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普华永道
Virtual banking in Hong Kong
A catalyst for change
Background
In September 2017, the Hong Kong Monetary Authority (HKMA)
launched a number of initiatives under the title A New Era of Smart
Banking. One of these was the introduction of new ‘virtual banking’
licenses for non-traditional financial services providers to enter the
Hong Kong banking sector without the requirement of physical
branches. The HKMA received over thirty applications; eight licenses
were granted in the first two quarters of 2019.
Virtual banks are acting as a catalyst for developments across the
banking sector – both digital and physical. They are focussing on
hyper-personalisation and other new business models, both of which
are realised through the adoption of new technologies, such as big
data, and by leveraging an ecosystem of partners.
As well as promoting innovation and the application of FinTech, the
HKMA wants virtual banks to enhance financial inclusion for retail
customers and small and medium-sized enterprises (SMEs) in Hong
Kong. With the expectation of lower cost-income ratios, virtual banks
should be able to offer more price competitive products and waive
minimum balance charges, for example. Traditional banks have been
deterred by the onboarding costs for some SMEs. Automated
procedures may make this segment more attractive for virtual banks.
Virtual banking in Hong Kong | 2
Engaging with customers differently
Virtual banks will put customers at the heart of what they offer –
moving away from the product and channel approach associated
with traditional banks. They aim to be more relevant to how people
live their daily lives, and are willing to embrace partnerships in order
to achieve this.
For example, when planning a holiday you will engage in multiple
transactions with a range of parties, including your bank: from buying
foreign exchange and travel insurance, booking flights and hotels, to
making overseas payments or renting a car. These transactions will
generally be undertaken on a range of platforms – including within a
bank branch – and may be dealt with separately across and within
organisations.
Virtual banks will aim to offer a seamless experience through an
ecosystem of partners that enables you to interact with different
service providers through a single platform. They will remove pain
points (e.g. having to supply personal information repeatedly) and
will look for opportunities to reward loyalty and add value, such as
eliminating the need to visit a bank branch to convert foreign
exchange.
3 | Virtual banking in Hong Kong
Democratising financial services
Virtual banks are looking to make financial services products more accessible. This could include offering lower
ticket sizes for wealth management products, more innovative forms of returns on investment (e.g. retail
benefits), quick and easy loans or pay-as-you-go insurance. They will educate and empower their customers to
take greater control of their finances.
Traditionally, banks have mainly offered static data (e.g. your account balance) and opportunities to buy
investment products. Your virtual bank could predict how your balance will look at the end of the month and how
you are progressing towards your monthly savings target. It can offer advice on how to reduce your outgoings
and what investment products most closely match your goals.
The best virtual banks will be able to offer the intuitive customer experience and ease of functionality that
customers have grown used to with the leading consumer technology companies.
Rewarding loyalty
Virtual banks will reward customer loyalty differently. They will seek to offer rewards from their partner
ecosystem that match the interests of their client’s demographic – rather than a one-size-fits-all rewards
points model. Loyalty could also be rewarded through better rates or more innovative forms of investment
returns
Technology as an enabler
Virtual banks will utilise the latest technologies to better target and then service precise customer segments –
resulting in enhanced customer experiences. They will also make use of data analytics, machine learning
and Robotic Process Automation to accelerate lending decisions and to flag up suspicious transactions much
more reliably.
Virtual banking in Hong Kong | 4
Virtual banks will offer differentiated features and propositions through
partnerships and new technologies
Open APIs will be a key enabler in the development of virtual banks. They allow seamless two-way interactions
between banks, third party service providers and business partners, thus creating innovative services to enhance day-
to-day life. For example, a non-bank could offer an account aggregation service by connecting with a virtual bank
through Open APIs. If you need to make a series of transactions with different vendors, an Open API can populate
separate online forms with your personal data. The goal is to remove the pain points from these customer journeys.
Open APIs will play a significant role
Propositions
• Personalised promotions
based on data-driven customer
insights
• Solutions that are integrated
with how people live their daily
lives
• Personalised information that
enables customers to change
their spending and savings
habits
Features
• Precise customer
segmentation – no
irrelevant offers
• Seamless experience
across a more focused
product range
• Consistently competitive
pricing; potentially tailored
pricing for individuals
Partnerships
• A wider variety of partners
than are typically found with
incumbent banks
• Loyalty offerings relevant to
your demographic provided
through partner ecosystem
• Connectivity to adjacent
products or businesses
through the partner
ecosystem
Technologies
• Open APIs to deliver seamless
customer journeys
• Instant account opening on a
smartphone
• Data analytics to accelerate
lending decisions
• AI to more accurately flag up
irregular activity
Differentiators
5 | Virtual banking in Hong Kong
Virtual banks will be compliant by design
Virtual banks will begin by offering simple products, such as savings, payments and credit and debit cards (both
virtual and physical). As they start to offer more sophisticated services, they will do so in an innovative way. If they
are targeting younger customers, an obvious step would be to leverage technology so as to offer wealth
management products that have traditionally been exclusive because of high minimum investment requirements.
