Hongkongers are reaping the benefits of virtual banks even before their launch

Hong Kong’s first virtual banks are not expected to be operational for at least another month, but banking customers in the city are already reaping the benefits. For the first time in about two decades, eight of the special administrative region’s largest banks will no longer charge fees for failure to maintain a minimum monthly balance.

HSBC, one of the city’s three currency-issuing banks, kick-started the movement and announced in June it would scrap the fees starting August 1. The award of eight virtual banking licenses since March may have had something to do with the change of heart.

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“HSBC needs to act now to persuade its millions of customers to stay on, or many of them may opt for joining the virtual banks, which do not charge a fee for small depositors,” Ben Kwong Man-bun, director at brokerage KGI Asia, said at the time.

Three million customers will be affected at HSBC, and its announcement was quickly matched by Standard Chartered Bank, Bank of China (Hong Kong), Hang Seng Bank, Bank of East Asia, Dah Sing Bank, ICAC Asia, and Citibank.

The minimum balance fees, introduced in 2001, allowed banks to recoup costs following a change in rules that let them freely compete for deposits and lending by offering different interest rates. The fee has long been criticized as a penalty on small but loyal depositors.

“I have paid the minimum balance fee from day one, when HSBC started charging me in 2001,” David Wong, a white-collar professional, said. “As a small depositor, I had no choice but to pay the fee, as I needed the banking services. I am happy to see the arrival of virtual banks has forced the big players to scrap it.”

Millions of small depositors like Wong have had to pay for basic banking services over the past two decades, with fees ranging from HK$50 (US$6.40) to HK$100 (US$12.80) a month if their bank balance falls below HK$5,000 (US$638.30) to HK$10,000 (US$1,276.60).

Virtual banks, on the other hand, have been banned by the Hong Kong Monetary Authority (HKMA) from charging any such fees, a move that is expected to keep traditional players on their toes as they work to improve their services.

The scrapping of minimum balance fees is also a “credit negative” for traditional banks, as it reduces their revenue and profit, according to Sonny Hsu, vice president and senior credit officer at Moody’s Investors Service. According to a Moody’s estimate, the removal will reduce HSBC’s annual net profit by less than 1%.

Anil Agarwal, equity analyst at Morgan Stanley, said in a research report: “The recent move by HSBC to waive off minimum balances indicates upcoming pressure. Cost pressure should start soon, as these entities are hiring staff for new businesses, which should cause wage and cost inflation.

“Hong Kong banks have large revenue and profit pools at about US$45 billion and about US$25 billion, respectively. The competition will rise for liabilities and, hence, revenues.

“This makes Hong Kong one of the largest profit pools for banks globally. But, as a result [of the virtual banking licenses], that pool is in the sights of global technology players as a market open to disruption and taking away a share of revenues,” he said.

But the strategy of scrapping minimum balance fees seems to be working – Wong said he would stay with HSBC. “Without the minimum balance fee, it seems there is not much difference between traditional banks’ digital banking services and virtual banks,” he said.