer cross-border collaboration - Promote cross-border fintech cooperation
- Partnership with Shenzhen Municipal Govt
- Develop distributed Ledger Technology (DLT) trade platform with Singapore
vii Enhanced research and talent development - Collaboration platform with Hong Kong research organizations to promote application new technology in banking

HKMA's other key initiative, Open API, targets expansion of the competitive landscape by allowing third-party service providers (TSPs) to access and use bank-generated data to provide broader scope of services. Banks once again reacted quickly according to the four-phase implementation timeline set out by the HKMA (table 2). The successful implementation and execution of Open API would help to create an ecosystem where TSPs could flourish and introduce new products that cater to an array of niche markets underserved by the large banks. By January 2019, product information such as deposit rates, credit card offerings, and service charges from participating banks had been made available. And by Oct 2019, customers could apply for products through Open API. That said, the implementation stagnated in the third quarter of 2019 as uncertainty on the governance and security of the TSPs mired progress. This is a hindrance to the implementation of phase three and four of the Open API initiatives, where account information could flow bilaterally between banks and TSPs and customers could start transacting across platforms (see "The Future Of Banking: One Year On, Hong Kong's Open Banking Initiative Hits A Roadblock," published March 10, 2019). HKMA aims to refine the technical standards on Open API in 2020, after which it will set a new timetable for the next two phases of implementation.

The announcement of a virtual bank (VB) license was a high note of HKMA's seven initiatives, which attracted much attention. In our view, VBs are more likely to be niche players whose focus will be promoting financial inclusion rather than becoming direct challengers to the existing banks. HKMA published its guidelines on VB authorization in May 2018 and received 33 applications for VB licenses by August 2018. A total of eight licenses were approved by May 2019, backed by a wide range of shareholders, including incumbent banks, online insurance companies, and established tech companies in China. The introduction of digitally savvy and nimble tech companies could introduce new customer acquisition channels and dynamics to the decades-old arena of banking in Hong Kong.

There is no question that HKMA's seven initiatives are already bringing disruption to the market. And we expect the competition to be bustling as more challengers enter the scene. ZA Bank, backed by Zhong An Online and Sinolink Worldwide, was the first VB to begin operation in December 2019. In January 2020, it rocked the industry by offering selected customers a three-month fixed deposit rate of up to 6%. Another VB, Mox, which is backed by Standard Chartered Group, PCCW, Hong Kong Telecom, and, targets to launch in late 2020. (See "Hong Kong's First Virtual Bank Licenses Will Rejuvenate The Banking Sector," published Oct. 3, 2019). We also expect the other six of the eight VBs to launch operation before the end of 2020.

We also believe the regulation changes in response to the COVID-19 outbreak will accelerate insurance and wealth management product offering through digital channels. In March 2020, as a temporary facilitative measure, the Hong Kong Insurance Authority (IA) has loosened the regulation on some insurance products that used to require face-to-face distribution. Some banks have already included permitted insurance products in their digital platforms as of May 2020. In the same month, ZA Bank also launched its insurance product lines, ZA Insurance, which aims to provide quotations, underwriting, and claim services solely through its online platform.

Table 2

Open API Implementation In Four Phases
Phase Open API Functions Examples Of Services Available Delivery Time
ii Product Information Deposit rates, credit card offerings, service charges, and other public information End-January 2019
iii Customer Acquisition New application for credit cards, loans, and other products End-Octobert 2019
iv Account Information Account balance, credit card outstanding balance, transaction records, credit limit change and others To be determined
v Transaction Payment and transfers To be determined

Industry: Disruption Risk | Low (2)

Disrupted but not displaced

In our view, new technologies and VBs could disrupt the way traditional banks operate, but incumbent banks are unlikely to be displaced, given their scale, entrenched market presence, and deep pockets. In particular, the top four largest banks, HSBC, BOCHK, SCBHK, and Hang Seng Bank, will continue to dominate the Hong Kong banking industry. These four banks accounted for close to 57% of loans and 61% of deposits as of first-half 2019. Their deeply entrenched market positions could shelter them from being displaced by big techs for a couple of reasons. First of all, many of Hong Kong banks' customers use their main banks for multiple products. For example, mortgage, credit cards, and savings. Unless the challenger banks offer significant reward for switching, it will be hard to ply customers away from incumbent banks, given their deep relationships with customers and the trust they have built over the years.

