Hong Kong's virtual banks are facing years of red ink on the bottom line after making limited inroads against their brick-and-mortar rivals in the financial hub.
The two leading digital banks so far, Mox Bank, backed by Standard Chartered, and ZA Bank, bankrolled by China's ZhongAn Online P&C Insurance, predict they will start breaking even by 2024 at the earliest as they continue to build up operations and roll out new products.
Launching a bank - even a virtual one - is capital-intensive and it typically takes years to scale up, achieve critical mass and be profitable.
Over a year after the first virtual bank launched, the banks are gaining traction but are yet to pose a serious threat to incumbent banks such as HSBC Holdings, Hang Seng Bank and even StanChart itself.
"When you look at the global examples, there are a couple of challenger banks or digital banks in the world, they just reach break-even point after five, six years," Mr Deniz Guven, Mox's chief executive officer, said in an interview at his office in Hong Kong's Quarry Bay neighbourhood.
Mox can likely start turning a profit in three to four years, he said.
Mr Rockson Hsu, the CEO at ZA Bank, expects to break-even by 2024.
Digital banks are vying for a slice of the city's retail, commercial and corporate banking revenue, estimated by consulting firm Quinlan & Associates at HK$373.9 billion (S$63.8 billion) in 2020.
Hong Kong's eight virtual banks had attracted HK$19 billion in deposits at the end of March, or about 0.1 per cent of the city's total, according to a Hong Kong Monetary Authority spokesman.
ZA, the first digital bank to launch in March last year, had more than 300,000 customers, while Mox, which started in September, had over 90,000 clients as at March.
The two make up about 62 per cent of the total 630,000 accounts opened at the digital banks. Many of these customers also have accounts with other lenders.
Fair pricing
While ZA initially offered a gimmicky deposit rate as high as 6.8 per cent, the lenders have refrained from undercutting their traditional rivals on price. ZA now offers a rate of 1 per cent for the first HK$200,000, and 0.01 per cent thereafter.
Mox offers a 0.65 per cent rate for deposits and, according to Mr Guven, does not want to just compete on pricing alone. "We believe that fair pricing is most important," he said. "You do not need to be dead competitive."
In response to the emergence of digital rivals, traditional banks have "reacted quite promptly" since 2019, upgrading their digital channels and rethinking some of their minimum deposits and fees, according to ZA's Mr Hsu.
The incumbent banks have been "aggressive" and many have cut or eliminated fees, Quinlan said in a report. For example, HSBC scrapped some general banking and transaction fees, and also removed its monthly fee for customers with deposits below HK$5,000, the consulting firm said.
The digital lenders are now focusing on rolling out more banking products that can bring in fees. That will be key to eventually making money, according to Mr Benjamin Quinlan, the CEO at the consultant.
"The future development of these banks will reflect the pace at which they can roll out those offerings, including insurance, wealth management," he said.
"For the leading players, they're actually doing very well, for the others, it's a little behind schedule. I do think Mox and ZA have driven an early lead and are capitalising on it."
Adding staff
Mox plans to increase headcount by 20 per cent this year, adding about 40 staff to its current of around 190, according to Mr Guven, who joined Standard Chartered in early 2017.
The lender, which also counts PCCW, HKT and Trip.com Group as owners, started offering a credit card this month and plans to introduce loans, foreign exchange and wealth products, according to Mr Guven.
The bank sees "a lot of opportunities" in the Greater Bay Area, particularly since one of its partners is Chinese online travel platform Trip.com, he said.
ZA is also in hiring mode as it adds offerings including wealth management, which Mr Hsu hopes to roll out later this year. The products could include mutual fund, fixed income and stock trading, he said. Roughly half of ZA's staff are in Hong Kong and the rest in Shenzhen, according to Mr Hsu.
The bank launched life insurance services this month and corporate banking services earlier this year, offering loans, deposits and transfers to small and medium-sized enterprises.
Another digital upstart, Airstar Bank, said in a statement this week that it would be the first virtual bank to offer a remote on-boarding service for small businesses in the city through a pilot programme.