Competition for deposits becomes virtual reality

Online banks have sprung up in Hong Kong, attracting customers with good incentives in their competition with traditional banks. However, they will need more than that to survive. Edith Lu reports from Hong Kong.

The Hong Kong Special Administrative Region government’s HK$10,000 (US$1,290) cash handout to millions of eligible residents to help them tide over the economic gloom offers a stark reminder that one would be all the wiser to stay ahead of the pack, or stand to lose out in procuring goods and services, as technology creeps into virtually every aspect of economic, business and social life.

Rebecca Zhang, 26, was thrilled when she got a text message in the wee hours of July 6 that the money was already in her bank account — a few hours ahead of the others who had applied for the handout.

The insurance company employee was among the first batch of more than 3 million local residents who had registered for the payment online instead of trudging all the way to the bank to hand in application forms in the midst of the coronavirus outbreak.

She chose to do it through ZA Bank — Hong Kong’s first virtual bank and the only such lender taking part in the government’s cash-handout program — saying she found the bank’s method of operation “quite attractive”.

ZA Bank took advantage of its uniqueness and offered cash rewards to lure more new customers in an already highly competitive field like banking.

It said an additional HK$1,000 awaits customers who open a new account with a given invitation code and choose to receive the cash handout through the account. Customers are also required to make at least two successful referrals within 14 days. Exhibiting some of the sales skills associated with her insurance profession, Zhang offered to share part of the bank’s bonus with her friends if they registered successfully.

“Compared with other banks’ promotional efforts, such as lucky draws or relatively high deposit rates, direct cash rewards appeal more to me,” she said.

Strong customer incentives

The campaign has gone viral, with the limited daily quota always surpassed within seconds. Meanwhile, hundreds of people have been sharing their invitation codes under every post of the bank on Facebook, trying to get successful referrals.

Calvin Ng, co-head of retail business at ZA Bank, said the market response has largely exceeded expectations. He said the bank had expected several thousand registrations, but he declined to reveal the exact number of new customers it has recruited so far.

In light of the overwhelming feedback, ZA Bank has increased the quotas for the campaign and extended the promotional period. The campaign’s popularity drew the attention of Hong Kong Financial Secretary Paul Chan Mo-po, who said he took it as one of the bank’s business practices. He believed there would be more similar incentive programs in the market when people receive the cash in July.

On the heels of its HK$1,000 cash rewards campaign, ZA Bank also rolled out a new promotional drive, including a lucky draw involving HK$170,000 and an incentive program offering new customers HK$300 directly after they have opened an account and registered for the respective handouts. “It’s similar to advertising, but more productive, I believe. Giving back money directly to customers is always the strongest incentive,” said Francis Fong Po-kiu, honorary president of the Hong Kong Information Technology Federation.

In fact, this kind of cash-burning subsidy has been widely used in companies’ initial market expansion, especially in new-economy sectors. A case in point involves Chinese mainland ride-hailing giant Didi Chuxing, which has been operating in the red for seven consecutive years as it continues to spend on incentives to build scale and maintain user growth.

The Hong Kong Monetary Authority issued eight virtual banking licenses from March to May last year, saying these digital banks will start offering services online within nine months.

Although the COVID-19 pandemic has inevitably affected the launch of virtual banks, ZA Bank and Airstar Bank — a joint venture between mobile-phone maker Xiaomi and Hong Kong-based financial services group AMTD — began full operations in March and June respectively.

It’s generally believed virtual banks’ development has met with perfect timing, as people have become more used to digital banking after being forced to work from home for the past few months.

Jasmine Lee, partner and virtual bank campaign leader at Ernst & Young, predicted that all the eight virtual banks licensed so far will open their doors to the public in the next three to six months. “The current atmosphere is very conducive to the development of virtual banks. From our observations, we’ve seen more transactions being conducted through digital channels these days”, she said.

Digital lenders are indeed making hay while the sun shines. Besides coming up with cash rewards, they’re embroiled in a price war, offering high interest rates to get residents to use their platforms for the HK$10,000 handout.