Second, while banks may not be as agile as tech companies on coming up with new forms of services such as AliPay and WeChat Pay, their reach and depth of services allow them to catch up with their customers' changing demands and preferences. For example, HSBC's payment app, PayMe, registered more than 1 million users only 17 months after its launch in February 2017. The other incumbent banks have also upgraded their mobile apps to enable electronic payment, using FPS as a foundation. These developments happened much later than AliPay or Samsung Pay, but were quick to gain popularity. It is therefore hard to argue that big tech can render banks irrelevant without a fight. This is also a sign that while incumbent banks may not have been quick to use new technology, they can react quickly and stay relevant.

Last but not least, the Hong Kong banking industry is subjected to the very prudent and stringent supervision of the HKMA, which may have constrained the growth and profitability of banks in Hong Kong from time to time. But the stringent supervision could also deter or hinder challengers' entry into the market. For example, VBs are subject to the same capital and compliance requirements as traditional banks and thus incur high initial investment. HKMA's tight requirements on data security and privacy protection would also translate into higher regulatory cost to potential new entrants, given the cost to employ compliance and data security expertise.

Chart 5


Preference: Disruption Risk | Low (2)

Customers like the old wine but prefer a new bottle

In our view, Hong Kong bank customers, while willing to adapt to new technologies, are inclined to maintain banking relationships with the established brands.

According to Ernst & Young's Global FinTech Adoption Index, an index that gauges the broadness of local consumers' usage of fintech, Hong Kong's index was 67% for 2019, which is the same as its regional peer, Singapore. This is above the global average of 64%. A separate survey indicated that the percentage of population who uses a mobile wallet increased from 65% to 89% from 2017 to 2018. The introduction of FPS in September 2018 is a good first-hand example of Hong Kong bank customers' tech savviness and openness to banking novelties. The service recorded 3.5 million registered users in a little more than 12 months after the launch, and by April 2020, the number has risen to close to 4.9 million. In terms of transaction volume, as of April 2020, HK$99.8 billion of transactions were performed through FPS. This is about 2.5% of the HK$4 trillion of all transactions that were electronically cleared.

FPS' success could be attributed to the fact that users access this service via a payment app or mobile banking app that carries the name of their primary banks. This is an advantage to the incumbent banks, which makes it harder for payment service providers such as AliPay or Apple Pay to compete. In addition, users of Hong Kong banking services have grown used to a high level of privacy and data protection. While in the past maintaining a high standard on data and privacy protection has led to higher cost of doing business, the level of trust built over the years will now serve as a barrier to potential entrants. In fact, based on PWC's digital banking survey in November 2019, 93% of the sample expressed trust in their primary banks in Hong Kong. When it comes to VBs, 56% of the sample expressed interest in becoming a customer, but only 38% would trust VBs with their personal data and only 33% would trust VBs to be financially stable. In our view, building trust will remain a key obstacle to potential entrants.

The Hong Kong banking industry and its customers are relatively mature compared with those in mainland China. This may have led to a slowness in adopting payment technology in Hong Kong. In contrast, mobile payment took off very quickly in mainland China, more than 10 years ago. Yet, the most popular payment services providers like AliPay and WeChat Pay had the benefit of starting with a low base. Putting things into perspective, as of June 2019, there were about 711 million credit cards issued in China, which houses a population of 1.4 billion. Given the popularity of electronic payments, the convenience of a credit card is considerably lower to Chinese consumers. On the other hand, credit cards have been a part of life of Hong Kong consumers for decades. As of June 2019, there were about 20 million credit cards in circulation in Hong Kong, which has a population of 7.5 million: On average, two credit cards per capita. In addition, another contactless payment option has been available to Hong Kong consumers since 1997, the Octopus card. It was then the most advanced payment technology. The Octopus card is accepted on almost all types of public transportation, in supermarkets, and fast food restaurants. As of 2018, 99% of the Hong Kong population aged 16 to 65 had an Octopus card and the card, on average, accounts for 14 million transactions every day. Given these payment options, the marginal benefit of adopting other forms of electronic payments like AliPay or Samsung Pay could appear to be smaller to Hong Kong consumers.

