The challenges come from the cost and effort of putting in place the necessary systems and personnel to handle what is a complex business and which carries a high degree of reputation risk if something goes wrong. Success in the MPF business also requires an established customer base, good distribution networks and strong brand image. All this means that the MPF is not a business where small players can hope to be successful on a stand-alone basis. Even for the large companies that have captured the lion's share of the business, the start-up costs and the ongoing expenses mean that it will probably take a few years for them to break even and still longer to achieve a reasonable return of capital. However, this should not blind us to the strategic importance of the MPF for the banking and financial services industry in Hong Kong. This is why it was vital for the smaller banks to pool their resources in the Bank Consortium Trust. This has enabled them to establish a credible vehicle and win a market share that is probably larger than the shareholders could have achieved if they had acted independently. The strategic appeal of the MPF lies not simply in the long-term profit opportunities that it offers directly. It is also that it will help to build a relationship with both employers and their employees that can be used to generate cross-selling opportunities.
Deregulation has been the catalyst – the more cynical would say the excuse – for banks to introduce fees and charges on deposit accounts. Most banks have also introduced tiered savings accounts, with higher interest rates being paid on larger balances. Sometimes the rate depends on the range of the bank's products and services that the customer uses. The converse is that some banks are now paying less than the standard rate on small deposits. A further innovation is that in a few cases there are savings products that are linked to HIBOR. Banks have not rushed to pay interest on conventional current accounts, though some have offered combined savings and deposit accounts that pay interest. At least one bank offers an auto-sweeping service from savings to current accounts. Such products are effectively offering interest on current accounts. Generally speaking, the amounts deposited in the innovative current and savings accounts are still quite small. Perhaps the biggest surprise so far has been that some of the banks have been able to lower their benchmark savings account rate to 1.75%, which is probably 25bp below what it would have been without deregulation. A few years ago, when the debate about deregulation was taking place, the conventional wisdom was that the savings rate was artificially depressed and would rise closer to time deposit rates after the cap was lifted. So far this has not been the case. Indeed, it appears that the interest rate rules effectively imposed a floor as well as a cap.