Virtual rivals

Jack Ma takes on Hong Kong banks

How much of the future of fintech is Chinese? That’s the question being asked in Hong Kong after the city’s monetary authority granted another batch of licences to virtual banks – that is to say, lenders that do business through digital channels rather than physical branches.

Eight licences have now been issued in total – and seven of them have backing from internet or financial companies from the Chinese mainland.

Bank of China, online insurer ZhongAn and travel platform Ctrip were already partners in joint ventures approved earlier this year. Last week Tencent and Alibaba were also given the nod, as was banking giant ICBC, smartphone maker Xiaomi, and Ping An, the world’s largest insurer (according to a Forbes ranking).

Only one of the licences went to a local fintech firm, prompting newspapers to spin the announcement with a ‘Hong Kong under attack’ storyline. Critics of the tendering process have complained that the minimum capital levels are too high, screening out smaller but potentially innovative players. Another theme is that the incumbent banks should be terrified as the full weight of China’s tech sector bears down on the city. Anything from a tenth to a third of their business is up for grabs, analysts have predicted.

The story is more nuanced than Hong Kong being served up as a sacrificial lamb. For a start, the mainland firms will bring a shake-up to the sector and that should benefit retail customers. Policymakers are also hoping to kick-start a clustering effect in fintech, bolstering Hong Kong’s reputation as a global financial centre and giving it an edge against competitors like Singapore. Forging ahead with fintech fits with Hong Kong’s positioning in the Greater Bay Area as well, where it wants to be the primary gateway between the region and the wider world, especially in financial services. More global in outlook, and with regulatory standards that are better respected overseas, its financial sector could serve as a bridgehead for the virtual banks to get into other markets, including the licence holders from China.

Of course Hong Kong also gets the chance to learn from what has been happening across the border, where the Chinese are light years ahead in digital payments, the area in which the fintech revolution has advanced fastest. Ant Financial and WeChat Pay already account for half of the world’s online payments, although their Hong Kong franchises will soon be offering a wider range of services, taking deposits and issuing loans by the end of this year.

Ratings agency Moody’s is still predicting that Hong Kong’s larger banks will hold off much of the new competition, however, because they benefit from sticky deposits that are less vulnerable to competition from new entrants. Lenders like HSBC will be chasing the same customers through their own investments in digital banking as well (its PayMe service has 1.5 million clients using its digital wallet technology). The newcomers may choose to target particular segments like small and medium-sized enterprises. But Moody’s reckons the bigger lenders derive significant profits from businesses that will be harder to penetrate, including wealth management and most corporate business.

Fintech investment climbed ninefold in China last year to $25.5 billion, according to analysis from Accenture, although it actually fell back to $188 million in Hong Kong from $546 million the year before. Admittedly, the figures from China were supercharged by the record $14 billion in fundraising from Alipay operator Ant Financial. Yet the differences in scale reinforce how Chinese fintech is being fuelled by some of its largest tech firms, which contrasts with Europe and North America, where start-ups are more likely to be backed by venture capital funds and financial sector incumbents.

Also in the tech firms’ favour: more than 90% of Chinese consumers under 35 say they would bank with a technology firm, according to Bain research, compared to 75% in the United States and just 51% in France.

All of this points to a future in which fintech is going to bring fundamental changes to the financial sector. Hong Kong’s banking regulators seem to have come to similar conclusions, deciding that this is a trend worth tapping into rather than trembling about.

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