HK banks focus on fee generation, customer experience amid low rates
Rapid digital transformation key to competitiveness as mainland China growth picks up
1 Dec 2020 | The Asset

With deposit accounts becoming less profitable and amid a likely prolonged period of low interest rates, Hong Kong’s banks will be looking to place a greater emphasis on fee-earning activities, including possibly levying fees for account balances, lowering costs and enhancing customer experience through digitalisation in 2021, according to a recent report.

KPMG’s Hong Kong Banking Outlook 2021 report finds the banking sector in Hong Kong has remained in reasonable shape in 2020. Economic growth starting to pick up in mainland China is another positive indicator for Hong Kong, a key conduit for capital flows.

A key success factor for banks in 2021 will be their ability to effectively assess if their customer’s businesses can be turned around when the economic environment improves, and which customer’s businesses are likely to remain unprofitable irrespective of the situation.

“The increased focus on fee-earning activities, particularly at a time when there is a lot of volatility and investment uncertainty, points to the importance of ensuring proper conduct and treating clients fairly,” says Paul McSheaffrey, partner, head of banking and capital markets, Hong Kong, KPMG China. “In particular, we expect there will be an increased focus on pricing and product suitability in the year ahead.”

“If the situation globally and in Hong Kong remains largely the same in 2021 with economic growth stagnating, we will start to see more defaults on loans, particularly on unsecured debt such as credit cards and personal loans, as well as corporate non-performing loans,” he adds. “However, this may not lead to a flurry of bankruptcies as we predict that banks will take a more considered approach to distressed businesses and individuals and balance the financial return and the fair treatment of customers.”

With increasing pressure on profitability, the most successful banks in 2021 will be those that can manage their operating costs while providing a holistic and digitally enabled customer experience, the report predicts. As well, traditional banks may face more competition from virtual banks, which are looking to step into the small and medium-sized enterprise (SME) banking space in 2021.

Virtual banks are likely to target SMEs for treasury management, financial product, and payroll and payment activities. For retail banks, the key to success in 2021 will be leveraging digitalisation to place customer-centricity front and centre. The more aspiring retail banks, the report states, will seek to rapidly grow their broader ecosystem by partnering with the right brands and start-ups relevant to their customers to help take customer engagement and experience to the next level.

“The ambitious traditional banks will go beyond existing services on electronic channels such as transaction processing and treasury, and seek to become more integrated with client business, covering their needs in day-to-day operations and providing insights to their business with different solutions and analytics capabilities,” notes Stanley Sum, partner, advisory, management consulting, KPMG China. “2021 might also be the year where we see the formation of creative partnerships where the banking brand takes a back seat in order to be more relevant to the end customer.”

As mainland China continues along its path to recovery from the disruption and challenges caused by the Covid-19, the report expects renewed interest from international and domestic banks in Hong Kong in expanding onshore, with the Greater Bay Area (GBA) a key opportunity. Banks expanding into the GBA will use the year ahead to invest in digital solutions and capabilities as a means to achieve scale quickly and consider how these can be tailored for the digitally savvy clientele in the region. This will be a key success factor given the level of technological advancement of their peers in mainland China, it says. However, the customer experience and expectation will be different.

“There will likely be an increasing number of partnerships between traditional banks and fintech [financial technology] players in the region,” foresees Terence Fong, partner, head of Chinese banks, Hong Kong, KPMG China. “With Shenzhen identified as a key innovation and technology centre in the GBA, there are significant opportunities for international banks expanding in the region to explore tie-ups and alliances with suitable local start-ups, fintech firms and technology companies.”

As well, as regulators begin to increasingly demand more granular and near real-time data from banks, regulation technology or regtech adoption will be a necessity in 2021. With Covid-19 rapidly changing business and operating models, the application of regtech will transform risk management and compliance and present significant growth opportunities for banks in Hong Kong in 2021, the report states. The successful banks in 2021 will be the ones that look beyond deploying regtech as a purely defensive strategy – solely for risk management and regulatory compliance – and instead use these solutions to pursue their growth agenda.

“In the year ahead, we expect many banks to actively consider the areas that can be addressed with regtech solutions, engage with regtech providers, trial new technologies in a controlled manner and co-invest in proofs of concept,” notes James O’Callaghan, partner, head of technology consulting, Hong Kong, KPMG China.  “Importantly, the successful banks in 2021 will be the ones that embrace innovation with regard to regtech, understanding that there will be success and failure along the way, and take bold steps to sponsor initiatives that can unleash the full potential of regtech throughout their organisation.”