Hong Kong’s fintechs must shake off their traditional shackles to make the next technological leap
The HKMA is blurring the fine line between the suppression of subversive ideas and promoting innovation
“Don’t take my words away from me,” cried Lenny Bruce, brilliantly portrayed by Dustin Hoffman in the 1974 biopic, “Lenny”.
In the 1960s, Bruce fought for his first amendment rights to tell profane and obscene jokes in his stand-up comedy act.
It’s easy to forget that the right and choice to possess and express ideas, especially those which greater society and government despise, was a struggle even in the US, which enshrined their expression in a constitution. But, the line between the suppression of subversive ideas and innovation can be easily blurred.
The most creative and intelligent people must be ideologically dangerous simply because they spout ideas that governments and establishments either cannot possibly understand or utterly detest.
China has made technological progress, but we must also acknowledge that all of China’s major tech and e-commerce companies are direct copies and local adaptations of Amazon, Google, eBay, WhatsApp and PayPal. China is now faced with making its own next technology leap.
Hong Kong struggles with its own creativity drought. Besides the problem that this Hong Kong generation of businesspeople and bureaucrats is not particularly creative, few care about ideas beyond property speculation and collecting rent.
The Hong Kong Monetary Authority’s (HKMA) recent position paper on virtual banking reinforces the inward looking, bureaucratic self-defence of Hong Kong at its most oblivious.
The HKMA recently published its “Guideline on Authorisation of Virtual Banks”, which sets out the principles which the HKMA will apply to authorise local “virtual banks”. Unfortunately, the rules hinder rather than support Hong Kong’s financial technology industry.
The HKMA defines a “virtual bank” as “a company which delivers banking services primarily, if not entirely, through the internet or other electronic delivery channels”.
According to the HKMA, the fulfilment of the minimum criteria for a virtual bank means it must have substance and cannot simply be a concept, “taking advantage of the popularity of the internet”.
Unfortunately, most fintech start-ups operate in the zone between concept and substance. They achieve initial milestones such as users and revenue, but usually not profits. And most ideas depend upon the “popularity of the internet” especially the proliferation of mobile applications.
HKMA also emphasises that a local virtual bank must be at least 50 per cent owned by a “well established bank or other supervised financial institution in good standing in the financial community and with appropriate experience”.
Entrepreneurs resist controlling ownership by a traditional bank, because the latter snuffs out creativity. Fintech exists because a new generation of customers and innovators resist banks and their outmoded services.
Unfortunately, the bureaucrats at the HKMA resist any opportunity and perceived risk to innovate. Their policies are equivalent to Trump’s vainglorious wall across Mexico.
And worst of all, the HKMA demands that our city’s virtual banks maintain minimum levels of paid-in share capital of HK$300 million (US$38.3 million).
This is nearly impossible for most new fintech companies because most of their capital is directed at product development or acquiring customers.
And most traditional banks are prohibited by domestic rules or the US Volker Rule from investing directly in start-ups, venture capital or private equity.
Yet the HKMA allows the city’s property developers to engage in exploitive shadow banking practices by making “top up” property loans that foist more debt on homebuyers.
HKMA doesn’t understand that fintech giants like PayPal and Alipay assiduously avoided becoming banks. Both were natural extensions of their parents’ e-commerce businesses.
PayPal proved in the 1990s that the true value of an e-commerce platform isn’t just in selling goods, but in the payment processing. Then, Alipay showed you can hold balances and sell massive amounts of financial products through the channel.
Fintech innovators exploit and develop technological and operational scale in the most profitable and least capital intensive business areas of banks – such as payment processing and remittance. And they avoid document and relationship intensive services like trade finance.
Outsiders and competitors have emerged as a new kind of bank, but not a virtual or revised version of traditional banks.
Hong Kong’s Regulators need to accept this fundamental unbundling of the market instead of vainly trying to re-bundle the concept of banking services to orbit around their regulatory regime.