DigFin’s survey of four CEOs at Hong Kong virtual banks poses the question of how they regard the sustainability of their business in the face of shrinking loan deposits, both in terms of declining accounts as well as declining sizes of average deposits.
We presented them with a report from December by consultancy Quinlan & Associates that ran through the numbers and found them problematic, noting that the eight licensed digital banks are far from becoming a primary bank to enough users. On this basis, WeLab Bank has one of the lowest numbers compared to peers.
Tat Lee, CEO of the virtual bank, says deposit base isn’t a critical number. “Virtual banks just need to be good at one or two features or products that they can scale and generate revenue,” he said. “Being a primary bank isn’t that important today.”
Different approach
He said WeLab is focusing on two things: lending and wealth management. And in the lending department, the bank just announced it is consolidating the online lending business of sister company WeLend with the bank’s. This is meant to create scale.
WeLab Group’s structure is different to other virtual banks in Hong Kong. Its roots go back to 2012, with the establishment of WeLend, a platform to provide consumer loans. It then built separate businesses in mainland China (called Wolaidai) and Indonesia, which leveraged the same tech stack.
It then applied that model to banking, first by winning a license in Hong Kong in 2018, and then acquiring a domestic, traditional bank in Indonesia, Bank Saqu, which it relaunched in 2023 with a mobile-first focus.
WeLab Group also differs from other virtual banks in Hong Kong in that it is a fintech, backed by multiple rounds of global venture capital. Even other tech-backed banks, such as PAObank (Ping An), Ant Bank (Alibaba) and ZA Bank (Zhong An), are divisions of Chinese Big Tech players, not startups that began on their own. (WeLab Bank is a wholly owned unit of the Group.)
Data-driven lending
WeLend has been operating big-data-driven alternative credit-scoring models for more than a decade. It’s the main financing partner in Hong Kong to Tesla and Apple.
“Our risk assessment is more sophisticated than a traditional bank’s,” Lee said. He boasts that the bank’s use of big data and artificial intelligence enable it to approve loans in a few minutes, at better pricing.
“A traditional bank just charges a high price if it can’t calculate the risk,” he said. “We don’t need to do that, because we can price it.”
He says traditional banks can’t copy WeLab’s capabilities, which are not just the data and the algo, but its experience interpreting the data.
Some traditional banks recognize this and have decided to partner with WeLab instead. Lee wouldn’t name names, but last year Citigroup led a $260 million asset-backed financing for WeLend, providing capital against the loans and their underlying collateral.
This is the business that WeLab Group now says is being merged with the lending business of WeLab Bank, which would be funded by deposits rather than by capital markets. (WeLend’s model involves turning consumer loans into investible products for third-party lenders, such as hedge funds, family offices, banks, or non-bank lenders.)
The Group says the combined loan book size will be above HK$5 billion ($640 million) and that the bank will fund WeLend’s operations. It doesn’t appear to mark a change in the operating businesses; it may just be a change in accounting to make the bank’s loan book look big. But this would have required sign-off from Hong Kong Monetary Authority, and the timing suggests the WeLab Bank side has proven itself to the regulator.
Digitalizing wealth
Lee says WeLab Bank’s tech mindset means it will grow its business differently from a traditional bank. “Banks thinking lending is transactional, but we create added value,” he said, such as using the platform for financial education, planning, and advice. “Our technology lets us serve everyone cheaply.”
This leads into WeLab’s second area of focus, wealth. It is trying to avoid the traditional business model of incentivizing relationship managers by commission, which often leads RMs to push expensive products that aren’t suitable for retail investors. WeLab was among the first in Hong Kong to build robo-advisors, and has since co-designed digital wealth management with its strategic partner, Allianz.
“We predict the probability of a customer achieving an investment goal in 15 years,” Lee said, which enables the app to recommend a portfolio. It does so on the back of Allianz’s 100-years plus of historical data. The service takes a 0.08 percent monthly fee, calculated daily, instead of charging front-end loads, which are often in the 1.5-2.0 percent range.
From deposits to dollars
Does all this add up to a sustainable business?
Lee says initially WeLab Bank’s idea was to take lessons from its China business. All the other virtual banks in Hong Kong have Chinese Big Tech backing (including Tencent in Fusion Bank and Xiaomi in Airstar Bank). But this meant going for lots of customers and building a big deposit base.
“After two years, we had a wakeup call,” Lee said. “We realized that wasn’t the way to win. Yes, if you have a China-sized market, you can monetize off a huge customer base. Hong Kong is small, and a bank is expensive to run.”
The management team realized its initial expectation of breaking even in the first three years was naïve. It wasn’t making any money off of deposits (from payment transactions or sitting on the float). But it was making money by charging higher interest rates for its loans, and for fees from wealth management.
This led the bank to pivot in 2022 from customer acquisition to customer monetization, Lee said.
“For us to focus on engagement activity doesn’t help the P&L,” he said, adding that he hopes WeLab Bank will be the first virtual bank to break even, some time in 2025.
Regional player
The WeLend portfolio announcement highlights another aspect to WeLab, which is that other units of the group matter. Its idea is to learn how to be a digital bank in Hong Kong, where regulation is good and customers are sophisticated. Then it will export this model – both the tech and the experience – to other markets.
WeLab Group acquired Bank Jasa Jakarta in 2022, and within six months repositioned it on a new digital bank system. On top of this, the group launched a second digital bank in Indonesia, Bank Saqu, in 2023. It reached 1 million customers within its first six months of operation.
“Yes we need the Hong Kong business to be self-sustaining, but we are also exporting it to the rest of Asia,” Lee said.
His biggest lesson from WeLab Bank’s experience so far? “Never discount; innovate. If your product is the same as a traditional bank’s, you can only compete on pricing.”
This series includes our introduction and profiles of ZA Bank, PAObank and Mox Bank, and our conclusion.
