It’s now four years since Hong Kong saw its first of eight licensed digital banks open their doors. This was regarded at the time as a decisive challenge to incumbent banks.
Yet these startups, also known as virtual banks, look like failures if judged by their ability to attract deposits.
But is simply tallying up account numbers fair? Should virtual banks be judged through a different lens? And do they offer a different pathway to becoming the primary account for a critical mass of users?
Why deposits matter
Four chief executives from virtual banks spoke with DigFin about their institution becoming a primary account for many users. They insist a qualitative analysis is required, not just a quant’s tallying deposit figures, to judge how they’re doing.
This matters to banks’ shareholders, managers, and customers. But it also matters more broadly. The Hong Kong Monetary Authority says licensing purely digital banks was meant to spur competition and innovation among incumbents.
By that yardstick, it doesn’t matter if a few virtual banks go under: they’ve already fulfilled their purpose, as far as the regulatory is concerned.
But if virtual banks fail to attract enough business, they will not be able to continue pressuring the broader banking industry. They need to become profitable, and that means they need to become far better at winning – and keeping – customer deposits.
First let’s look at those deposits. In December 2023, Quinlan & Associates, a local consultancy, ran the numbers across all eight virtual banks.
Wrong direction
It found they have amassed 2.1 million customers as of June 2023, which is formidable for a population of 7.3 million people. That added up to HK$32.2 billion of customer deposits.
But, according to Quinlan & Associates:
- Total customer deposits represent only 0.2 percent of Hong Kong’s total deposit base of HK$15.4 trillion
- 55% of accounts remain dormant (defined as customers not logging in to their online account at least once a month)
- The average account size has been cut in half, from HK$29,300 in 2020 to HK$15,50 in 2023
- About 70% of customer deposits leave a virtual bank at the end of deposit-product promotions
Quinlan’s thesis is that virtual banks can’t hold onto customer deposits without building enough breadth and depth of product, such as mortgages or sophisticated investment programs. Customers use virtual banks tactically to take advantage of short-term deals, and then return their funds to their primary bank.
The qualitative argument
Virtual-bank executives can’t dispute the numbers, although those figures do vary among the eight; some such as ZA Bank and Mox Bank have bigger numbers. But that just means a few other banks have even fewer deposits.
Instead they can argue two things. One is that they are on the path to become primary account providers for at least some customers, and therefore they will soon become sustainably profitable.
“We want to be the primary bank, but that’s a long-term goal,” said Calvin Ng, co-CEO at ZA Bank. “In the medium term, it’s about users trusting us more, because ‘primary bank’ is all about trust. This means everything we do has to be user-centric.”
For an SME-focused virtual bank, becoming the primary account is about niche, and grind: “You have to go step by step and be more focused,” said Michael Fei, CEO at PAObank. “Our focus is to make loans to SMEs. Every virtual bank feels pressures to be sustainable, but focus is the one thing we can fully control.”
The other argument is to redefine what it means to be a primary-account bank. For Barbaros Uygun, CEO at Mox Bank, it’s not important to be the primary provider for everyone, but for the mobile-savvy. “We will become the primary bank starting with young people,” he said. Looking at the past decade of challenger banks worldwide, he believes a Hong Kong bank could join the ranks of a Revolut, KakaoBank or NuBank and become a cross-border franchise.
Tat Lee, CEO of WeLab Bank, says he isn’t trying to be the primary account for depositors. “It’s not as important today because, with digital payment infrastructure, money moves in and out at the click of a button. It’s not sticky. So it’s more important to be good at a couple of features or products. Those we can scale to create revenue.”
He adds that in 2022, WeLab made a strategic pivot away from customer acquisition in favor of customer monetization. “We will be the first virtual bank in Hong Kong to break even,” he said, saying the bank will reach that milestone in 2025. “We’re pretty confident about that.”
Technology and customers
All of these arguments share the fact that these are new, mobile-first, branchless businesses built on cutting-edge, cloud-based architecture. This means they can innovate and iterate quickly and constantly.
This front-to-back agility is the differentiator versus incumbents. Large banks have not been idle: they have also improved their digital footprint (Covid forced them to) and now many banks offer decent mobile apps with a lot of functionality.
But virtual bankers agree that such changes are mostly about the app and the customer-facing experience. Behind the scenes, banks’ operations and databases remain siloed and tethered to legacy mainframe systems. It still takes them months to effect changes.
“Banks aren’t changing their hygiene products,” says ZA’s Ng. “They do big product revamps, but they’re not good at continuous improvement. We have a new release every three weeks, big or small.”
Nor do the startups believe the incumbents can match this speed.
“A traditional bank could do this too, but it’s not their focus,” PAObank’s Fei said. “You need the operating model to support the technology. It’s not just going mobile, but how you approve, settle, and disburse your loans.”
Mox’s Uygun says he welcomes incumbents restructuring their back offices to become more agile. “I hope more players do more transformation. Then those banks are playing on our turf.”
This series includes profiles of four virtual banks: ZA Bank, PAObank, Mox Bank, and WeLab Bank, and our conclusion.
