Hong Kong being pulled into the 21st Century — digital banking licenses finally arrive

Schulte Research | Paul Schulte | June 17, 2019

global network and points of presence maps - Hong Kong being pulled into the 21st Century — digital banking licenses finally arriveDigital banking finally arrives in HK --all in one go!

Be careful what you wish for — you might get it.  Hong Kong People have been kvetching for years about the poor quality of banking services. Now, they will have a deluge of ultra-efficient and essentially free new services. These services will offer strictly online banking services without branches and ALL of them have very deep pockets. The first batch below, which I will enumerate in a moment, have capital to burn of about USD 250 million.

This can go a long way in eroding the highly profitable cartel of HSBC and Hang Seng Bank.  Hang Seng Bank has consistently had among the highest ROE globally north of 20-21%. And its revenue per customer has been among the world’s highest as well. HSBC owns more than 40% of HSB, so it has been a cash cow for the bank. Hong Kong is really the center of profitability for HSBC, since its ROE for commonwealth countries is the single digits and it has basically given up on the US financial market.  It’s European business, like all Euro banking franchises, is in the doldrums.

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Before we delve into the new guys on the block, lets focus on two issues.  Hong Kong is desperately behind on all of this digital banking.  Let’s just say that the HKMA has been ultra-cautious to not rock the boat for incumbent banks. Hong Kong has been an example where the regulator has caused some degree of asphyxiation of the environment due to its cozy relationship with the status quo players. Banks like Goldman Sachs have had digital bank Marcus for many years. JP Morgan has had Finn for some time.  Others like BNP, ING, Santander all have had digital banks for many years.  And of course, China is a banking system which no longer has cash, credit cards or checks. Hong Kong still runs on checks and taxis only accept cash.  This Big Bang we saw in April and May will be very painful for the incumbents.

HK digital bank licenses April 2019 - Hong Kong being pulled into the 21st Century — digital banking licenses finally arrive

The second issue is traditional telecom services have traditionally gone through telecom trunks. Hong Kong’s vital importance to the region has been little appreciated.  It is the nerve center for much of the undersea telecom services for Asia Pacific — as much as 90%. HSBC, for instance, has relied on this for many decades to connect its vast commonwealth system.  As China decides to go its own way and disconnect from the Western systems (like Google and WhatsApp) and create a self-sustaining systems based on Alibaba and Tencent. As Hong Kong slowly morphs into a Chinese city, it is quite certain that China will not wish to remain vulnerable to a cable system open to hacking by western intel services. In this way, HSBC is very much tied to the fate of the “Five Eyes” and can no longer say its future lies in being an Asian bank. The same goes for Standard Chartered.

Given that all eight of the new digital bank entrants are either pure Chinese or have important PRC anchor tenants, this sudden burst of highly adept and highly competitive entities will surely drive down margins for all banking services within 2–3 years. This reminds me of when the PRC investment banks came into Hong Kong. Many people said they could not compete outside of China.  They said they could not go up against polished investment banks with long histories.  (I worked inside CCB Intl and from the time I got there to time I left two years later, they had gained massive experience and it was lead manager on the highly successful CITIC Securities IPO.  Within a few years of the investment banks arriving, commissions fell 50% and banking fees fell more than 50%. I predict the same will happen for traditional banking services, but it is likely to happen faster.

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Why will traditional banking fees fall faster with the NEW PRC digital banks than when PRC investment banks caused commissions and fees to collapse in 2010-2014? Because Alibaba and Tencent, among others, invented digital banking many years ago. They have mastered online asset gathering, online SME lending, online robo-advisory, online FX transfers, online everything. And it is glued onto a cell phone that is fully integrated into the lifestyle of 1.4 billion people in ways that Hong Kong people could hardly dream of.  Banks are essentially nowhere in understanding how financial choices are a mere subset of a person’s lifestyle choices.

HK digital bank licenses May 2019 - Hong Kong being pulled into the 21st Century — digital banking licenses finally arrive

The first batch of online banking services below are a smattering of Hong Kong and western entities, but they are all basically Chinese entities.  The second group announced last week are all of the major players in Asia pacific lifestyle and financial services. Let’s not forget, for instance, that Alibaba is now connected to Pay TM, Lazada, Tokopedia. And Tencent can leverage WeChat in HK online activity. This can render much of the local banking services irrelevant. I was doing some consulting three years ago with some of these incumbents and was begging them to split off online banking services with a separate entity. I also wore out my welcome with the HKMA and told them to force a big bank in digital services for the good of the local incumbents. Nothing happened for years. Now, ALL of the most adept online banking powerhouses — hungry, entrepreneurial, savvy and well funded — have come into Hong Kong virtually on the same day. God help the incumbents.  They have no one but themselves to blame for not being prepared.

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paul schulte2 - Hong Kong being pulled into the 21st Century — digital banking licenses finally arrivePaul Schulte, Schulte Research
Founder and Managing Editor
Hong Kong

https://linkedin.com/in/paul-schulte/

Paul Schulte's roles in banking & financial services in the past 30 years include equity & fixed income research (buy & sell sides) in emerging markets. In recent years, technology has evolved rapidly to challenge all facets of financial services his core belief is: Liquidity & credit are everything; get bank liquidity & solvency right and the rest follows. Aside from being the founder & editor of Schulte Research, he has taught for 18 years IN MBA programs: Tufts, HK UST, HKU, LMU Hilton School in LA & SUSS in Singapore. He has also worked for the Number 1 investment bank from Switzerland, US, UK, Japan, PRC & Holland starting in 1990. Paul has been a source for the WSJ, NYT, Bloomberg, Nikkei, FT, Economist, Barron’s & Forbes. His clients include some of the largest sovereign, pension, mutual and hedge funds globally. He served as an advisor to IOSCO, ASIC, HKMA, Malaysian SFC, PRC PBOC & CBRC, Thai SEC & Indonesian OJK and Bank Indonesia.


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