In this DigFin series on virtual banks in Hong Kong, we have started with the premise that these fintechs are struggling to attract and keep customer deposits, so we are asking their CEOs how they intend to achieve profitability.
The exception of the eight licensed digital banks is Mox Bank, majority owned by Standard Chartered along with PCCW, HKT and Ctrip Financial Management.
Mox has attracted the largest userbase of the eight. It’s also the only bank in this survey that shared recent numbers with DigFin, even if these are cherry picked.
With more than 550,000 customers, Mox now claims a penetration rate of the bankable population of above 10 percent—and for people below the age of 40, that figure is 20 percent.
This doesn’t translate into dollar amounts in deposits that match established incumbents, but Mox says it accounts for about 30 percent of all virtual bank deposits and loans. It continues to grow both at a rapid pace.
Growth versus profits
It seems likely over time that consolidation will come to virtual banking. Although M&A is unlikely to take the form of ‘VB1’ swallowing ‘VB2’ (it’s more likely to be reshuffles among shareholders or an incumbent acquisition), this makes Mox look like the most attractive asset among the lot.
Even so, Mox has yet to reach escape velocity. It’s still being compared among its fintech peer set, rather than seen as a serious benchmark versus an HSBC or a Bank of China: that’s the purview of Mox’s biggest shareholder. And it’s not yet profitable.
These virtual banks launched four years ago at a time when capital was ultra-cheap and the basic idea for any kind of tech company was to go for eyeballs and growth; profits didn’t matter because financing was cheap.
Today’s world is very different. Profitability, or at least a believable path to it, is more important; financing is expensive; monetizing users is valued more than acquiring new ones.
Global trendlines
Mox’s CEO, Barbaros Uygun, remains focused on growth, however, and adding new products.
He has the benefit of corporate and strategic backers, not venture capital. Standard Chartered can afford to take the long view. For example, Uygun notes that Mox’s tech stack went into another StanChart-backed digital startup, Trust Bank in Singapore. That business has ramped up Singaporean customers and is on track to become that country’s fourth-largest retail depositor bank by the end of this year.
Nonetheless, when asked about becoming a primary bank for more of its customers – a critical proxy for business sustainability and funding the loan book – Uygun returns to the growth story.
“Virtual banking is new to Hong Kong, but not the world,” he said. “Elsewhere it’s in its third generation.” For example, ING introduced the internet-only bank ING Direct in the 1990s (the unit was eventually sold to Capital One in 2012), while in 2000, Singapore’s OCBC launched finatiQ (which was enfolded into the rest of the bank in 2011). They typically offered higher interest on savings to attract depositors.
The industry’s second generation started in 2008. Between the financial crisis and the introduction of the iPhone, branchless banking went mobile, became more personalized, and added product lines beyond savings accounts.
“The third generation of virtual banks are the Covid natives,” Uygun said, which aim to do everything via mobile, cover almost the entire product spectrum, and intend to serve as the primary bank of younger people, not just an add-on with higher savings rates.
Transformational
Looking at the growth of the most successful digital-only banks around the world, Uygun says they all follow the same pattern. They onboard tech-savvy younger people and the winners consolidate to fuel the next boost in growth. The winners are the ones that have the greatest appeal to customers, to the extent that users urge their friends and family to also get an account.
“This process has started in Hong Kong, and some virtual banks will grow and strengthen their brand,” he said. “These winners will mature into sizeable franchises and become primary banks.”
Turkish-born Uygun added, “I’m new to Asia but I don’t see amazing surprises.”
He acknowledges that most virtual banks – challenger banks, neobanks, what have you – fail. He reckons out of 450 digital banks globally, only 5 percent are becoming global leaders, such as Revolut, Monzo, KakaoBank and NuBank.
“It’s true that 90 percent of them don’t make money, but what’s with the 10 percent that do? That’s more than enough to create global transformation. It’s a change we change for every household, not just our customers, because it forces the industry to become more transparent, fairer, faster, easier.”
And, citing the Trust Bank example, a fully digital bank becomes a platform business, with portable technology and know-how, which eventually leads to a lower unit cost per client served. Another example is Mox’s recent tie-up with Interactive Brokers to offer its customers fractionalized trading of US equities. “IB’s systems run it in the back, but the front-end data structure is ours,” Uygun said.
Primary redefined
Along with his peers interviewed in this series, Uygun talks up the bank’s agile tech stack: lower cost to serve, fast product iteration (60 products in under four years for Mox), and a focus on front-to-back data and information architecture. This enables a relatively flat organization. “We have functions [such as operations, risk, credit assessment, etc] but they don’t dominate the business,” Uygun said.
More specifically he argues that Mox is already becoming a primary bank to a large number of users. He does so by redefining ‘primary’ to mean a customer that uses four or more of Mox’s products and services, rather than whether they keep the bulk of their deposits there. That can mean credit and debit cards, payments, billing, or transferring money. Mox has also recently launched a wealth capability, with financial advice and digital-asset trading in the works.
By that definition, he says 28 percent of Mox’s customers use Mox as a ‘primary’ bank.
Looking ahead, Uygun expects to grow by moving into SME lending. It has work to do on its core lending product. “We want to improve our underwriting and become a full-fledged bank for retail,” he said. “When we do SME and corporates, it will be the same: end-to-end digital, creating value across the value chain.”
Uygun ended the interview noting that the growth-at-all-costs model doesn’t work. “We can’t rely on incentives. We have to add value,” which derives from a full tech stack, not just a user-facing app, and working with partners to improve products and services.
Yet virtual banks are still offering incentives to win new customers, and Uygun invoked growth as a strategy. The question will become which of these startups will gain the heft – win the landgrab – to evolve into something bigger? Uygun is confident there will be a champion. Will it be Mox? Will it be any of the coterie of virtual banks from Hong Kong?
This series includes our introduction and profiles of ZA Bank, PAObank and WeLab Bank, and our conclusion.