Newly launched Airstar is offering a 3.6 percent demand deposit savings rate on the first HK$20,000 deposit for new clients, saying the rate will remain for one year. ZA Bank is offering a 1 percent interest rate for savings of up to HK$500,000. For the time being, one-year deposit rates stand at 1.15 percent at ZA Bank, and 1.3 percent at Airstar. Traditional-banking powerhouses have also entered the fray. HSBC, the city’s biggest lender, is offering a 10 percent rate on savings of up to HK$50,000 for two months for new customers opening an account via mobile application until the end of July. Bank of China (Hong Kong) is offering a 4.3 percent interest rate for three-month deposits of up to HK$100,000 for new customers. Normal demand deposit rates in Hong Kong are close to zero, while time deposits for one year stand at between 0.5 percent and 1 percent.

There’s apprehension the price war for long-term deposits will lead to margin compression after the full launch of all the virtual banks. This is good news for consumers in a low-yield environment, but less positive for banks, according to a report by KPMG.

The interest-rate war will push up the cost of funding, but it’s expected that deposits at virtual banks in terms of total balances will be relatively minor, at 2 to 3 percent, at least in the short term, which will mitigate this particular pressure, the report said.

“You’ll definitely start seeing some compression on smaller retail banks. But I believe large scale or foreign banks with corporate deposits and cash management business won’t be affected,” Paul McSheaffrey, partner and head of banking and capital markets at KPMG Hong Kong, told China Daily.

He said virtual banks are getting a growing market share through high deposit rates. In the future, when they need to make profits, they probably will not maintain the same interest rates for their products, he added.

All the virtual banks recorded net losses last year as they were still in the preparatory stage at the time, according to their annual reports released in late June.

Mox Bank — a joint venture led by Standard Chartered Bank — saw a net loss of HK$265 million and operating expenses of HK$288 million, both being the highest compared to those of their peers. ZA Bank posted a net loss of HK$194 million in 2019 with operating expenses of HK$213 million. Livi Bank, backed by Bank of China (Hong Kong), has the largest share capital of HK$2.5 billion.

Lee said one or two virtual banks may see slight profits in the third year of their operation, but everything remains uncertain in view of the current economic environment.

ZA Bank and Airstar have already cut several rounds of interest rates. The former offered a rate as high as 6 percent for three-month deposits for selected clients in January when it was running trial services. “They’re now making efforts on branding to motivate people to join them,” Lee said. She believes the high interest rates won’t be a long-term weapon as it’s not the core spirit of virtual banks.

The HKMA’s intention to set up virtual banks was to spur financial innovation in the city and catch up with the more tech-savvy financial hubs in the United States, Europe and on the mainland. It was also seeking to promote financial inclusion with more customer-friendly lenders that were offering high-interest rates, easy account openings and round-the-clock services.

Building up the ecosystem

“As virtual banks, first of all, they’re expected to really excel in information technology. For example, they may not be expected to have a system technical glitch,” Lee said. She said people expect virtual banks to lead the way in some innovative services. For instance, customers may be allowed to handle or modify or change the terms of their time deposits anytime they want in the future on the digital platform.

“Virtual banks do face pressure in terms of innovation and creativity. The direct way to do something innovative is to build up an ecosystem,” Lee said.

Under the ecosystem, virtual banks will be in a network with several partners from other sectors so that its customers will be able to enjoy special services or discounts when they use their partners’ services, such as in restaurants or shopping malls. “Actually, looking at the shareholders behind the eight virtual banks, you can find many of them can bring new elements to the banks,” Lee added. For instance, ZA Bank is owned by mainland online insurer ZhongAn Online P&C Insurance and Sinolink Group. Meanwhile, ZhongAn is teaming up with Fubon Life Insurance to branch out into digital insurance after obtaining a digital-only insurer license from the Hong Kong Insurance Authority.

“Once ZA Insure is launched, questions would arise as to why customers can’t purchase their insurance product through ZA Bank. The fact is that we’re two independent entities regulated by two different regulatory bodies,” Ng said.

He said they would love to find a better collaboration mode that could bring more added value in the future. “I can see there’s a lot of pressure and competition in the market,” Lee said. “We have eight virtual banks here and so many more traditional banks are also enhancing their digital platforms. Thus, virtual banks have to run faster, create interesting products and bring new ideas. Otherwise, they can’t sustain well.”

According to Lee, just after the eight virtual bank licenses were granted last year, some companies were still seeking her advice if they could get one, or asking whether there will be a second batch of licenses.

“I don’t think it will be very likely that the HKMA will grant a second round of licenses in the short term,” she said, adding that some companies are now actively exploring the possibility of securing virtual banking licenses in Macao.