(Angie Lin, Co-Founder and Chief Investment Officer of FinEX Asia, is the author of this article, which is reproduced from the column “Politics and Economy 800” in Commercial Times on 2 May 2019) Hong Kong has recently granted four virtual banking licenses to Livi VB Limited, SC Digital Solutions Limited, ZhongAn Virtual Finance Limited and WeLab, a local financial technology (FinTech) startup in Hong Kong. After the granting of these four banking licenses, the number of licensed banks in Hong Kong has increased to 155. And the competent authorities in Hong Kong are currently examining four other shortlisted operators and will not rule out the possibility of granting more licenses. Why have so many virtual banking licenses been granted despite the relatively mature financial development in Hong Kong? What changes will virtual banks bring? And what challenges lie ahead? Involvement of both tradition and new technology Let’s first take a look at the backgrounds of the four licensees. Livi VB Limited is a wholly-owned subsidiary of BOC Hong Kong, and jointly established with JD New Orbit Technology (Hong Kong) Limited and JSH Virtual Ventures Holdings Limited of Jardine Matheson; SC Digital Solutions Limited is a strategic joint venture company inaugurated by Standard Chartered Bank (Hong Kong), and co-established with PCCW, Hong Kong Telecom Trust and Hong Kong Telecom and Ctrip Financial Management (Hong Kong); ZhongAn Virtual Finance is a wholly-owned subsidiary of ZhongAn Technology (International) Group. WeLab, founded in 2013, is a Hong Kong-based FinTech startup which specializes in WeLend, an online lending platform. The requirement imposed by Hong Kong Government on virtual banking obligates licensed banks to provide retail banking services through mobile electronic devices or computers, without setting up any physical branch. The concept of virtual banking originates in the United States, where its scattered population makes physical banks not necessarily more convenient than e-banking services. On the contrary, Hong Kong is densely populated and banks or automatic teller machines are everywhere. It is therefore obvious that convenience is not the biggest concern when the Hong Kong Government grants virtual banking licenses. Instead, it is about how to serve the customers unattended by traditional banks through virtual banking, so as to promote the scope and quality of banking services in retail, SMEs, wealth management, etc. As a result, financial inclusion becomes the main focus. According to the media in Hong Kong, Hong Kong virtual banks will put the emphasis on ‘inclusive finance’ and call for the waiving of minimum balance for accounts or the minimum balance fee. The services of these four virtual banks will be launched within six to nine months. Representing a government point of view, Mr Norman T.L. Chan, Chief Executive of the Hong Kong Monetary Authority, believed that virtual banks would not only help drive FinTech and innovation, but also bring about brand new customer experiences and further promote financial inclusion in Hong Kong. From the perspective of companies, the executives of the licensed banks have responded positively to this idea. They communicated their intention to transform the traditional process in financial product design and bring new changes to the financial services industry in Hong Kong. Virtual banking produces catfish effect It seems that after the granting of virtual banking licenses, the catfish effect will gradually emerge. However, competition will also intensify. As virtual banking brings subversion to the financial industry, where do the new opportunities lie? According to the Standard & Poor’s global rating data, the target market for virtual banking is not limited to Hong Kong, but also includes the Guangdong-Hong Kong-Macao Greater Bay Area – a market having a gross domestic product (GDP) of 1.5 trillion USD and a total population of around 70 million. Virtual banks will enter into a fierce competition with traditional banks in terms of customer experience, product innovation and payment channels, etc. Nevertheless, the low-cost business model of virtual banks should help financial agents reach out to previously underserved customer bases and ultimately benefit ordinary customers and SMEs. After the introduction of virtual banks, the market anticipates a gradual expansion of retail banking business, such as cross-selling among banking, securities and insurance, cross-border financial innovation and cross-border product sales in the three markets of the Greater Bay Area, and a greater diversity of asset management and wealth management products. The emergence of virtual banks will make these asset management platforms and commodities in new forms more prominent. For example, the US consumer credit fixed-income asset class that adopts the AI risk analysis model has gained popularity among institutional legal entities and possesses great potential. Upcoming challenges of virtual banking should not be overlooked Without a doubt, virtual banking will bring about new elements of FinTech in the entire banking industry, promoting transformation of traditional banking industry and encouraging application and innovation of FinTech in more fields, as well as providing customers with better experience and more innovative services of financial inclusion. Virtual banks certainly still have to face intensive market competition in the banking industry. Traditional major banks such as HSBC have dominated the market share of Hong Kong. They have repeatedly mentioned their continuous investment in science and technology infrastructure. In the next two years, they will invest up to 15 to 17 billion in technological development. Instead of applying for a virtual banking license, they will continue to provide digital services to customers on the existing basis. Meanwhile, issues that licensed banks should ponder on include the challenges from the traditional banking industry and the deep-seated habits of customers, as well as how to provide quality services through innovative scenes to customers and SMEs that have yet to be covered by traditional banks. But the new era of virtual banking will undeniably bring a new mindset to the development of the banking industry. The likes of big data, artificial intelligence and digital development will overhaul the manpower allocation and services of the banking industry. To cope with the competition, even major banks like HSBC will have to develop in this direction. As an international financial center, Hong Kong’s major concern will revolve around whether it can maintain its advantages as a FinTech hub.