Virtual Banking: an Outlook for the Hong Kong Market

Hong Kong consumers might be ‘virtually banking’ as early as the end of the year. That’s how fast the Hong Kong Monetary Authority (HKMA) plans to turn around the first set of applications, due today. These virtual banks form a key pillar of the HKMA’s plan to build “a new era of smart banking” in the city.

With over 60 local and international companies reported to have expressed an interest in being one of those virtual banking pioneers, there is no shortage of buzz. But can these small start-ups really be compete with the established behemoths and their billions in capital, their hundreds of branches, and their thousands of ATMs spread across the city? If we look at the experience in the US, the answer is “yes, and then some”.

From zero to hero: the growth of FinTech lenders in the US

In the aftermath of the financial crisis, US lenders were battered and wary. As one of the usually higher-risk products, personal loans found themselves out of favour. Between 2008 and 2012, several established personal loan lenders failed or retreated from the market and total personal loan balances shrunk by 35%. The product looked doomed.

From 2010 onwards, home equity lines of credit (HELOCs) have been disappearing, too. HELOCs had been an easy source of finance for homeowners, as they could borrow against the extra equity created by years of growth in the value of their homes. But when home prices crashed, they suffered. Homeowners with credit needs now needed to turn to an alternative credit product.

Personal loans would have been the obvious choice but, as we’ve seen, the traditional players were reluctant to issue these. Enter the FinTechs.

In 2010 FinTechs originated 1% of new personal loan balances; in 2011 they originated 2%; in 2012 they were originating 4% and other lenders were starting to get interested again. In 2013 personal loan balances finally started to increase again at the industry level, but even then FinTechs doubled their share of originated balances, as they did again in 2014.

By 2015, just five years later, FinTechs were originating 28.3% of all new personal loan balances, a larger share than banks (26.9%), traditional finance companies (22.7%), and credit unions (22.2%). The speed at which they took over the market shows that incumbent lenders can take no comfort from the fact that FinTechs are small lenders in Hong Kong today.

As the market dynamics that opened the way for US FinTechs might not be the same as in Hong Kong today, our virtual banks will have to find their own gaps. That’s where we can help. TransUnion provides solutions and products that offer deeper insights, provide greater certainty and help you make smarter decisions

As a startup, achieving fast-growth while navigating risk, fraud and compliance can prove daunting. TransUnion can help. We understand the key drivers at each phase of your growth, and can help you navigate the common pitfalls during periods of early uncertainty and rapid expansion.

“Outside of providing us really, really great data, we’ve gotten flexibility. We’ve had some outside of the box things we wanted to do, so we approached TransUnion and they were very, very willing to accommodate and work with us, in order to accomplish that.”

- Paul Zhang, Co-founder and Chief Technology Officer, Avant

In Hong Kong, we’ve spent many years helping the big banks go digital. Now we’re working with FinTechs and virtual banks to give them a running start by providing the most widely-used consumer credit score in Hong Kong, as well as more niche scores; with trended data that can identify patterns in spend and payments that snapshots simply can’t; and with eKYC solutions and decision tools for complete digital on-boarding.

To learn more about TransUnion’s solutions for Hong Kong lenders, contact Wingo Wong (Chief Business Officer, TransUnion Hong Kong) at [email protected].