The economic downturn has led the new entrants to exercise more prudence.

Competition amongst virtual banks in Hong Kong is off to a slow start as growth prospects were curbed by ongoing economic uncertainties, reports Fitch Ratings.

The Hong Kong Monetary Authority has granted eight virtual banking licenses in 2019, although most only began operations this year because of launch delays, Fitch said in a report.

Given the ongoing economic downturn resulting from the social tensions that began last year, the ongoing trade uncertainties, as well as a global recession driven by the coronavirus pandemic, Fitch believes that the new entrants are likely to exercise more prudence.

Despite these challenges, neobanks still have many advantages over their incumbent peers. For example, many of the VBs offer much more attractive deposit rates than those offered by the incumbents banks, noted Fitch. The promotions, usually up to three months, look attractive in the low-interest-rate environment—though there is usually a cap per customer under these promotions.

Deposit rates are offered as high as 5% per annum, and one neobank is granting interest-free loans of up to HK$100,000. Other campaigns include referral fees and cash rebates of up to 5% on spending to founding merchants.

Virtual banks’ distinct advantages are their abilities to cross-sell and bundle customers using other non-bank shareholders' platforms in order to enhance overall customer loyalty and brand recognition.

Since unveiling their platforms, Hong Kong’s virtual banks has launched unique and differentiated products such as numberless or personalised credit cards, which could especially be attracted to the younger population. This segment has been identified by neobanks as their prime target, as it is under-served by traditional banks which tend to focus more on higher net-worth customers.

“The traditional way of transacting through branches is poised to change, as customers grow more accustomed to digital platforms. We expect the incumbents will continue to boost their fintech capabilities, so to keep pace with the competition,” Fitch Ratings said in a report.