Are Hong Kong’s banks ready for a digital transformation?

Hong Kong consumers are embracing digital banking amid a significant shift in how banks craft customer experience and design product offerings, according to the latest edition of McKinsey’s survey of personal financial services.

The survey, which polled more than 1,000 respondents in Hong Kong and about 20,000 across the region, shows that 93 percent of Hong Kong consumers use digital banking at least once per month, compared with 90 percent in the rest of developed Asia.

In a notable development since the survey’s 2017 edition, age and affluence are no longer arbiters of digital banking use in Hong Kong; adoption is near-uniform across age groups and income levels. Importantly, two-thirds of respondents would consider switching to a pure-play digital bank, known as virtual banks, slightly more than the developed Asia average of 62 percent.  

Penetration of fintech and e-wallet services is less pronounced. Forty-seven percent of consumers currently use these services, though this is expected to increase as higher income and older age groups lead a transition to a cashless society. Overall, 64 percent of consumers use cash for less than 30 percent of their weekly purchases, according to the survey.

Virtual banks are stoking fierce competition around customer experience

The shift to digital reflects the impact of the COVID-19 pandemic, which pushed people to take up online banking during lockdowns. Regulatory changes are also playing a part. For example, in June 2021, the Hong Kong Monetary Authority launched its Fintech 2025 Strategy, which provides a framework for banks to foster fintech innovation while ensuring consumers receive fair and efficient service.

The launch of eight new virtual banks has also proved disruptive. Promotions like high deposit interest rates, cash rebates for referrals, and spending rewards have attracted 420,000 new (but not unique) customers to the challenger banks since their 2020 debut.

Consumers are embracing virtual bank innovations such as app-based QR code payments and numberless debit cards. Tie-ups with parent and partner ecosystems such as WeChat Pay HK, Alipay HK and Yuu, a rewards club app that spans thousands of stores, are also proving popular.

Perhaps more importantly, the digital disruption has shaken up Hong Kong’s highly mature banking market. Large incumbents are improving their services in order to retain customers, and match competitors’ performance. Reactive measures included cancelling minimum balance requirements and service fees, and raising interest rates on current and savings accounts.

Traditional banks are also accelerating the rollout of their own digital services: Citibank Hong Kong launched “Citi Plus”, a mobile app that offers a suite of services including deposits, foreign-currency transactions, stock trading, and wealth management. Hang Seng Bank offered almost 500 digital innovations and enhancements in 2020, while HSBC released an important update for PayMe, its social payments app.

Major banks are also spearheading open API partnerships, allowing communication with software from commercial and industrial partners; Citibank Hong Kong has nearly 10 API partnership agreements with merchants, for example.

This transition should pay dividends. McKinsey research shows that since the onset of the pandemic, Asian banks with stellar digital sales performance have grown wealth management revenues five times faster than digital laggards. 

Traditional banks have room to improve their digital offerings

We expect these trends to change the way consumers use bank branches. Customers that experience faster onboarding and more efficient customer services on digital platforms are unlikely to return to the queues often associated with physical outlets. Indeed, 85 percent of respondents expect to maintain or increase their use of mobile and online banking post-COVID, the survey says.  

While Hong Kong consumers are more satisfied with digital banking channels than they are with conventional counterparts such as branches and call centers, overall satisfaction across the customer journey lags other developed Asian markets, according to our survey.

Moreover, as many as 64 percent of respondents say they are planning to change their main bank. Consumers cite poor mobile functionality and hard-to-navigate internet banking services, alongside poor product pricing and sub-optimal branch networks, as leading reasons why they would consider switching.

Enterprise agility and talent are key to incumbent banks’ success

Hong Kong’s virtual banks are leveraging more agile, purpose-built IT systems to offer consumers better services like faster money transfers and easier access to government stimulus payments. Larger, established banks that want to tap into consumers’ growing need for digital-first services while keeping their virtual banking competitors at bay will need to undertake a digital transformation. This will require them to focus on building the following three capabilities:

Flexible IT infrastructure: Established banks that are transitioning towards a digital-first model will require a more flexible IT architecture that enables them to make quick updates to key customer touchpoints such as websites and mobile banking apps. Connecting front-end, customer-facing systems with their legacy IT systems via middleware can ensure they make the updates they need while preserving and protecting the underlying systems that deliver the bank’s core applications.

Banks should also store customer records in a uniform format across IT systems, while deploying staff responsible for monitoring adherence to data privacy regulations.

Organizational agility: For established banks in Hong Kong, agile IT systems should go hand in hand with agile organizational structures and processes. To develop and refine new digital banking products, they should form multifunctional teams that bring their best design, IT, product, and risk compliance experts together. They should be empowered to make quick decisions that do not always require repeated consultations with senior management.

Banks should also integrate risk and other control functions early in the product development process to enable faster launches of innovative products. They should also consider making the planning process a quarterly exercise, rather than an annual one, to allow them to respond more rapidly to shifts in consumer demand. 

Talent-focused culture: Undertaking a digital transformation won’t work without the right talent. Established banks will need to create a whole host of new roles, ranging from digital marketers and UX designers to new product owners and agility coaches. Hong Kong is experiencing a severe shortage of this kind of talent, to the extent that banks may consider cross-border arrangements to take on staff based in Shenzhen or other locations on the Mainland.

Developers are in particularly short supply, so even outsized remuneration may not be enough to tempt them away from competitors. Established banks will therefore need to offer softer perks that will attract scarce tech talent, such as more relaxed dress codes, work-from-home options, and flexible hours.  

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For now, Hong Kong’s virtual banks do not pose a serious threat to the customer bases or assets of the large established banks, many of which have been in operation for over a century.  But COVID-19 has accelerated changes in the way consumers interact with providers of personal financial services, pushing digital services to the fore. Traditional institutions that fail to innovate quickly enough will see younger customers gravitate towards nimbler, more user-friendly services offered by the virtual banks.   

I'm the Managing Partner of McKinsey & Company's Hong Kong office. Arthur Shek, a Partner in Hong Kong, co-authored this article.

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