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Building a better bank in Hong Kong

July 1, 2016

I’ve having the most amazing conversations in the last few weeks, and all of this has got me thinking about things.  So let me put together a hypothetical.  I’m doing want I’m doing giving my own cash position, but let’s suppose hypothetically that someone were offering me enough money to be able to get a full service banking license in Hong Kong (and we are talking about USD 10-25 million), what could be done with that amount of capital.

First of all, this reverses the standard bootstrapping mechanism of startups.  In the bootstrapping mode, you try a lot of small projects that generate income with the intention of providing capital to expand.  Also you try to use the smallness in your favour by doing things that give the regulators headaches with the notion that if you don’t do anything original and aggressive you are dead anyway.  But lets suppose you have a rich uncle that has a ton of money.  At that point, you don’t have to bootstrap and you have the capital to go through the regulatory process.  This means that the natural thing to do is to think of a business where you aren’t bootstrapping.

So my proposal would be to become the world’s first full reserve bank.

The basic problem with the banking is that the traditional banking model doesn’t work.  The traditional banking model has people depositing your money in your bank, you letting them transmit money through bank wires, and then you make money by loaning out that money.  My proposal is that you can build a better bank by just not loaning out the money to anyone except the government.  The trouble with making money loaning out money is that you are promising people that they money will be 100% safe, but the moment you loan out money, they money just won’t be safe, and so it makes more sense to go into P2P mode where you loan out money but if the loan goes bad then the person loaning the money absorbs the loss.  The bigger problem is that you can’t make money from this any more.  Interest rates for “risk free” loans are zero adjusted for inflation, and if you assume risk then you go back to trying to back a riskless deposit with a risky asset.

So my proposal is that any deposits you get, you invest in government treasury bonds and maybe commercial paper if there isn’t enough liquidity.  At that point your costs go *way* down.  Once the only thing that you deposit your money in is government treasuries, then your loan managements go to zero, your compliance costs also go to near zero.  If the bank regulators are interested in your risk management, you hand them one sheet of paper saying that you have 100% of your deposits in government bonds, and you are done.

So how do you make money?  Well from fees.  Once you have a banking license, you are on the Hong Kong interbank system and you can do wire transfers, and issue and cash checks, and you can also issue debit cards.  In return for these services, you can charge a monthly management fee.  You can also do international check cashing.  Right now if you show up to a HK bank with an international check, it takes six weeks to cash.  What you can do is to cash that check with a fee.  You can also do cross marketing with other fintechs.  Suppose someone wants a loan, then what you do is to point them to a P2P lender and arrange a referral fee.  You then get the benefits of cross marketing without any of the costs and without most of the risks.

Also you are pretty immune from competition.  One problem with getting into the loan or e-wallet business is that you end up competing with companies that do it better than you.  If you stay in the full-reserve depository business, then they can’t compete with you because you have the capital to get the banking license from the Hong Kong government and they don’t want to bother with this.  At that point, all of the e-wallets and P2P vendors become your allies rather than your competitors.

The thing is that once you no longer have the headaches of managing a loan portfolio, then you can focus your efforts at things like providing services for depositors that will allow you to justify the fees.  This services include

  • just giving them an account.  Right now if you are doing any sort of overseas business or fintech business, the traditional banks will not open an account for you because they are afraid of AML/KYC issues.  That’s because banks are doing AML/KYC all wrong.  If you are a bitcoin exchange or money transmitter, you should have your own AML/KYC policies, and what a bank *should* do is to have the bank’s AML/KYC people work with the AML/KYC people of the fintech to jointly work with the regulators.
  • Easy money transmission and open API’s.  The idea is that the bank is the backend, and people can put their own GUI’s on the frontend.
  • Big data.  One thing that banks are trying to do is to make money is through using big data.  The trouble with that is that they are doing that through the same technique of “we are doing stuff with your money behind your bank.”  Now with a new bank, if you pay the standard fee, the your account details are off limits to everyone except for the government.  Now if you want to have someone look at your account to see how big data will help you run your business, then you can talk to the bank, and the bank can work with you to run big data analysis on your bank statements.
  • Custom statements.  Right now, banks just issue statements.  Wouldn’t it be cool if you could go to your bank and see, “I’d like to see my statements in form X and to calculate numbers Y so I can dump that into my cloud financial analysis tool.”  So you end up paying the bank HKD 500/month, but you get statements that will allow your business to save that money by automating statements.

But the basic idea here is that once you don’t have to think about the lending and money transmission part of the equation, you can focus only on the deposit part, and the people that do money lending and money transmission become your partners rather than your competitors.


From → hong kong

  1. AlphaRho permalink

    >>The traditional banking model has people depositing your money in your bank, you letting them transmit money through bank wires, and then you make money by loaning out that money. My proposal is that you can build a better bank by just not loaning out the money to anyone except the government.<>So my proposal is that any deposits you get, you invest in government treasury bonds and maybe commercial paper if there isn’t enough liquidity. At that point your costs go *way* down.<<

    if your bank is similar in structure to a traditional bank with a network of branches and automated teller machines, then i doubt that the cost associated with loan management, risk management, compliance are large enough to give your bank a competitive advantage over the established players.

    • The goal is not to compete with established players but to be able to profitably manage accounts that they can’t manage. ATM machines you don’t have to deploy on your own, and as far as branch offices, this can be done pretty cheaply. You find a co-work space and rent a desk and as long as you are not doing paper cash deposits, it’s extremely cheap.

      The main costs that you can’t remove are IT costs. It’s not the direct costs to loan management, risk management and compliance, but the IT cost association with those elements, and you are in a slightly different situation. If you have an established bank, those costs are sunk, whereas if you have a new bank, you have to built your own IT systems. If you decide not to do loans, then the capital costs are removed.

      The big thing that protects established players is not head to head competition, but the fact that the startup costs are so high that they have a protected market. If you remove the capital costs of IT, then you can get into the playing field, at which point you can stay in business by poaching businesses which the established banks are not interested in or can’t move fast enough.

      • AlphaRho permalink

        so you are not aiming for the ‘average joe’ as customer, but what kind of people/companies?

      • Fintech startups in Hong Kong. You have to ask what is the real purpose of a bank in a post-2008 environment, and the reason banks have so much trouble is that they haven’t figured out that their business isn’t to do finance.

        The purpose of the bank is to provide a gateway to the currency system. If you have electronic USD cash, then ultimately what you are holding is a ledger entry in the Federal Reserve system. If you have electronic HKD cash, then ultimately what you have is an ledger entry in the Hong Kong Monetary Authority. A bank is an interface to that system. If you can provide a friendly gateway to the HK currency system, then you’d have a lot of customers.

  2. AlphaRho permalink

    and how many fintech startups are there in hong kong according to your estimation?

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