Since the first local virtual bank was launched in March this year, there are now seven virtual banks operating so far. As of the end of June, the total deposits of the seven virtual banks have reached HK$3.3 billion (US$426 million). Compared to traditional banks, this total deposit volume seems to be insignificant, but virtual banks are mainly targeted at the younger generation, so there is a lot of great potential for development.

According to the definition of the HKMA (Hong Kong Monetary Authority), a virtual bank is a bank that provides retail banking services primarily through the Internet or other forms of electronic transmission channels rather than through physical branches. Virtual banks are subject to the same set of regulatory requirements that apply to traditional banks. Moreover, depositors are also protected by the Deposit Protection Scheme (DPS) paying them compensation of up to a maximum of HK$500,000 in the event of the failure of a bank that is a member of the scheme.

It is true that the more important factor in determining whether a deposit is safe with a financial institution is the background of its shareholders. The shareholders behind the virtual banks in Hong Kong are very strong, including major note-issuing banks and major financial institutions in China, as well as comprehensive consumer companies and local consortia, etc. As such, virtual banks are actually quite stable given their financial capitals are stronger than many small local banks.

Virtual bank customers are mainly retail customers, and its basic banking services include deposits, loans, payments, and debit cards. Faced with the huge deposit base of traditional large banks, virtual banks have made great efforts to innovate in the deposit business. In order to create new sensations for consumers and provide them with an incentive to try out virtual banking, virtual banks have added deposit target setting to help people realize their goals, engaged in deposit group purchases where multi-person deposits can enjoy high interest rates, or added an appealing app interface design and a trendy ATM card, etc.

It is imperative for virtual banks to develop the deposit market, but the author believes that virtual banks must be able to promote impromptu spending in order to sustain their development in the banking business.

In retrospect, the success of Alipay was because the Taobao shopping network had already created the demand for online payment, and then developed into physical retail and transfer functions. Similarly, the success of WeChat Wallet was also due to the deep integration of communication software and consumer demand. Whether it is an e-wallet or a virtual bank, the first step to success is to give people a reason to open the app, preferably one that they will want and need to open every day. Readers may go a whole day without saving money, but it will be difficult to not spend money all day. If a virtual bank can prompt users to open its virtual banking app or use its virtual bank’s ATM card first when they pay, a whole new world can be created for the banking business by leveraging the payment market. A good example is Livi, the virtual bank co-owned by Bank of China (Hong Kong), which has issued a virtual debit card and collaborated with yuu to launch a cash rewards program for online spending. The author believes that the sooner a virtual bank recognizes that the payment market is the focus of development and the more it focuses on expanding its spending privileges, coupled with a large consumer network behind its shareholders, the more likely it will become the biggest winner among these virtual banks.

In the principle of marketing, the process of making a product or service addictive is called “awareness - understanding - liking - action - habit.” Some people may still not know what virtual banking is, so the various virtual banks can only burn money at the beginning to try to attract users to experience the convenience of virtual banking.

“You can only fill a cup that is empty.” Users can only have reasons to deposit money if there is a way to make the money available for spending. With the accumulation of more relevant consumption data, virtual banks will be able to launch targeted promotion offers for a certain customer to stimulate impromptu spending, meanwhile collect marketing fees from merchants for the consumption data and explore potential installment loan opportunities, returning to the starting point of the bank’s lending business. This creates a win-win-win situation where banks make profits, users get discounts, and merchants have businesses.

The emergence of virtual banking not only promotes local fintech innovation, but also enhances user experience, driving the popularization of finance, and ultimately accelerating the development of the local banking sector.

(Kwan Cheuk Chiu, economist, director of ACE Centre for Business and Economic Research)

Click here for Chinese version

We invite you to join the conversation by submitting columns to our opinion section: [email protected]

Apple Daily reserves the right to refuse, abridge, alter or edit guest opinion columns for accuracy, length, clarity, and style, and the right to withdraw and withhold columns based on the discretion of our editorial page editors.

The opinions of the writers do not necessarily reflect the opinions of the editorial board.

---------------------------------

Apple Daily’s all-new English Edition is now available on the mobile app: bit.ly/2yMMfQE

To download the latest version,

iOS: bit.ly/AD_iOS

Android: bit.ly/AD_android

Or search Appledaily in App Store or Google Play