Is Hong Kong Ready for a FinTech Revolution?
[Sponsored article] Across the globe, FinTech promises to not only drive the creation of a wide range of new and more accessible financial services, but also promote more competition, improve customer experience and lower costs. All, potentially, very good news for consumers, but can Hong Kong claim a role as an international powerhouse when it comes to the development and deployment of FinTech?
Professor K C Chan, the third and fourth term HKSAR Government’s Secretary for Financial Services and the Treasury, notes that the term FinTech covers so many areas, products and services.
“Entirely new business models are now being developed, such as those built around peer-to-peer lending platforms and new insurance products sold online,” he explains. Parallel advances in the field of cybersecurity that include new ways to authenticate identity online, help to make these models possible.
He also cites the use of big data by banks and insurance companies seeking to achieve a better understanding of risk, and therefore make better pricing decisions, as other examples of FinTech’s possibilities.
Blockchain technology, or distributed ledger technology, first hit the headlines with the launch of digital currencies but, in recent years, interest in other applications has snowballed. The speed at which securities can be traded and mortgage loans approved, for example, may be transformed using blockchain.
The use of this technology to facilitate trade financing is viewed as particularly interesting by Professor Chan. “Traditionally, this has involved a number of middle men, and complex certification and documentation procedures, as the goods move across borders. There is a potential offered by distributed ledgers to make this process quicker and easier.”
Is Hong Kong set to seize the opportunities?
A future transformed by FinTech is seen as inevitable by Professor Chan. “So if we develop the right ecology here, and we offer the right incentives, we can make Hong Kong the place to come.”
From the city’s first-class digital and travel infrastructure upwards, he believes Hong Kong is as ready as anywhere else in the world for this revolution in finance.
“Hong Kong is a world-class financial center, and much often seen as a place that has a good regulatory environment with high standards, and as somewhere people can work together and collaborate,” he points out.
Mr Nelson Chow, Chief Fintech Officer at the Hong Kong Monetary Authority (HKMA), agrees. In light of rapid FinTech development, the HKMA has established the Fintech Facilitation Office (FFO) in March 2016 to facilitate the healthy development of the local FinTech ecosystem.
“Hong Kong certainly has the potential to become a FinTech hub in Asia, given its well-established international financial center status, robust and efficient financial infrastructures such as the multi-currency large-value payment systems - covering the HKD, USD, RMB and Euro - and the presence of a large number of international IT companies and service providers,” he explains.
However, many of the applications arising from this new technology have not yet been tested by an economic downturn; it is only prudent that Mr Chow also flags up the potential challenges.
“The great challenge for the HKMA is to provide adequate protection for FinTech consumers, while retaining appropriate flexibility so as not to hinder the development of FinTech. Our job is to find a good balance between market development and user protection. As for the incumbents, disruption is often one of the features of FinTech innovation. They will therefore need to adapt their business models quickly to fend off the threats of disintermediation, displacement and increased competition so as to remain relevant in the long run.”
The role of Hong Kong’s government and regulators
Compared to the mainland market, Hong Kong is relatively small, Professor Chan points out. “So we believe the Hong Kong FinTech industry should be offering services and solutions beyond our local market. We want Hong Kong to be a center of excellence for FinTech, in terms of both research and the creation of applications.”
As well as encouraging Hong Kong’s financial institutions to invest more money in FinTech R&D and develop their ties with startups, Professor Chan says the government is also committing resources to a range of related initiatives.
“We have incentive programs for local startups, and to attract startups from outside Hong Kong. The government has also established a venture capital fund to co-invest with the private sector in local innovation and technology start-ups.”
Tech centers such as Cyberport offer low-cost rental space to startups and create an ecology of innovation and collaboration.
“We’re making resources and research centers available,” he says. “Our government-funded Applied Science and Technology Research Institute (ASTRI) is working with the financial institutions on a number of programs whose focus includes cybersecurity and blockchain.”
Professor Chan adds that the government would like to see more collaboration between Hong Kong’s universities, other research institutes, and businesses on FinTech applications.
To succeed in Hong Kong, the emerging FinTech industry is going to require an appropriately skilled workforce.
“I think we should encourage our young people to go into technology and we need to put more resources into developing their talent,” he says. “I think HKUST is a wonderful institution for that mission. We need people who both understand the technology and know how to apply those technologies in the business services sector, particularly in finance.”
Mr Chow says the HKMA has been actively looking for cross-border collaboration opportunities around FinTech.
“Hong Kong could take part in the rapid development of FinTech in Mainland China,” he suggests. “Our city can act as the bridge and facilitate the entry of Chinese firms into the global market and the expansion of foreign companies in Mainland China. We also continue to look for opportunities to co-operate with other jurisdictions and create synergy.”
Earlier this month, the HKMA and the Office of Financial Development Service of Shenzhen Municipality agreed to strengthen co-operation between the two cities, with a view to creating a more favorable environment for the development and use of FinTech by banks and other financial institutions.
At the end of last year, the HKMA and the UK Financial Conduct Authority entered into a cooperation agreement to foster collaboration between the two regulators in promoting financial innovation.
In Hong Kong, the HKMA has implemented the Cybersecurity Fortification Initiative for the banking sector, conducted research on Distributed Ledger Technology, launched the HKMA-ASTRI Fintech Innovation Hub as well as Fintech Career Accelerator Scheme to offer more than 100 internship places for students in Hong Kong, and partnered with the Cyberport to help banks and Stored Value Facilities (SVF) issuers to host Hackathon and Accelerator competitions.
On regulating SVF, the HKMA launched the SVF supervisory regime. As of today, 13 SVF operators and three banks have issued SVF.
“We believe these initiatives and collaborations could provide significant opportunities for financial and FinTech companies to enhance their services not only in Hong Kong, but also globally,” Mr Chow says.
Developing the regulatory framework
In what is likely to continue to be a rapidly changing market environment, Professor Chan suggests that regulators and industry players have to make greater efforts to understand each other.
“You want to encourage innovation but, at the same time, you also have to offer basic investor protection. It is nice that the HKMA has put in place a FinTech Supervisory Sandbox for pilot FinTech initiatives, and the Securities and Futures Commission and the insurance regulator have also set up their own offices on FinTech.”
It is good for the industry if the customers and investors feel comfortable, otherwise no new product or service is going to be viable. A balance needs to be struck, he advises. “You have to set a regulatory standard that allows people to trust, say, a securities trading platform or a cybersecurity application.”
For those who worry whether regulators might stifle innovation by setting their standards too high, Mr Chow has some words of reassurance. He says that decisions on the development and implementation of regulatory frameworks and requirements will be based only on the intrinsic characteristics of the financial activities or transactions, and on the risks arising from them.
“We will not introduce undue exemptions or excessive requirements simply because novel technologies have been used,” he says.
He adds that although Hong Kong’s legislation and supervisory guidelines provide clear and precise regulatory requirements for the various financial services and products that are regulated by the HKMA, the authority understands that some FinTech startups may need help to grasp the rules.
“We will continue to keep in close touch with the industry - including FinTech startups - and ensure it understands correctly the regulatory requirements by creating a smooth process when they launch new services and products.”