After years of sustained development, the growth of Hong Kong’s fintech industry is stalling, with business formation slowing down and startup funding plummeting to pre-COVID-19 levels, a joint research report by industry trade group, the Fintech Association of Hong Kong (FTAHK), and Hong Kong consulting firm, Fintech Consult, reveals.
Findings from the research, which is based on a study of the Fintech Consult database of Hong Kong’s fintech companies, show that the city was home to 508 companies as of October 31, 2023, representing a mere 1.2% growth from 2022 with 502 companies, a rate unseen during the past two decades.
Data from the report also reveal that a total of 22 fintech companies closed down over the prior 12-month period, and that 30 entities were identified as “dormant”. These figures put the total number fintech companies in Hong Kong that are actually actively to 478 companies.
2023’s growth figures are in stark contrast with those of the prior decade. Between 2014 and 2018, Hong Kong’s fintech industry grew at a dramatic pace, increasing at a 39% rate annually to reach 390 companies. That growth decreased slightly moving forward, standing at about 4% per annum between 2019 and 2022.
Fintech Hong Kong: Funding Plunges By 61%
In addition to a slowdown in business formation, the report also shows that fintech funding plunged this year, reaching US$579.7 million for the first 11 months of 2023. The amount brought the sector to levels last seen in 2017-2020, and represents a dramatic 61% drop from 2022’s US$1.490 billion and a staggering 81% decline from 2021’s all-time high of US$3 billion.
The number of funding deals also decreased substantially, dropping to a mere 8 transactions year-to-date (YTD), the lowest level in almost a decade.
According to the report, the decline reflects investors adopting a more cautious approach to startup funding and a shift towards more mature and proven business models, a trend that’s also evidenced by larger rounds being secured by the industry.
This year, the average ticket size in the fintech sector peaked at an unprecedented US$72.5 million, a pattern which the report partly attributes to a more meticulous allocation of investments to fewer companies with stronger financial performances.
Trends observed in Hong Kong are consistent with those observed globally.
After decades of hypergrowth and record funding levels, the fintech industry is now facing a notable slowdown caused by a dramatic market correction and challenging macroeconomic conditions.
Between 2015 and 2020, venture capital (VC) fintech funding increased 17% year-over-year (YoY), data from global consultancy McKinsey show, a growth that accelerated in 2021 due to the pandemic’s effects, with fintech funding soaring by 177% YoY to reach US$92.3 billion.
However, in 2022, a market correction and a challenging business environment triggered a slowdown in the sector’s explosive growth momentum, prompting a decline in funding and deal activity, a decrease in new unicorn creation, and a slowdown in stock market listings. That year, fintech funding dropped by 40% YoY to US$55 billion, the data show
Fintech in Hong Kong still stands strong
Despite a slowdown in business formation and falling funding activity, Hong Kong maintains a strong fintech ecosystem and remains a prominent fintech hub in Asia.
Findings from the FTAHK and Fintech Consulting research show that the city is currently home to six fintech unicorns that are worth US$1 billion and up. The ventures, which are insurtech company FWD Group, business financing platform Micro Connect, cross-border payment platform Airwallex, digital bank ZA and Pan-Asia fintech firm WeLab, jointly employ about 12,000 staff, or nearly half (48%) of Hong Kong’s fintech workforce.
Data also reveal that fintech is playing an increasingly important role in the Hong Kong’s economy, employing 25,000+ employees or 0.66% of the city’s total workforce. The proportion is the highest percentage in Asia, ahead of Singapore with 0.29%.
In Hong Kong, the government and public agencies have played a crucial role in driving the growth of fintech, the report notes. The Hong Kong Monetary Authority (HKMA), the Securities and Futures Commission (SFC), the Insurance Authority and Cyberport, in particular, have launched numerous initiatives to create a favorable environment for the sector to grow, including regulatory sandboxes, funding support schemes and talent programs.
These agencies and organizations have also introduced supportive policies and frameworks in addition to promoting the development of digital infrastructure, and conducting research with other agencies to explore technologies such as central bank digital currencies (CBDCs) and blockchain.
Most recently, the government introduced a groundbreaking move by offering HK$800 million in tokenized green bonds, and the SFC published a licensing regime on June 01, 2023 for virtual asset trading platform operators with a grandfathering scheme and full compliance required by July 2024.
The HKMA is also actively piloting CBDC trials, including retail e-HKD and cross-border wholesale e-HKD via the mBridge Project.
In the realm of sustainable finance, regulatory initiatives, such as the Green and Sustainable Finance Cross-Agency Steering Group, aim to strengthen Hong Kong’s position in the field.
These developments have fostered the development of healthy fintech ecosystem, particularly in the segments of digital assets, distributed ledger technology (DLT) and cryptocurrency.
Data from the FTAHK and Fintech Consulting research report show that blockchain and digital assets sector now stands as the top vertical with 85 companies in the space, representing 16.7% of all fintech companies in Hong Kong.
This year, also, the cryptocurrency sector surpassed data analytics and artificial intelligence (AI) to become the third largest vertical with 61 crypto companies, representing 12% of all fintech companies in Hong Kong. In comparison, crypto was only the fifth largest fintech vertical in 2021.
Looking ahead to 2024 and beyond, Hong Kong envisions establishing itself as a global Web3 hub, capitalizing on Greater Bay Area opportunities and aspiring to become an innovation and technology hub with a focus on AI, fintech, life sciences, and advanced manufacturing.
The Fintech Promotion Roadmap, led by the HKMA with support from KPMG and Quinlan and Associates, emphasizes wealthtech, insurtech, and greentech as key areas of focus.
The plan, published in August 2023, outlines key initiatives that will be undertaken over the following 12 months to give further impetus to fintech adoption in the financial services industry, including the establishment of the Fintech Knowledge Hub, as well as the hosting of fintech showcase events, roundtables, seminars and training sessions on specific fintech topics.