Plenty of chatter, and even some action, as Hong Kong makes progress on fintech

Hong Kong has now, albeit belatedly, crashed the fintech party.

Globally, it’s a party where there is plenty of chatter, and in Hong Kong there are a plethora of organisations, working groups, commissions, and thought leaders offering their views on how the city’s regulators, start-ups and financial institutions can adapt to a new environment where technology is at the heart of financial services.

To offer just one example, the Hong Kong Fintech Association was launched on Tuesday.

This is progress from a few years ago, when the conversation around fintech (financial technology) in Hong Kong was primarily a variant on the theme of how Hong Kong is falling behind Singapore and mainland China.

All the talking is a sign of progress, but whether these conversations form an institutional framework that will enable Hong Kong to maintain its role as a financial services centre is still an open question, say analysts.

“The speed of development in Shenzhen has been a factor in pushing conversations in Hong Kong, and now there is a lot going on,” said James Lloyd, fintech leader for EY.

“The Hong Kong government and regulators have introduced a number of measures to support fintech over the past two years or so, despite the appearance of relatively modest development in the sector,” said Karen Man, a partner in law firm Baker McKenzie’s corporate practice group in Hong Kong. “These include more incubator support, increasing engagement with the private, public and academic sectors, dedicated platforms within each of the financial regulators, as well as the launch last year of a fintech supervisory sandbox and fintech innovation hub.”

The supervisory sandbox and the innovation hub were unveiled in September2016, though concerns were raised that they were aimed more at existing institutions, rather than start-ups or other technology players.

The supervisory sandbox allows banks to conduct trials of newly-developed technology on a pilot basis, and without the need to achieve full compliance with the Hong Kong Monetary Authority’s supervisory requirements.

According to figures provided by the HKMA, eight banks have been given access to the sandbox in respect of 18 fintech applications, and 10 pilot trials have been completed, followed by the full launch of the fintech products.

Some of the successful concepts involved biometric authentication, securities trading services, and blockchain technology for uses in mortgage valuation, a spokeswoman for the regulator said.

“We have used the HKMA’s fintech supervisory sandbox to facilitate pilot trials of technology initiatives like voice biometrics, touch ID and soft tokens before launching them in full scale,” said Greg Hingston, head of HSBC’s retail banking and wealth management Hong Kong. “The ability to add products into the sandbox and test with wider audiences is very valuable.”

The HKMA added that banks have collaborated with fintech firms in 10 of the 18 cases.

In contrast, the Monetary Authority of Singapore, which set up its sandbox in June of last year, said that more than 80 per cent of applications to use its sandbox came from start-ups, though the regulator did not say how many applications there had been in total.

The launch of the sandbox and the innovation hub also marked a turning point in attitudes in Hong Kong.

“Since the launch of the sandbox we have seen a great deal of interest from the HKMA in talking about fintech,” said Angel Ng, Citibank’s country business manager for Hong Kong, speaking at Citi’s “Hong Kong fintech challenge demo day” last week.

Ng said that Citibank had contact with the regulator once a month to discuss its fintech plans.

A willingness to talk to major existing players is not the only requirement though.

“I think it is still an open question as to whether the attempts to drive the fintech agenda in Hong Kong, and also Singapore, come with a clear view of what success would be, and how this will be achieved,” said EY’s Lloyd.

“Another open question is whether there is the regulatory and institutional framework in place for a pure technology player to move into financial services and threaten the dominance of the banks.”

Fintech companies from Hong Kong and Singapore, constrained by the size of their domestic markets, face challenges different from their mainland rivals.

“If we look at the way the fintech startups are operating in Hong Kong, it is apparent that the more disruptive services, such as the large scale e-payments systems, are not as active given the size of Hong Kong’s market compared to China for example,” said Baker McKenzie’s Man.

“This is partly because of Hong Kong’s relative population [as well as its mature credit card market], but also because fintech start-ups are more likely to complement traditional bank services in Hong Kong rather than challenge their existing revenue streams.”

On the Chinese mainland, where technology firms such as Alibaba and Tencent have challenged financial institutions much more aggressively, banks have been forced to respond more quickly.

“Banks in China are much further on than those in Hong Kong when it comes to using technology,” said Victor Wang, a banking analyst at Jefferies.

Still, collaborative cross-border partnerships with mainland technology firms could end up driving innovation in Hong Kong’s financial institutions.

“There is agreement in principle about boosting greater integration between Hong Kong and the greater bay area from the perspective of fintech, but we are nowhere near to having a regulatory or institutional framework in place for that to happen,” said Lloyd.