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Hong Kong’s Monetary Authority (HKMA) has granted virtual banking licenses to Ping An Insurance’s subsidiary Ping An OneConnect, Ant Financial Services’ unit Ant SME Services, Xiaomi-AMTD Group’s Insight Fintech HK, and the Infinium consortium that includes Tencent Holdings, according to the South China Morning Post.
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The news comes after HKMA issued the first three licenses in March this year to Standard Chartered, Bank of China Hong Kong, and Chinese digital insurance firm ZhongAn, followed by WeLab in April.
Virtual banks in Hong Kong aim to facilitate financial innovation, enhance the customer experience, and promote financial inclusion. The new ventures are expected to be live in six to nine months and will offer deposit and lending services.
Here’s what it means: While incumbent banks are holding the fort in the finance industry, big tech entering may change the reign.
- Customers’ interest in banking with big tech companies is threatening banks’ established position in the finance industry. Nearly one-third of consumers said they would potentially turn to big tech firms for financial products and services, according to a report from Capgemini and Efma. This interest increases to 43% for Gen Yers and 53% for tech-savvy consumers. Additionally, the head of the Bank for International Settlements (BIS), Agustín Carstens, has previously said that big tech firms pose an existential threat to banks.
- Hong Kong could act as a gateway for big tech to move into other markets. The city has a unique position as a gateway into China and Western regions. Its proximity to China gives foreign players the chance to learn more about Chinese market conditions and potential cultural and language barriers prior to entry. Meanwhile, its separate economy, currency, and legal and parliamentary systems make it easier for Chinese players to enter Western markets. Hence, in the future we may see more foreign and local big tech firms apply for virtual banking licenses in Hong Kong to enter new markets.
- Big tech companies are having an impact on the finance industry globally. Ant Financial, for example, acquired WorldFirst earlier this year, giving it a larger presence in Europe, and Apple recently rolled out its credit card in the US in collaboration with Goldman Sachs. Additionally, Singapore — another major Asian fintech hub — is currently exploring offering virtual banking licenses similar to the ones in Hong Kong, which would give big tech firms more options to enter the finance world.
The bigger picture: While consumers will benefit from new products launched by big tech firms, some are worried about the impact this will have on financial stability.
Entering the finance space would give tech giants access to more data and potentially push incumbents to assume greater risk. The Financial Stability Board said in February 2019 that big tech firms could introduce new risks to financial systems by compelling banks to loosen lending standards and take on greater risk to keep up with the competition.
Additionally, the board said that big techs like Alibaba, Amazon, and Tencent could use their wealth of data and massive customer bases to quickly expand their banking businesses. While this is good news for big techs, it would also give these companies even more access to consumer data, risking a data monopoly that could end up harming consumers.
Here’s the industry’s opinion, as told to Business Insider Intelligence:
"With Hong Kong being the eminent financial center in Asia, and highly profitable for banks here, the virtual banking licenses will provide a launch pad for big tech firms to test their services in a developed market and then expand their footprint regionally and globally. The introduction of virtual banking along with other smart banking initiatives of HKMA, including Open Banking and Faster Payment System, and entry of virtual insurers like Bow Tie, will drive the local Hong Kong FinTech & Digital ecosystem to become a global powerhouse and change for the better how customers are served and experience financial services." — Musheer Ahmed, general manager at the FinTech Association of Hong Kong
"Alipay’s growing presence across Europe serving Chinese tourists is a concern for banks in the region. Alipay is building an infrastructure and relationships that could pave the way for a broader rollout to European consumers in the coming years" — Bragi Fjalldal, CMO & VP Business Development at Meniga
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