Can Hong Kong embrace the technology revolution in global finance?
David Lynch says Hong Kong must compete aggressively in the financial technology sector to stay on top
Hong Kong's position as an international financial centre is under major threat. The liberalisation of policies on the mainland is diminishing many of Hong Kong's traditional advantages. Arbitrage opportunities are reducing. Other international financial centres are competing aggressively for cross-border renminbi flows. Regulations are tightening.
While Hong Kong is home to some of the best bankers in the world, the future will be decided instead by a new form of competition. The new battleground is financial technology.
Banks face a simple choice - either adapt and compete, or face extinction. Can Hong Kong re-invent itself to retain its position, with so many new business models attacking traditional players?
Banks in Hong Kong have enjoyed margins unimaginable in most industries. To a nimble start-up, that equals opportunity. Banks have historically been obsessed with benchmarking among themselves. But this time, the threat isn't traditional competition. A new breed of players is entering. These companies are built in the cloud. They are mobile first. They are technology, social or e-commerce players largely unencumbered by policy and regulation. These new players are able to arbitrage their own massive scale and customer reach to create new revenue streams.
Incredible advances in data science and artificial intelligence are creating new models for banking services. They are not burdened by the myriad of legacy systems, layers of procedures and controls, or expensive physical distribution networks and call centres that virtually every bank must manage.
A decade ago, most would think it unimaginable that the likes of Alibaba, Apple, eBay (PayPal), Google and Tencent would be in the business of providing financial services. While these companies were creating entirely new ways of delivering financial services, banks focused mostly on how to put traditional banking on a mobile platform and enhancing internet capabilities. It is hard to find an example of a bank that has succeeded to the extent of these new players.
Banking and financial services sit right at the heart of Hong Kong's economy, accounting for approximately 15 per cent of gross domestic product. None of the new technology players mentioned here are domiciled in Hong Kong. However, we are seeing the emergence of a new wave of local financial technology start-ups as well as foreigners choosing to launch their business here, attracted by the many advantages Hong Kong still enjoys.
In his bestselling book on dealing with change, Who Moved My Cheese?, Spencer Johnson described two characters, Hem and Haw, who reacted differently to the disappearance of their store of cheese. While Hem feels victimised and decides to sulk, Haw goes out boldly in search of new cheese. It is time for Hong Kong's banking system to be like Haw. The financial cheese has moved.
Hong Kong has many of the essential ingredients needed to lead in financial technology, including best-in-class infrastructure, transport, telecoms coverage and bandwidth, and a sound legal environment, especially protection of intellectual property rights.
Change is in Hong Kong's DNA. It has always adapted. Having said that, why is it that we don't yet have a local Hong Kong technology hero like Jack Ma or Elon Musk? When will Hong Kong see its first financial technology "unicorn", that is, a start-up company valued at over a billion dollars?
Hong Kong must nurture a new generation of talent who are willing to take risks and not simply pursue a safe career path. The youth of today cannot live by the methods of their forefathers. Digital leadership demands very different skills. Hong Kong has a void of programming skills. Creative talent is scarce. Few high school graduates aspire to be a user-experience designer or customer-experience professional, and many are actively discouraged from these professions by their parents. Even fewer are encouraged to be entrepreneurs. Arts and humanities have been largely stifled.
Instead, students are given the hope of attaining the salaries or trading incomes of their forefathers by following the traditional paths of finance, economics, business or actuarial studies. Diversity in Hong Kong's talent base is missing - an essential ingredient for success in financial technology.
Financial services, and financial technology especially, are critical to the current and future success of Hong Kong. But the formula for success is far more complicated now and requires a world-class financial technology ecosystem to be developed, leveraging Hong Kong's core strengths.
David Lynch is managing director and head of technology & operations, Hong Kong and mainland China, at DBS Bank (Hong Kong)