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China’s tech giants have upended the country’s payments system and promise to shake up its consumer-banking sector. The rest of the region won’t be so easy.
Asia is quickly becoming next battlefront for Alibaba Group Holding Ltd.’s Ant Financial and Tencent Holdings Ltd.’s WeChat Pay, after both secured licenses to set up online-only banks in Hong Kong this month. Singapore’s welcoming regulatory environment makes the city-state an obvious entry point to Southeast Asia.
The region’s huge market could offer some easy wins. Much of its population of over 650 million are digitally savvy smartphone owners, already comfortable with ride-hailing apps like Go-Jek and Grab. Meanwhile, inefficient bank branches, low interest rates and poor professional investment advice is trumping privacy concerns: 62% of people in developing Asian countries don’t mind sharing personal data to get customised products, compared with just 23% in wealthier Asian nations, according to a 2017 survey by McKinsey & Co.
Yet traditional lenders remain formidable competitors. Take Hong Kong: While the city awarded licenses to eight virtual banks, three have gone to incumbent lenders Standard Chartered Plc, BOC Hong Kong Ltd. and Industrial & Commercial Bank of China Ltd. HSBC Holdings Plc, which has a lock on 30% of city’s deposits, hasn’t even applied.
HSBC may have good reason to be unmoved. Together, the city’s virtual-bank contenders will have a balance sheet of just HK$150 billion, which would put them on par with Hong Kong’s third-smallest bank, Dah Sing Banking Group, according to Citigroup. While picking up retail customers is one thing, getting them to put large amounts of money into a virtual bank account is another. Without a big-name lender behind them, newcomers grapple with a trust deficit.
Virtual banks also aren’t exempt from frustrating know-your-customer routines, which can hinder efforts to sign up cash-heavy small and medium enterprises. A hair salon that finally convinced HSBC it’s not laundering money will be reluctant to repeat that process. While an individual can open a virtual account in a matter of hours, the same can’t be said for SMEs, which face more onerous regulatory hurdles. That means it’s unlikely to be any less time-consuming than the average 38 days it takes for a traditional bank in Hong Kong.
Another issue is that newcomers’ cost advantages may be smaller than anticipated. Virtual banks might save money by not having branches, but Hong Kong is setting same capital requirements for online-only banks as their bricks-and-mortar rivals – something Singapore is likely to replicate.
Then there’s liquidity. Singapore’s DBS Group, which started a mobile-only digital bank in India in 2016, claims to be targeting SMEs with data-driven lending. It’s unclear if deposit base required for a meaningful operation can come from online-only customers. In Indonesia, Malaysia, Myanmar, Philippines, Thailand, Vietnam – in addition to China and India – 46% of consumers flatly refused to move any of their money to a bank without branches, according to the 2017 McKinsey survey.
That doesn’t mean traditional banks should get complacent. Many startups are backed by deep-pocketed Chinese tech giants, which gives them the flexibility to scale up quickly.
Ultimately, big banks may even want to consider ceding some of this race for retail clients to nimbler tech rivals. The real money to be made is in a dustier corner of the banking business: in the accounting departments of large multinationals.
—Bloomberg
Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Time