(Bloomberg Opinion) -- Ironically, the city that should have been first to be swept up by China’s fintech revolution is still a picture of old-world conservatism. Not for long, though. Hong Kong, whose last big innovation in retail payments is as old as the former British colony’s 1997 handover to China, is on the cusp of big change.
The Hong Kong Monetary Authority’s revised May 30 guidelines for online-only banks will lead to the first licenses being issued by the end of this year. More than 50 parties, including the likes of homegrown fintech players such as WeLab Ltd., backed by billionaire Li Ka-shing, have evinced interest, even though the minimum capital requirement has been set at a not-insignificant HK$300 million ($38 million). And these will have to be real business plans, marrying traditional risk management with technology; concepts alone won’t fly, the HKMA has told applicants.
Still, the prize will be worthwhile. HSBC Holdings Plc, Standard Chartered Plc and Bank of China (Hong Kong) Ltd., the city’s three note-issuing banks, can’t take their stranglehold on deposits for granted. Not when the new virtual lenders are being told to refrain from imposing minimum balances on customers.
The mainland’s BAT trio of Baidu Inc., Alibaba Group Holding Ltd. and Tencent Holdings Ltd. are waiting for any opening to penetrate the territory’s payment landscape. Their main battle currently is with Octopus, a contactless card system majority-owned by subway operator MTR Corp. The ubiquitous card became popular very quickly during the handover, when there was a shortage of coins; it works like a charm on public transport and in convenience stores. But Octopus hasn't had the same success with newer technologies like mobile payments. It takes two weeks to link Octopus O! ePay wallet with a traditional bank account online. That’s two weeks.
Octopus, as well as WeChat Pay, Alipay and HSBC’s PayMe have stored-value-facility, or SVF, operations in the city. Octopus gave up its deposit-taking license to become an SVF. But digital wallets are struggling even to dislodge cash from Hong Kong taxis.
Rival Singapore, which has been faster in emulating China’s success with quick-response-code-based payments, will have a national QR code standard later this year. Meanwhile, Singapore’s largest lender, DBS Group Holdings Ltd., runs the world's biggest banking application programming interface platform for third-party developers. Results are starting to show in the lender’s return on equity: Every DBS digital customer is three times as valuable to the bottom line as somebody who walks into a branch.
For Hong Kong to lift its fintech game, it needs to dismantle the silos in which deposits and payments operate. Online-only outfits could be the way to do it. What strategy will the brick-and-mortar banks adopt? Bank of East Asia Ltd., a 99-year-old, family-owned lender, has said it may not want a virtual bank license on its own, but is keen to work with partners.
The shakeup of the competitive environment will force the likes of HSBC, which are already making significant investment in mobile-based banking, to step on the gas. Whether they finally arrive in the 21st century as traditional banks, or under a new license, is immaterial.
To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net
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