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Virtual banks threaten Hong Kong’s small players

Hong Kong's Virtual Banks can expect greater competition

The advent of virtual banks is adverse for most Hong Kong existing virtual banks because, according to Moody’s, there will be an crucial fresh contest in several critical financial fields. The introduction of technologic upstarts which benefit from the assistance of their substantial sibling companies and the price benefit of being branchless makes small and medium-size banks that aim to serve small companies and personal sales clients among the most susceptible. “We predict the arrival of new digital companies with their powerful data analysis capacities to contest the banks ‘ strategy to use and use of technology. Credit rating agency reports that incumbents companies are also under stress to enhance their subsidiary and operating efficiency.

Livi VB Limited and SC Digital Solutions Limited are the eight companies licensed by the Monetary Authority to run digital funds which include BOC Hong Kong, and Standard Chartered as part of their backers. The Chinese business giants Ant Financial, Tencent, and Xiaomi, respectively, have been endorsed by Ant SME Services (Hong Kong) Limited, Infinium Limited and Insight Fintech HK Limited. ZhongAn Virtual Finance Limited and Ping An OneConnect Company Limited are online insurance legends. Fintech unicorn WeLab completes the impressive 8.

Where it will hurt

On three sides, digital strangers will harm tiny and medium-sized holders. First of all, client deposit rivalry will be fiercer and will give smaller companies a stronger hit, considering their strong dependence on interest-rate sensitive loans to finance relative to big companies. Time payments usually amount for around 70 per cent of the total assets of small and medium-sized companies, as Moody’s figures demonstrate.

Unlike several small and medium companies who depend on casual payment initiatives with advertising interest prices, digital investors can deliver appealing payment prices for gaining a market share, because they do not have costly retail networks to retain and can transmit their purchase information on their internet and mobile platforms transparently. “This will reduce the data expenses for depositors looking for the finest distribution and increase the responsibility for the incumbent companies to protect their market share,” said Moody’s.

Analysts also predict digital companies to concentrate on borrowing to retail clients, including people and small companies, rather than big corporations given their restricted budgetary and cash management capacities. The commercial loan industry also has a comparatively small return, which makes it unattractive to foreigners. This will, however, be at the cost of standard companies that supplied the loan line. “As incumbent banks and finance businesses already service borrowers in the whole loan spectrum, development in the borrowing company of the digital banks will arise at the cost of the market share of existing loans and financial businesses,” Moody’s said.

The Payment Powerhouses

However, it won’t be smooth sailing on all sides. Virtual banks, like Octopus, the leading local electronic stored value card, are anticipated to compete strongly against current credit networks in Hong Kong. According to the HKMA, in a workforce of 7.2 million, 17.6 million loan checks have been given. Also, incumbent companies can protect their card company actively because credit card payment revenues accounted for roughly 3 per cent of total bank revenue in 2018.

The fresh digital companies, in specific Ant SME Services (HK) and Infinium (supported up by Tencent), are, however, at danger of disturbing new and alternative billing techniques, “Moody’s said, which will make the incumbent companies competitive and force them to incur higher costs of retaining customers through commercial tie-ins and cards.

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