With the dominance of cross-border funds and the strong distribution market share of global retail and private banks, Hong Kong and Singapore - two of the four Asian 'Dragons' - are seen as the most appropriate targets for distribution-only strategy in Asia [1]. Until today, digital sales of mutual funds in these areas have remained low and many fund firms in the region have generally been slow to adopt financial technology strategies.
But, as noted by PwC, there is now much more openness towards digital distribution. In particular, the introduction of virtual banking channels may kickstart better integration of Fintech into asset management businesses, as well as potentially provide a platform for new products, a route for reaching new tech-savvy and underbanked investors, and a boost to overall fund sales.
Indeed, only 51% of migrant domestic workers in Singapore have a bank account, and just 1% of migrant domestic workers in Singapore, Hong Kong, and Malaysia are invested in mutual funds [2]. By leveraging new technology but limiting the overheads of traditional banks, there could be an opportunity for fund managers to offer wealth management products to these historically underserved customer segments. Some of them are already laying the groundwork for striking distribution partnerships with these new virtual banks.
Development of virtual banks
The Hong Kong Monetary Authority granted its first virtual banking licenses in March 2019, and there have been a total of eight such license recipients in the city so far. The first batch of virtual banking licenses included Livi VB (a joint venture between Bank of China, JD Digits and Jardines), SC Digital Solutions (formed by Standard Chartered, HKT, PCCW and Ctrip Financial) and ZhongAn Virtual Finance.
In May, further licenses were granted to joint ventures formed with Chinese ‘Big Techs’: Infinium (a joint venture including Tencent, Industrial and Commercial Bank of China and Hillhouse Capital), Insight Fintech (a partnership between Xiaomi and AMTD Group) and Ant SME Services (established by Alibaba’s Ant Financial). Tencent is also set to open a blockchain-based virtual bank after the approval of the Hong Kong Securities and Futures Commission (SFC).
As said by EY, this recent licensing of several China ‘Big Tech’ banks in Hong Kong represents the formal entry of such players into the international financial system. And Singapore followed suit by opening up the banking industry to technology companies. The Monetary Authority of Singapore announced in June that it would issue up to five new digital banking licenses to non-bank players, with the application invitation process expected to begin in August.
MAS’s stated aims for the virtual banking industry is to address the financial services needs of underbanked segments of the market, in area where wealth and asset management could be quite meaningful. These segments include domestic, construction and gig economy workers, as well as the self-employed, and there is a lot of opportunities to provide some basic financial services and investment tools for them to start saving.
The demand for a range of connected services, including investment products and wealth management, delivered through a single mobile platform is increasing in Singapore. Tech companies like Singapore-based Grab [3] were named as potential virtual banking licensees.
Ant Financial is also actively looking for a virtual bank license in the country. A successful entry would challenge traditional incumbents DBS Group Holdings and Oversea-Chinese Banking Corp in the growing market for digital banking in Southeast Asia, especially since it is also present in Macau. Indeed, Ant Bank Macau was the city’s first virtual bank and it now offers deposit services denominated in pataca (MOP), with an interest rate of 0.125%, for customers with a Macau Resident Identity Card and a local phone number.
OCBC, Southeast Asia’s second-largest lender,has agreed to join peer-to-peer lender Validus Capital and Temasek Holdings’venture capital arm to seek a wholesale license in Singapore before the year-end application deadline.
Fund houses courting new virtual banks
As in Hong Kong, virtual banks start with traditional retail banking products (cash, saving accounts, lending) and then leverage that customer base to sell wealth management-related products. That’s why Asset management firms have started to connect with these new actors.
Asset managers rely heavily on the intermediary model; they are exploring how they can provide a differentiated experience through new technology to their distribution clients, and influence them to sell the product to the end customer. Indeed, virtual banking channel could widen wealth management coverage and increase opportunities for asset management companies to access young, underbanked investors.
Moreover, Asian asset managers do not have access to or information about end clients. EY says the vast majority of asset managers never actually talk to their retail or high-net-worth clients in Asia. Thus, they need to rethink the business-to-customer approach in order to better leverage Fintech opportunities. Some of fund companies have begun conversations with virtual banking consortia at a local and regional level.
These conversations are at an earlier stage in Singapore than in Hong Kong, where there are already some partnerships emerging between wealth and asset managers and new virtual banking players. But they are not far behind. The MAS has been especially active in promoting Fintech adoption in the funds industry, providing financial support to fund houses for development initiatives and training. This could put Singapore’s fund houses in an advantageous position for finding ways to link up with virtual banks.
A win-win partnership model
Many virtual banks have adopted partnership models, which has piqued interest in the broader asset management industry to look at how they can also develop potential partnerships.
These new virtual banks may not necessarily have any asset management experience, and asset managers could provide white-label digital solutions for clients. One challenge is how to get the digital distributors to promote a fund, as investors do not need to visit a bank or speak to an advisor to get recommendations on purchasing funds. PwC says asset managers can provide timely information and consistent quality of data to distributors to help them identify the right customers for the right products.
Partnerships with virtual banks offer a new route for asset managers to grow sales via digital distribution, including through robo-advisors,in which many have already invested. In Singapore, robo-advisor players thus seem to be aggressive. As noticed by Refinitiv, the pitch is that potential virtual banking licensees can white label the robo-advisor’s solutions and offer it to their end clients, because most virtual bank players are not considering manufacturing their own funds.
In this battle to conquer younger and more mobile customers, newer or more engaged with technology and data asset managers are competing with the traditional players. ETF providers and alternatives managers would also potentially push the boundary and be more innovative from a tech and data perspective because that is part of their strategy.
Author: Pascal Buisson - December 2019
[1] APAC Distribution 360 2019 Edition - Broadridge - [2] 2019 report by information services firm Experian and Hong Kong charity Enrich - [3] Grab, which started as a ride-hailing service, has built out its financial services capabilities in recent years, including the launch of a digital wallet and lending services. It has already stated its plans to offer wealth management services in the region as well - [4] Hong Kong-based Value Partners last year decided against launching a D2C robo-advisor, even after obtaining the licences to do so, over concerns about attracting enough clients and potential conflicts of interest from playing the roles of both manufacturer and distributor. In 2017, Franklin Templeton Investments invested US$3 million into Singapore-based robo-advisor Bambu. Meanwhile, U.S.-based Legg Mason contributed US$10 million of investment into Quantifeed, a Hong Kong-based robo, which has also partnered with Taiwan’s Conning Asset Management.
