Hong Kong digital banks need more than a name change

More than five years after Hong Kong regulators first announced they would allow digital banks, the online lenders are performing modestly at best – and in some cases, not well at all. The argument that introducing digital banks would somehow alter the competitive landscape of banking in the city and put heavy pressure on incumbent lenders seems increasingly unrealistic. After all, incumbent heavyweights like HSBC and Standard Chartered have long been investing heavily in digitization. Yet both the banks and regulators have been reluctant to acknowledge underlying problems.

In mid-October, the Hong Kong Monetary Authority (HKMA) announced that it would change the name of Hong Kong’s online lenders to “licensed digital bank” to increase the public’s confidence in them. The HKMA noted that the Chinese term for “virtual” (the previous name for the banks) can mean “fictional.” To be sure, the term “virtual bank” is odd, and “digital bank” is better. However, it is unlikely that the terminology is a serious problem here. The problem is that there are too many offshoots of big banks and tech companies offering similar products, without any distinct value proposition.

Among the eight digital banks, we believe that two stand out. First, there is WeLab Bank, which is the only of the eight online lenders to begin as a startup backed by venture capital. WeLab Bank’s management told Hong Kong media in late June that it expects to be profitable in 2025. As of June, its customer deposits had tripled year-on-year to HK$6 billion. Tat Lee Ka-tat, WeLab’s CEO, says that the digital lender expects significant additional deposit growth this year, with a target of HK$8 billion by year-end. WeLab also is also expanding to Southeast Asia.

The other Hong Kong digital bank that seems to be doing reasonably well is Standard Chartered-backed Mox, which has been working to cultivate a niche in wealth management for the masses. Traditionally, private banking in Hong Kong has targeted high-net worth individuals. In August, Mox started a cryptocurrency exchange-traded fund (ETF) last week. Mox is the first digital bank in Hong Kong to offer transactions in spot bitcoin and ether ETFs.

However, times are tougher for many of Hong Kong’s other online lenders, and we would not be surprised to see several eventually call it quits either through consolidation or simply shutting down. The HKMA tacitly acknowledged the problematic situation in August when it published a review explaining why it would not issue digital banking licenses. “The already keen competition in the retail banking sector will be further intensified if more new market participants are introduced,” the HKMA said in its review. “Moreover, with virtual banks yet to achieve profitability, introducing new players to the market is unlikely to be conducive to a healthy development of the sector.”