Virtual banks can democratise these products by breaking them down into more affordable units and pairing them
with investor education. Partnerships and ecosystems can also be used to offer access to otherwise unattainable
wealth management services and investor advice. Virtual banks are likely to build on the success of FinTechs,
which have targeted high value products or services where there is friction, such as foreign exchange.
Looking forward to wealth management
Virtual banks beyond Day One
Hong Kong as a stepping stone to the world
The Greater Bay Area will play an important part in the strategies of some of the Hong Kong-based virtual banks.
However, they will face significant competition from existing innovative financial services providers in the GBA.
There are also a number of legal and regulatory considerations that will take time to be addressed. While these are
being tackled, virtual banks are likely to look at other virtual banking regimes, such as Malaysia and Taiwan.
Singapore has just announced plans to issue up to five digital bank licenses. A bank that operates in Hong Kong
enjoys international credibility, so more distant markets may also be of interest to the virtual banks.
Banks looking at international expansion need to consider transfer pricing and approaches to value creation, as tax
regimes differ from country to country. The European Union, with a single set of tax rules, may prove attractive to
virtual banks. Fortunately, the direction of travel globally is towards more consistent tax policies.
Compliance costs are chiefly made up of staff expenses and, sometimes, fines imposed by regulators. For large
incumbent banks, implementing new technology takes a long time, so there are often manual workarounds
requiring significant headcount.
Any bank building its infrastructure from scratch today can be compliant from Day One and automate key
processes to ensure ongoing compliance. A virtual bank can also make use of a cloud-based technology provider
that is already meeting these compliance needs for other banks. These reduced compliance costs will be enjoyed
by all virtual banks, will differentiate them from incumbents, and will enable them to pass on these cost savings to
their customers.
From a tax perspective, the Hong Kong government's introduction last year of a new ‘super tax deductions’ regime
for R&D expenditure can motivate virtual banks to continue to explore more innovative ways of doing business on
an ongoing basis.
How should the industry respond?
Focus on customer journeys, not products
Traditional banks are still built around products and channels. The customers that virtual banks are targeting
want integrated solutions, not the silo approach that the majority of established banks currently offer. They are
seeking a seamless experience – not a series of products. Financial institutions that have successfully
embarked on a digital transformation have all moved from a product-centric approach to one that truly puts the
customer at the centre of what they do.
Create a culture of collaboration and innovation
In addition to being customer-focused, traditional banks need to be innovative, agile and collaborative. This
involves improving everyone’s “digital fitness” – from the CEO to the bank teller. Traditional banks will no
longer be able to build everything in-house – they need to look outside for opportunities to collaborate and
partner.
Get the basics right, then iterate
Some of the biggest new economy businesses – such as Amazon, Spotify or Uber – started with a very simple
proposition and then perfected it before offering more complex services. This is also what we have seen with
the most successful virtual banks globally: go with something simple, but delight the customer. And then build
up your menu of services from there.
Virtual banking in Hong Kong | 6
Our established banking clients are challenging themselves on
how to…
• Break down their silos to move away from products and channels to journeys and experiences
that are relevant to how their customers live their lives.
• Continue to be the bank of choice for their chosen segments.
• Utilise a greenfield approach to incubate new technologies and solutions.
• Identify and capitalise on potential partnerships to acquire, retain and grow their customer
relationships.
• Enhance how they manage their regulatory obligations so that they become compliant by
design.
• Create a culture of customer obsession to improve customer retention in the face of new
competition.
• Improve the digital fitness of all their people.
• Maximise customer value from the physical channel in light of Virtual Banking.
Virtual banking in Hong Kong | 7
Whether you are a virtual or an established bank, PwC can help
accelerate your digital journey by:
• Developing a business strategy that is fit for growth.
• Designing and building a digital bank using new technologies and partnerships.
• Guiding your application through regulatory approval.
• Accelerating your customer acquisition and brand loyalty.
• Enabling you to onboard your clients instantly.
• Helping you serve your customers in a digital-first world.
• Helping you adapt your workforce for the future.
• Simplifying your finance and treasury functions.
• Navigating you through complex risk and compliance challenges.
• Protecting your digital bank from cyber attacks.
This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
© 2019 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal
entity. Please see www.pwc.com/structure for further details. HK-20190326-5-C1
Your PwC contacts
www.pwchk.com/virtual-banking
Harjeet Baura
Digital Strategy &
Transformation
Gary Ng
Technology Risk &
Cybersecurity
Akihiko Katayama
Technology Architecture & Partnerships
Ho Kee Fu
Onboarding & Anti-Money
Laundering
Guy Parsonage
Customer & Branding
Strategy
Adams Chan
Licensing and Regulatory
Compliance
Brian Yiu
Risk Management
Emily Lam
Risk & Regulatory
Compliance
Julie Chan
Wealth Management
