DigFin has spent the past month profiling Hong Kong’s virtual banks and profiling some of their CEOs.
We began with the quantitative side, looking at the industry’s challenge in retaining customer deposits. The numbers on average are disheartening. Virtual banks attracted customers through promotions. Some continue to find ways to make their business sticky.
Across the eight licensed digital banks, however, deposits have fallen, in terms of both numbers of accounts and amount of money in those accounts.
Against this, the CEOs have posited a qualitative argument. They point to innovation, built on nimble tech stacks, that will gradually win over customers. Some even argue that deposit size is not representative of their business – although it’s the deposit base that provides cheap funding for lending, where banks traditionally make the most revenues.
The arguments made by the heads of four virtual banks who spoke with DigFin – Mox Bank, PAObank, WeLab Bank and ZA Bank – reflect the customer focus of fintech. It’s a refreshing challenge to the siloed account-based formula of traditional banking. (Execs at Airstar Bank, Ant Bank, Fusion Bank and Livi Bank didn’t respond to requests to be interviewed.)
But how likely is it that any of these banks will reach the scale necessary to be sustainably profitable?
The CEOs referred to global benchmarks that prove that some virtual banks have become sustainably profitable. They regularly cite KakaoBank, Revolut, and Nubank as examples.
Let’s take a look at those stories.
KakaoBank
KakaoBank now serves over 22 million users in South Korea, out of a population of about 52 million people. Its local rivals Kbank and Toss serve about 20 million between them.
KakaoBank launched in 2017. Within two weeks it had amassed two million customers and $930 million in deposits, thanks to being launched by the country’s leading social messaging app. It worked with regulators to get customers ready to open accounts using selfies via an app. This makes it more like WeChat than any player in Hong Kong, but this growth also shows how lousy retail banking was in Korea.
KakaoBank became profitable in just two years. It went public in 2021. Its IPO was a blockbuster, reaching a market value of $29 billion, making it the country’s biggest financial services firm by market cap. It timed its IPO for the height of the zero-interest rate era; today it’s worth about $10 billion, but it’s still reliably profitable.
Now KakaoBank is expanding. Its home market is saturated, with a fourth digital bank recently joining the Korean scene. KakaoBank recently launched Superbank in Indonesia with Grab. Although Indonesia has plenty of digital banks, this tie-up brings both financial heft and tech acumen.
Revolut
Revolut has gone from 1.5 million users in 2018 to 40 million today. The UK fintech was founded in 2015 to provide travelers with access to good deals on foreign exchange.
It has outpaced UK digital banks of the same era, such as Monzo and Starling, thanks to the fluidity of being a fintech, and it now has 40 million users. Its rapid growth, by users and by markets, was fueled by venture capital, including a monster round in 2021 – again, the peak of zero interest rates – that drew $800 million from SoftBank and Tiger Global.
At that point it was valued at about $33 billion. That figure probably fell in line with other fintechs that suffered in the painful adjustment to more expensive capital. But today Revolut is looking at a $40 billion valuation as it sells employee shares to the private market.
Revolut has sought a UK banking license since 2021. That goal has been held up by issues over some sloppy accounting practices. But Revolut must feel confident, having signed a lease to move its London headquarters to Canary Wharf. Nothing screams ‘establishment bank’ like that.
Notably, despite these successes, Revolut’s Asia ambitions have not been realized. It has operations in Singapore, Australia and New Zealand. It has said for years that it will enter new markets in Asia Pacific. It is repeating the assertion today. But licensing aside, it faces lots of homegrown competition throughout the region.
Nubank
Finally, Nubank. Its story is even more impressive, serving 92 million Brazilians plus another 8 million users in other markets in Latin America. It took off by offering Brazilians low-limit, zero-fee credit cards and mobile apps. Its rapid growth was fueled by three things. First, the Brazilian banking industry was too bureaucratic and didn’t treat customers well. Second, Nubank was founded by a former partner at Sequoia Capital, so it had big VC backing, which later included Tencent and GIC. Third, its products were innovative and met customer needs.
By 2018 it had become a unicorn (valued above $1 billion), and it IPOed in 2021 with a $45 billion market cap, bigger than any traditional bank.
Unlike fintech IPOs from Asia, Nubank’s valuation has held steady, and it’s worth about $51 billion today. Investors seem optimistic that Nubank will replicate its success in countries such as Colombia and Mexico.
Tough acts
Why go through these quick stories? They show how difficult it will be for any virtual bank in Hong Kong – or in Southeast Asia or India – to replicate this success.
First, capital.
The world’s biggest virtual banks got their start thanks to cheap capital and generous VC backing. In Hong Kong and Asia, there are some deep pockets behind the banks, and thanks to Covid, there is a critical mass of people now ready to do banking online. But capital is now expensive.
