Hong Kong’s fintech industry continued to grow in 2020, on the back of rising adoption by incumbents and a rapidly expanding startup community.

86% of banks have adopted or plan to adopt fintech solutions across all types of financial services, according to a 2020 survey by the Hong Kong Institute for Monetary and Financial Research (HKIMR), the research arm and subsidiary of the Hong Kong Academy of Finance (AoF).

Mobile banking, open banking (APIs), machine learning and predictive analytics, customer identification and authentication, as well as cloud computing were found to be commonly applied by over 40% to up to two thirds of Hong Kong incumbent banks.

In the startup space, data from InvestHK show that Hong Kong is currently home to more than 600 companies, with 66% of them focused on the business-to-business (B2B) sector. Regtech and blockchain were the two fastest growing categories in 2019, followed by insurtech, wealthtech and digital assets.

This year, the Hong Kong government further demonstrated its commitment towards fintech by launching support schemes to help companies weather the COVID-19 crisis, introducing new rules to provide startups with greater clarity, and pursuing its own fintech ambitions in the fields of blockchain, digital currency, open banking, and more.

Hong Kong launches fintech support schemes amid COVID-19

Amid COVID-19, Hong Kong launched the Fintech Anti-epidemic Scheme for Talent Development (FAST Scheme) in July, providing financial assistance to local companies engaged in the fintech sector to create new jobs. Each successful fintech applicant company is provided with a subsidy of HK$10,000 per month as a salary subsidy for a maximum of 12 months.

The scheme has a quota of 1,000 new roles with a total subsidy of up to HK$120 million.

The government also launched this year the Fintech Proof-of-Concept Subsidy Scheme, which aims to encourage traditional financial institutions to partner with startups to conduct proof-of-concept projects.

Virtual banks begin operations in Hong Kong

Seven virtual banks started operations this year, including ZA Bank, Airstar Bank, WeLab Bank, Livi Bank, Ant Bank (Hong Kong), Mox Bank and Ping An OneConnect Bank.

These virtual banks are offering more attractive deposit rates than incumbents, and one of them is even granting interest-free loans of up to HK$100,000.

Distinct advantages of virtual banks include the ability to cross-sell and bundle customers by partnering with third-party providers, as well as offering innovative and differentiated products such as numberless or personalised credit cards.

Tencent-backed Fusion Bank is now the only virtual bank in Hong Kong that’s not yet fully operational. It had however soft launched for 1,000 customers in September 2020.

Hong Kong granted eight virtual banking licenses in 2019 to spur financial innovation and competition in the industry.

Hong Kong’s open banking initiatives

At the annual Hong Kong Fintech Week in November, the Hong Kong Monetary Authority (HKMA) announced that it is considering building a new financial infrastructure called the Commercial Data Interchange (CDI).

The CDI, a consent-based financial infrastructure, aims to enable more efficient financial intermediation in the banking system and enhance financial inclusion. The system will allow data owners to share their digital footprint with banks through data providers, enabling account aggregation and more.

HKMA had previously issued its Open API Framework which mapped out a four-phase implementation approach, but since the third quarter of 2019, implementation has stagnated before the deployment of the last 2 phases.

HKMA gives update on CBDC initiative

The HKMA has been collaborating with the Bank of Thailand on Project Inthanon-LionRock, an initiative focusing on developing a blockchain-based central bank digital currency (CBDC) network to improve cross-border payments.

A proof-of-concept was developed, and the partners are now exploring business use cases such as cross-border trade settlement and capital market transactions. They will soon bring banks and large corporates into trials to test the network using actual trade transactions, HKMA said in November. The Hong Kong Exchanges and Clearing Limited, 19 banks, and five other corporates are currently on board.

Proposed licensing regime for virtual asset trading platforms

The Hong Kong Securities and Futures Commission (SFC) introduced in November a new licensing regime and framework to regulate virtual asset trading platforms operating in Hong Kong as well as those targeting Hong Kong investors.

The new licensing regime will provide greater financial protection to investors, prevent market manipulation, and enable more effective anti-money laundering monitoring.

SFC’s CEO Ashley Alder said that once the new regime is in place, all virtual asset trading platforms in Hong Kong would be regulated, supervised and monitored under one of two regimes: the existing opt-in framework the SFC introduced last year, or the proposed new licensing approach.

Regtech gets a boost

A two-year roadmap to promote regtech adoption in the Hong Kong banking sector was announced during the 2020 Hong Kong Fintech Week.

The roadmap, laid out in a white paper titled entitled Transforming Risk Management and Compliance: Harnessing the Power of Regtech, includes a series of promotional activities to be rolled out over the next two years aiming at fostering a more diverse and interactive regtech ecosystem in Hong Kong.

These include boosting awareness of the benefits of regtech solutions, expanding the scope of regtech events to reach different stakeholder groups, issuing practical guidance for the industry and developing talents.

The HKMA will be launching a flagship regtech event as well as its first regtech challenge in the first half of 2021.

Featured image: Image from Pixabay