6 August 2020

Virtual banks: Real game-changers?

The potential of online only lenders is enormous — providing they can sign up new customers

Photo by cottonbro from Pexels

By Holly Huang

How many of us have visited a bank in the past 18 months?

Not many, I suspect, irrespective of the ongoing lockdown.

Even before COVID-19, consumers and business executives had little need to visit their local branch to make a payment or purchase a loan. That’s because all banks in their own way are virtual, having offered online banking services for almost two decades. So when a new report published by Nielsen made the headlines last week with claims that virtual banking will become a “real game changer”, I was intrigued.

Virtual banking presents noteworthy benefits to customers: Reduced fees, a more user-friendly service, and — dare we dream of it — an enjoyable online experience. But just how disruptive will virtual banking be to physical ‘bricks and mortar’ financial institutions?

Potentially very.

Somewhat surprisingly, Nielsen doesn’t predict the market’s future size, nor does it give an idea of how much market share the industry will take from physical incumbents. The study doesn’t even give a description of what virtual banking actually is. Rather, it surveys the views of more than 1,000 respondents from Hong Kong, aged between 18 and 64 — unsurprisingly, 42% of respondents have heard of the term but don’t have a strong understanding of what it means.

Virtual banking is the provision of banking services without the need for a physical branch. Rather than filling in application forms in a bank’s waiting area, for example, or signing paperwork at a cashier’s counter, all statutory forms are uploaded online. The information desk that is typically manned by well-groomed staff is replaced by chatbots.

Quick, simple and fuss-free — as long as you’re internet-savvy.

Approaches to virtual banking vary across Asia. At the time of writing, the Hong Kong Monetary Authority has licensed eight banks including Ant Bank, Ping An OneConnect Bank, WeLab Bank and ZA Bank. In Singapore, the Monetary Authority of Singapore intends to award 14 digital bank licenses by the end of this year — a tie-up between all-encompassing app Grab and telco Singtel is expected to be one of the first to enter the market. And in South Korea, the Financial Services Commission has awarded virtual banking licenses to Kakao Bank (a consortium comprising tech giant Kakao, KB Kookmin Bank, eBay and Tencent) and K Bank (a consortium including telco KT, Woori Bank and Ant Financial).

Other Asian markets exploring virtual banking include China, India, Japan and Taiwan, S&P Global reports.

The above names provide a hint of what customers can expect from the service. Local Big Tech brands, a few non-bank financial players, and telcos — these companies have something that conventional banks typically struggle with: Trust. They enjoy significant brand loyalty, having built consistent, user-friendly online experiences over the past decade or so. Plus, they also hold extensive databases with which to engage with new customers.

The Nielsen study points out that only 18% of respondents would consider borrowing from a virtual bank. While this figure suggests that there is a long journey ahead for the likes of Ant Bank, it is nonetheless a wake-up call for bank bosses. For instance, net interest on loans issued by United Overseas Bank made the Singaporean lender US$6.6 billion in FY2019 — 18% of this figure is equal to about US$1.2 billion. A market loss of this amount would keep any bank executive awake at night.

Virtual banks won’t have it all their way, however. Despite enjoying greater customer love than their bank rivals, tech players must convince prudent customers to park their money with them instead. This is a task that is far easier said than done — many consumers and business executives think opening a new bank account is laborious and troublesome, the OECD finds.

Moreover, with interest rates at near-zero, a key consideration for virtual banks is just how low they can supress lending rates and still make a profit. No one as of yet quite knows how profitable these ventures will be. FinTech magazine DigFin says virtual banks will likely enter the wealth management space, where there is room to charge less than conventional wealth managers while still making a handsome profit. There is also the opportunity to capitalise on the region’s rising middle class who have growing amounts of spare cash with which to invest.

The next few years are therefore critical for the sector. By then, the economic fallout of COVID-19 should be behind us, and we will have a clearer idea about just how profitable virtual banks are — and how conventional players will have responded to stay relevant.

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