Moreover, most of the strategic backers are Chinese Big Tech firms, who since the crackdown against Alibaba in 2021 face difficult conditions at home, including a consumer economy that is struggling in the face of China’s real-estate crash. To these companies, pouring money into a city of 7.4 million people is probably a low priority.
Second, fast growth.
The likes of KakaoBank, Monzo and Nubank were scalable from the start: South Korea’s population is mobile-savvy, rich, and big enough to support multiple virtual banks; Revolut was cross-border from the start; and Brazil has 215 million people, all badly served by existing banks. They all enjoyed lightning-fast growth.
That was partly because they were among first movers in sectors that needed better service. That’s true today in Hong Kong and regional markets, but less so. Covid forced traditional banks to improve their online capabilities. Asian banks have been digitizing. Some even operate their own virtual banks in expansion markets (DBS in India, UOB in Thailand, CIMB in Philippines).
Virtual banks benefit from a cloud-native tech stack, an innovative culture, and a customer-centric operation. They do outcompete the big incumbents with their ability to constantly innovate and iterate. But how big is the difference between what a Hong Kong virtual bank offers versus what HSBC or Standard Chartered offer today, versus the difference between what Nubank offered customers in 2018 compared to the likes of Itaú Unibanco?
Third, expansion.
The hidden advantage of virtual banks is their ability to export a platform. Mox’s tech stack was used to launch Trust Bank in Singapore. WeLab Bank grew out of online lender WeLend, and is used now to support two banks in Indonesia. ZA Bank and PAObank are linked to the technology vendors of their parents, Zhong An and Ping An.
But expanding into other Asia markets is harder now. The fact that Revolut has struggled is one sign.
Another marker is KakaoBank’s entry into Indonesia in partnership with Grab as well as SingTel (Grab’s virtual-bank partner in Singapore) and Emtek, a local telco and media conglomerate. For virtual banks looking to move into Southeast Asia, not only are there plenty of local competitors, but now there are cross-border giants to contend with.
With capital now dear, the business case behind any international expansion has to be watertight.
Crowded Asia
These points are relevant for all the virtual banks and various digital banks across Asia. There are five virtual banks in Malaysia, four in Singapore, six in Philippines. Plus many traditional banks in Indonesia, Vietnam and India that are being repurposed as mobile-first players. It’s hard to imagine anyone from outside trying to expand into Korea, China or Japan (with its giant online brokers).
This is the hardest part for Hong Kong. In traditional finance of days of yore, Hong Kong was the springboard to mainland China. Not in tech. Its strength is that it’s an obvious place for China Big Tech to experiment with fintech: Hong Kong’s legal and market environment is totally different to the mainland’s, so it could be a great place to test and learn.
Or Big Tech can simply go directly to whatever market it finds attractive – Indonesia, Thailand, Nigeria, Argentina – and dive right in.
Three ways
These points don’t negate the business case for Hong Kong’s virtual banks, but it does suggest what at least one of them will need to achieve to become a sustainable and impactful player.
First, funding. These banks can’t rely on VC or strategic backing as KakaoBank, Revolut and Nubank did. That ship has sailed. Therefore deposit funding will be even more important. Unfortunately, this is not a bright spot.
Second, differentiation. Here the virtual banks have an opportunity. The gap may not be as big as in other markets, but there is still a gap in service, pricing, and access. But in a wealthy enclave like Hong Kong, the ‘unbanked’ is niche. That means expanding the business.
So, third, cross-border. This is probably true even of digital banks in Southeast Asian markets: at some point, they will have to scale beyond their borders. On these points, WeLab, with its independent VC funding intact and a head start in Indonesia, seems to have the best position.
Hong Kong does have ties to mainland China, where there remain plenty of pain points around payments and micro lending.
Hong Kong’s crypto culture can also provide opportunities, not just catering to speculators but embedding tokenization into the core of the bank, from cross-border payments to deposits to wealth. Digital assets and tokenized forms of money are cross-border by definition, and here lies an advantage that even China Big Tech can’t access at home. ZA Bank seems to have the best lead here.
But geographic expansion will be harder now: expensive to fund, and there are lots of competitors, both local and foreign, wherever a bank looks. It’s hard to see any of these institutions racking up either the kinds of user numbers or valuations of KakaoBank, Revolut or Nubank.
The virtual banks are therefore running out of time. In an easier environment, they could coast on cheap money and build up a real product and service differentiation. If a bank’s strategic backer regards it as just a way to enter Hong Kong, then its future is bleak. The best outcome is ‘just enough’ to hang in there, which risks a zombie-ish outcome, kept alive mainly to save face.
If, however, a virtual bank’s Big Tech shareholders have a view to using their Hong Kong beachhead to become a global fintech leader – if those investors are prepared to be patient – then the CEO’s qualitative case for their business can win the argument.
