It shows how important FinTech is when major financial centres vie for focus. London has been leading the charge to be the FinTech capital of the world, but many other cities are nipping at their toes. So I was intrigued to see Hong Kong issue their FinTech strategy today. Here’s the summary:
Financial Technology, more commonly referred to as FinTech, looks set to reshape the financial sector in the coming years and present Hong Kong with both challenges and opportunities. By taking proactive steps, Hong Kong could become the leading FinTech centre within the region and one of the leading centres in the world. A less proactive approach could cede business and employment to rival centres elsewhere.
FinTech, the application of information technology to the provision of financial services, has surged in recent years, spurred by dramatic advances in technology along with post-crisis regulatory changes. The financial services sector has seen a new wave of participants, including FinTech start-ups as well as major e-commerce and technology firms, alongside incumbent financial institutions. Many FinTechs are providing financial services directly to customers in areas such as payments and P2P (peer-to-peer) lending. Others are seeking to challenge incumbents in a range of areas, while yet others are working with incumbents to improve their services. In Mainland China and the developing world, FinTechs are providing millions of people with access to financial services for the first time largely thanks to technology, increasing use of mobile and particularly smart phones, and decreasing cost of servicing.
FinTechs and FinTech-powered incumbents elsewhere are coming out with superior propositions. Jurisdictions such as the UK, Singapore, Switzerland and Australia are introducing FinTech-friendly policies and regulations. Mainland China is already the global FinTech leader in terms of scale. Hong Kong, despite its large financial sector, as yet has only a modest showing in the FinTech space.
Does this matter?
Yes, FinTech matters to Hong Kong because over the coming decade or so it may dramatically alter today’s financial services delivery model. Since financial services contribute 18% of Hong Kong’s GDP and 6% of its employment, the impact will be considerable. FinTech may overhaul many current jobs and business processes derived from complication of process and administration. This will mean better and cheaper services for financial services customers, but it will also threaten today’s jobs and revenue streams. It will be important for Hong Kong to seek new job and business opportunities from new sources, including new FinTech services.
This is a demanding goal. With its large financial industry, its East/West linkages, its trusted institutions and respected regulatory standards, Hong Kong comes to FinTech with much strength. However, there are significant weaknesses. From the standpoint of consumer opportunities, Hong Kong is a small market, already heavily served by principal incumbents.
From a wider standpoint, Hong Kong’s financial regulations and policies have been caught up with the development of FinTech. Other issues include a lack of overall coordination in the public sector, little tradition of technological innovation, and high cost. From a long-term developmental standpoint, Hong Kong is very strong in ‘Fin’, but not strong in ‘Tech’. And there is competition as other centres move rapidly ahead with their own FinTech initiatives.
In recognition of the need to progress, a Government-appointed FinTech Steering Committee delivered its report in early 2016, and the Financial Secretary’s 2016/17 Budget restated a commitment to further develop FinTech in Hong Kong. However, it must be recognised that Hong Kong is a latecomer and, to have any chance of competing with and if possible overtaking other centres, it must focus. Hong Kong should not try to be a FinTech generalist but should focus on key areas within FinTech and build its reputation and expertise based on its strongest advantages and most promising opportunities.
With its large financial sector incorporating many regional headquarters operations, Hong Kong can act as a landing pad for FinTechs eyeing regional opportunities, as a market for FinTechs providing business-to-business (B2B) services, and as a launch pad for Mainland FinTechs seeking international expansion. Based on analysis of opportunity and Hong Kong’s present capabilities, five areas of FinTech merit greater focus and attention. The aim would be to invest in these areas to attract talent and transaction so as to form a cluster, eventually generating world-class firms and technologies in the context of an overall FinTech Strategy. Such FinTech Strategy should cohere with government initiatives in the areas of Smart City, digital certification, and cyber strategy generally.
This is crucially important not only to Hong Kong’s large financial sector but to the wider economy and indeed to the society. Cybersecurity is already a focus. The Hong Kong Association of Banks (HKAB) had developed a cybersecurity threat sharing platform, while the Hong Kong Monetary Authority (HKMA) has indicated that the platform can be extended to non-bank financial institutions. Building on this and related initiatives, a publicly-funded Cybersecurity Centre should be established. The Cybersecurity Centre would be a channel for sharing information on cyberattacks and developing responses. It would conduct research, development, education and training, with a regional as well as local emphasis.
Payments and securities settlement.
Leveraging Hong Kong’s extensive settlement platforms, the aim would be to secure and expand Hong Kong role as a settlement hub for China-international payments and securities transactions. On the payments side, the retail payments environment can be improved via the Stored Value Facility (SVF) and the HKMA’s forthcoming Faster Payments System (FPS). On the securities settlement side, the Stock Connects and the forthcoming Bond Connect indicate the potential for the modernisation of the platforms and interconnection with the payments infrastructure can be essential further enablers.
Digital ID and KYC utility.
Verifying customer identity and ascertaining suitability and preferences is a costly responsibility for the financial sector. A FinTech solution in the form of a sector-wide digital ID utility to address know-your-customer (KYC) requirements would be welcomed by participants and would in turn support the development of a range of new services. Once established, the digital ID utility would have potential to extend to the registration of broader categories of entity with greater geographical scope, and perhaps ultimately can support the emerging Internet of Things.
WealthTech and InsurTech – data analytics, automation and AI.
As a major investment management and insurance centre, Hong Kong is already heavily involved in the application of technology in related areas, particularly computerised trading and investment management. There is much greater potential in the areas of automated advice (‘robo-advisory’), Big Data, and artificial intelligence (AI). The scope does not just to enhance Hong Kong’s competitiveness in these areas but to impact more broadly on other aspects, such as insurance and banking, of Hong Kong’s financial centre role.
Hong Kong’s regulators, already respected, can further show their leadership by carving out an appropriate regulatory regime for FinTech, and by developing the application of technology to regulatory compliance. Regulatory reporting can be automated through FinTech, partnering with supportive Big Data analysis, would render a new paradigm of financial regulation in which regulators monitor and analyse their charges’ transactions in real time. New approaches are also needed to address the risks posed by FinTech.
This strategy needs to be pursued with energy and vision. A FinTech Office referencing an advisory group from major stakeholders from the private sector, public sector and academia, should be created by the Government to monitor, support and coordinate implementation of the FinTech Strategy. The FinTech Office will also act as a channel for FinTech practitioners to provide input to the formulation of policy and regulation.
The five programmes described above should be supported in due course by initiatives to recast financial regulation along digital lines, build out technical capability, and extend regulatory passporting for Hong Kong financial products and services into the Mainland, regionally and internationally. At the same time, the potential risks of FinTech – increased interconnectedness and complexity, greater herding and liquidity risks, more intense operational risk and opportunities for regulatory arbitrage – need to be recognised and monitored and, where appropriate, addressed through focus on the regulatory perimeter, improved resolution regimes, and a more disciplined approach to operational and cyber risks.
This FinTech Strategy would be a major statement of Hong Kong’s intent to be a regional, even global, FinTech centre. The programmes would establish a platform for FinTech empowered finance in Hong Kong over time and help to foster an ecosystem that attracts players from overseas and Mainland China as well as nurturing home-grown enterprises.
Hong Kong would strengthen its attractions as a springboard for Mainland FinTech firms to expand internationally. Local consumers and businesses and government would benefit from improved financial services and from the territory’s continued competitiveness as a major international financial centre. Hong Kong would secure an important role in the future of FinTech.