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Digital Banking - Virtual Banks

Despite increasing uncertainty in the global economy and financial markets, Hong Kong’s banking industry and systems remain stable. In fact, in order keep up with new trends, the Hong Kong Monetary Authority (HKMA) granted eight virtual banking licenses in 2019, bringing Hong Kong banks into the ‘neo bank era’ and leading banks to search and incorporate digital technologies, data management, and innovations into their operations and services.

The need to focus on digital transformations (i.e. industry mindset shifts) and customer experiences has also been driven by the current market conditions and trends. As interest rates climb, price competition in the deposit business may increase leading banks to find new ways to differentiate themselves; likewise, customers are searching for greater process automation and autonomy in the way they handle their finances and business on their digital devices.

Digitalization and automation continue to be and are key focus areas for both banking management costs and customer experiences. Since 2017, several banks have indicated increased spending on innovation and technology. In 2018 Standard Chartered Bank invested $1.6 billion in technology, up from $900 million in 2015. During that period, the bank’s investment into old technology systems did not increase but mainly focused on emerging technologies e.g. blockchain, AI, etc. Annual costs invested into new technologies tripled in the last three years, and banks are teaming with tech companies to develop new business models. For example, Standard Chartered Bank is working with Alibaba’s Ant Financial to provide blockchain cross-border remittance services.

In the short-to-medium term, we expect banks to increase their investments in technology and innovation, a strategy to ’renovate’ the traditional banking ideas is being prioritised and used to update and create new operating models, for example, Hang Seng recorded an increase of 13% in their operating costs related to staff costs and technology in 2018. Still, the success of these new models and banking’s digital transformation ultimately depends on the cross cooperation between strategy, technology, and operations.

Traditional vs. virtual banking

In the HKMA’s ‘Guidelines on authorization of virtual banks’, a virtual bank is referred to a bank that delivers retail banking services primarily, if not entirely, through the internet or other forms of electronic channels instead of physical branches.

Virtual banks handle all transactions online, whereas ‘online banking’ is just an internet-based option offered by traditional banks. Not only do virtual banks provide online and mobile based banking, but by eliminating the overhead of physical branches, people expect virtual banks to offer higher interest rates on their accounts than traditional retail banks. Additionally, under the HKMA’s requirements, virtual banks should not set minimum account balance requirements or levy low account balance charges, resulting in 10 traditional banks, including HSBC, Bank of China, and Hang Seng Bank to cancel minimum account balance requirements.

Another point of differentiation is that virtual banking licenses are not only being granted to financial companies (including Hong Kong’s existing banks), but also non-financial companies including technology firms.

Opportunities and challenges

The entry of virtual banks presents itself with several new opportunities to capitalize on new audiences, but it challenges the industry into new ways of thinking. New financial businesses operating as virtual banks will complement the financial industry. Initially promoting the evolution and transformation of Hong Kong’s inclusive financial system and driving the innovation and technology that will enhance the customer’s experiences; for example, the industry’s focus on Artificial Intelligence to provide personalised services. In addition, the easy access that virtual banking allows for retail customers, including small and medium-sized enterprises, expands financial services to a greater number of people – including those from financially disadvantaged groups.

Hong Kong’s small population and saturated market present another opportunity for banks who have obtained a virtual banking license to expand into mainland China – particularly those institutions who are headquartered there. If the regulatory policy allows, virtual banks may help drive capital from China southwards, which could be conducive to the prosperity of Hong Kong’s financial markets.

Still, as with all new technologies and business models, there are challenges to overcome. Technology-related risks are major concerns for virtual banks, especially in terms of information security, system stability, and business continuity management. Incidents by unauthorised persons could result in financial losses, as well as damage to the bank’s brand and reputation.

What’s the impact on real estate?

With the growing number of virtual banks and their customers, the distribution of traditional retail banking services is being affected by digitalization, foreseeably enacting a transformation from a mass branch network model to a digitally centralized one that includes data, security, risk management, and applications.

From a real estate market’s perspective, the requirement for commercial properties such as bank branches and ATMs will decrease significantly. On the other hand, the demand for office spaces that can facilitate both innovative workplaces and data security requirements will grow. Unlike the traditional banking model, the neo banking industry may not require a premium core business district. Traditional banking especially retail banking for individuals or small and medium-sized enterprises relies on faceto-face customer services, and convenient core district locations are a key factor to better customer experience. On the other hand, virtual banking uses only online platforms and mobile devices to improve customer experience, while exploring new technologies like artificial intelligence to improve on it. Allowing them to significantly decrease the number of physical counters required, to a handful primarily used as a centralized services and complaints office.

In addition, based on the regulations around digital technology, data management, and even virtual banking licenses, new banks will be looking towards reliable properties that can support these. Neo banks may focus more on the technical side of a premises e.g. stable and enough power supply, rather than Grade A offices in Central with a premium rental and tenant mix. Neo banks may also prefer districts with more diversified industries, especially technology, media, TMT, etc. which could be benefit the landlords in these areas.


With the rise of virtual banking and the mindset shift in their approach to location strategy, decentralized districts with potential new supply and high specifications, where rents are lower than the Central and Fringe areas, will be in higher demands. Additionally, by hiring a mixture of financial and technology skillsets as well as younger talent, a culture shift in the workplace is likely to happen – in terms of what benefits and amenities are being sought after from tenants and users, which should transform office spaces to places encouraging greater productivity, collaboration, and flexibility.

For more information on current trends in banking i.e. the rise of virtual banks, current workplace strategies, or the current office market, contact Dorothy Gao at