Hong Kong customers' preference could also be attributed to its demographics. As of first-half 2019, about 25% of Hong Kong residents are aged 60 or above. This group of customers prefers the traditional way of banking such as having face-to-face discussion with relationship managers or visiting bank branches. Illustrating how sticky customer preference can be, many bank branches in Hong Kong still have passbook update machines functioning dutifully with an anachronistic buzzing noise.

It is still too early to tell how the introduction of Open API and VBs will influence customer preferences as both are still in an early stage of development. However, we expect, over the short term, customers will prefer to bank with established names. While Open API and VBs could present challenges to the incumbent banks, as of now, the old guard are still trusted and proving themselves to be very apt at learning new tricks. We also expect increasing customer preference for bank digitalization. In fact, COVID-19 has become a surprise catalyst for Hong Kong's fintech adoption. Control measures such as social distancing and branch closure have forced bank customers to turn to digital platforms for their regular banking needs. Some banks such as HSBC and Citi have witnessed substantial increase in retail transactions conducted online or through mobile apps in the first quarter of 2020. Mobile payment platforms such as Octopus Cards and TNG FinTech Group also saw sizable increases in transaction volumes in the first two months of 2020 as more people opted for cashless payment to lower transmission risk.

Fintech Is Rocking The Hong Kong Banking Sector But Not Overturning It

We expect fintech to have a rippling impact on the Hong Kong banking system, but the incumbent banks are well anchored and unlikely to be overturned. In the short term, the incumbent banks will likely maintain their market positions and profitability without losing too much ground to new entrants. We also believe the incumbent banks can avoid being left behind in the innovation race with their financial resources and talents, which should allow them to respond quickly to emerging technologies and evolving customer needs. Their long history of services and deep customer relationships should also alleviate the potential threat of large-scale loss of customers to potential entrants.

Over the medium to long term, the landscape will continue to be shaped by HKMA's initiatives such as Open API and VBs. Open API could give rise to an ecosystem where TSPs can bring more product transparency and convenience through newly available data and the creative use of technology. VBs could also introduce a new dynamic to the competition as they can focus on the niche markets that are underserved by the incumbents. However, there are impediments to the success of these initiatives. The progress on Open API has been stagnant as the industry is clouded by uncertainty on data and privacy governance. And many VBs have yet to launch their services. The potential is real but it is too early to tell where it will lead.

Related Research

S&P Global Ratings' research
  • Tech Disruption In Retail Banking: Australia's Big Banks Hold Their Ground As Tech Takes Center Stage, June 3, 2020
  • Tech Disruption In Retail Banking: Singapore Banks Are Front-Runners In Digital Race, June 3, 2020
  • The Future Of Banking: Research By S&P Global Ratings, Feb. 19, 2020
  • Tech Disruption In Retail Banking: Better Late Than Never For Japanese Fintech, Feb. 6, 2020
  • Tech Disruption In Retail Banking: Brazilian Banks Rise To The Challenge, Feb. 3, 2020
  • Tech Disruption In Retail Banking: U.K. Banks Embrace The Tech Race, Nov. 14, 2019
  • Hong Kong's First Virtual Bank Licenses Will Rejuvenate The Banking Sector, Oct. 3, 2019
  • The Future Of Banking: Will Retail Banks Trip Over Tech Disruption? May 14, 2019
  • Tech Disruption In Retail Banking: German Banks Have Little Time For Digital Catch-Up, May 14, 2019
  • Tech Disruption In Retail Banking: China's Banks Are Playing Catch-Up To Big Tech, May 14, 2019
  • Tech Disruption In Retail Banking: Swedish Consumers Dig Digital--And Banks Deliver, May 14, 2019
  • The Future Of Banking: One Year On, Hong Kong's Open Banking Initiative Hits A Roadblock, March 10, 2019
Other research
  • A New Era of Smart Banking, Sept. 29, 2017, Hong Kong Monetary Authority.

This report does not constitute a rating action.

Primary Credit Analyst:Patrick Chan, Hong Kong (852) 2533-3528;
Secondary Contacts:Fern Wang, CFA, Hong Kong (852) 2533-3536;
HongTaik Chung, CFA, Hong Kong (852) 2533 3597;

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