Fintech is set to transform the financial services landscape and presents both opportunities and challenges. But for Hong Kong to capitalize on the trend and become a leading fintech center within the region and one of the leading centers in the world, it must take proactive steps, according to a new report by the Hong Kong Financial Services Development Council.
Mainland China is already a fintech leader in terms of scale. Hong Kong, however, and despite its large financial sector, has only a modest showing in the fintech space.
“Does [fintech] matter?” the paper asks. “Yes, fintech matters for Hong Kong because over the coming decade or so, it may dramatically alter today’s financial services delivery model.”
This has its importance considering that financial services already contribute 18% of Hong Kong’s GDP and 6% of its employment. Fintech enables customers to access better and cheaper services, but it is also threatening today’s jobs and revenue streams.
Despite the considerable opportunities that fintech brings to the financial services industry, there are challenges specific to the Hong Kong market that need to be considered and overcome.
These include Hong Kong’s relatively smaller-size market that’s already heavily served by principal incumbents, the lack of overall coordination in the public sector, its little tradition of technological innovation, and the high costs.
“From a long-term developmental standpoint, Hong Kong is very strong in ‘fin’ but not strong in ‘tech.’ And there is competition as other centers move rapidly ahead with their own fintech initiatives,” the report says.
A Fintech Strategy
The document advises Hong Kong not to try to become a “fintech generalist” but rather focus on key areas in fintech. It should build 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 China fintechs seeking international expansion.
The report proposes a Fintech Strategy built around five areas of fintech which it believes merit greater focus and attention. These are cybersecurity, payments and securities settlement, digital ID and Know-Your-Customer (KYC) utility, wealthtech and insurtech, and regtech.
Cybersecurity: The objective should be to establish a more dynamic and connected cybersecurity ecosystem. The core of the ecosystem should be a major government-funded Cybersecurity Centre, which would be a channel for sharing information on cyberattacks and developing responses. It would also conduct research, development, education and training, with a regional as well as local emphasis.
Payments and securities settlement: The retail payments environment can be improved via the Stored Value Facility (SVF) and the Hong Kong Monetary Authority’s forthcoming Faster Payments System (FPS). On the securities settlement side, the Stock Connects and the forthcoming Bond Connect indicate the potential for the modernization of the platforms, and interconnection with the payments infrastructure can be essential further enablers.
Digital ID and KYC utility: A fintech solution in the form of a sector-wide digital ID utility to address KYC requirements would be welcomed by participants. It would also support the development of a range of new services. Once established, the digital ID utility can be extended 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: There is great potential in the areas of automated advice, Big Data, and artificial intelligence. The scope does not just cover the ability to enhance Hong Kong’s competitiveness in investment management and insurance but to impact more broadly on other aspects.
Regtech: Hong Kong regulators should encourage and push the development of digital solutions for regulatory compliance. The goal should be to move from periodic regulatory reporting to online regulatory access via API to the institution’s transaction recording systems. This would allow regulators to have full real-time insight, and institutions would no longer need to compile onerous reports.
Fintech regulation
But in order to build a healthy and prosperous fintech industry, proper regulation that would support digital approaches to financial activities is needed.
In order to drive the development of fintech policy in Hong Kong, the report advises the Government to create a Fintech Office. The Office would be charged with overseeing fintech-related policy, regulation and other initiatives and ensuring that the goals of the Fintech Strategy are met.
“This Fintech Strategy would stimulate the growth of the fintech ecosystem in Hong Kong, and have benefits reaching far beyond the finance sector,” the report says. “Through the proposed fintech programs, Hong Kong would secure an important role for itself in a fintech-enabled future, with consequent benefits in employment, revenues, innovation and societal well-being.”
Last year, Deloitte named Hong Kong the world’s top fifth fintech hub. Hong Kong is overshadowed by the UK, Singapore, New York and Silicon Valley.
Featured image: Hong Kong, City, High Houses, The Skyscraper, via Pixabay.
