China fears weigh on launch of Hong Kong virtual banks
Passers-by near Xiaomi’s flagship store in Hong Kong’s busy Mongkok shopping district were last month confronted with a jarring sight: the Chinese smartphone maker’s shop was a burnt-out shell after being trashed and set alight by protesters.
The Beijing-based electronics company has more to lose from Hong Kong’s pro-democracy protests, which are now entering their sixth month, than a shopfront. Along with Chinese tech giants Alibaba and Tencent, Xiaomi is one of several mainland entities hoping to tap into Hong Kong’s $15bn virtual banking market.
But where once the Chinese entrants sensed an opportunity to disrupt the Asian financial centre’s staid banking market dominated by established names such as HSBC, rising anti-Chinese sentiment in the territory is throwing their plans into doubt.
“I don’t even go to pro-government restaurants, why would I go use a Chinese bank?” said one protester, an actuary in his late 20s who identified himself as Ben.
The Chinese companies had hoped to replicate in Hong Kong their success in mainland China when they won seven of eight new virtual bank licences awarded by the Hong Kong Monetary Authority, the city’s financial regulator, between March and May this year. The new virtual, or digital, banks plan to offer similar services to traditional banks but at a lower cost. The most important difference is that they operate online only and may not open physical branches.
The licences were considered the biggest shake-up of Hong Kong’s finance sector in more than a decade. The territory’s four largest banks — which aside from HSBC include its affiliate, Hang Seng Bank as well as Bank of China Hong Kong and Standard Chartered — account for about two-thirds of all retail banking loans, according to Goldman Sachs.
Just one of the virtual bank licences was granted to a homegrown Hong Kong fintech company, with the other seven awarded either to Chinese companies or joint ventures including a Chinese partner.
In addition to Xiaomi, ventures including Alibaba’s Ant Financial, Tencent, Ctrip and Ping An were selected, as well as Bank of China and the Industrial and Commercial Bank of China.
The virtual banks are either collaborations between multiple companies, such as Livi VB, a partnership between Bank of China, JD Digits and Jardine Matheson, or sole operators, such as Ant Financial’s Ant SME.
The companies’ plan was to use Hong Kong as a launch pad before offering services in western markets.
All eight of the banks had said they would launch within six to nine months. But they remain in testing mode and none is likely to launch full services this year, according to people with knowledge of the matter.
The banks are likely to launch savings and payments services first, before rolling out credit card and wealth businesses, said the people.
In mainland China, Tencent-backed virtual bank WeBank is serving more than 60m customers since launching five years ago. The average cost for a WeBank customer per account per year is Rmb3.60 (50 US cents), compared with Rmb20 to Rmb100 for traditional banks.
“Most people are hoping that by the half year [in 2020] you’ll see some activity,” said Andy Halford, chief financial officer at Standard Chartered, which was involved in one of the new banks, on a results call.
But the political chaos in Hong Kong, which, in turn, has helped send the territory into recession, was likely to delay these plans, analysts said. “Given the current economic climate, we believe that the successful applicants will take a measured and more gradual approach to introducing their services,” said Dan Jones, a partner at Capco Digital.
That might mean a reprieve for traditional lenders, such as HSBC and Citigroup, which opted to not apply for virtual banking licences, arguing that they did not require them.
Others said “micromanaging” by the HKMA, which was keen to avoid any failures or controversies in the current business climate, was another reason for slow progress. The regulator rejected the accusations but declined to comment on whether the negative business climate in the city was affecting timing of the rollout.
The launch of the virtual banks would be a key test of hostility towards mainland businesses, said Fraser Howie, a co-author of Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise. “It is a fascinating control experiment for anyone watching to see if there’s a genuine boycott of Xiaomi or anyone else,” he said.
Companies might still launch but they would “wouldn’t be too public about it”.
“If I was Xiaomi, I wouldn’t be having a [launch] party in a shopping mall,” he said.
If the attitudes of Ben, the actuary and protester, are anything to go by, such caution is well-placed. Warning Hong Kong citizens against using Alipay or WeChat Pay — the payment systems belonging to Alibaba and Tencent — Ben said that since the protests had begun, he had become more concerned with sharing his information with Chinese corporations. “I believe they report directly to the Chinese government,” he said.