Hong Kong’s Fintech Transformation

From payments to back-office functions to stock trading and data analytics, technology is reshaping Hong Kong’s financial services. In turn, Hong Kong’s fintech research and development is having global impact.

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Fintech matters greatly to Hong Kong because it will alter the financial service delivery model. Since financial services contribute over 18% of Hong Kong’s gross domestic product and provide more than 6% of its employment, the influence will be considerable.

With China already the world’s largest e-commerce market, Hong Kong – as both a special administrative region (SAR) of China and an international financial centre – stands to benefit.

“Hong Kong has proximity to mainland China, which is really a global leader in retail fintech development and adoption,” says James Lloyd, a partner heading up professional services group EY’s Asia-Pacific fintech and payments team, and a committee member of Hong Kong’s Financial Services Development Council. “There is a lot of opportunity there. The big tech companies are using Hong Kong as a proving ground and a launch pad, due to not only its geographic location but also its languages and skills.”

Fintech can be divided into four broad sectors: payments and currencies (currency exchanges, mobile money and payment apps); software (any new process designed to improve back and middle office processes); platforms (crowdfunding, fund raising, secondary trading); and, data analytics (technology that gathers and analyses data to produce information to improve businesses).

Such sophisticated tech requires optimum oversight, says Mr Lloyd, and Hong Kong has a “highly regarded international regulatory regime”. The SAR is also an attractive market of more than 7 million people, was visited more than 50 million times from mainland China in 2018, and has a large wealth-management sector. The Hong Kong Monetary Authority (HKMA) this year issued its first virtual banking licences, Mr Lloyd notes. “There were eight new licences issued from 33 formal applications and more than 70 expressions of interest,” he says. “The level of interest and detail in the applications speaks to the attractiveness of Hong Kong.”

“As the virtual banks start to implement their strategies over the next year, we will see the major traditional banks strive to keep up in response.”

Avril Rae
director and head of fintech, KPMG China

The shareholders of the first eight licensees reflect a diverse mix of banks and non-bank organisations, including insurance companies and technology companies. “The new Hong Kong virtual banking licences are a very exciting development,” says Avril Rae, director and head of fintech at KPMG China. “As the virtual banks start to implement their strategies over the next year, we will see the major traditional banks strive to keep up in response.”

One licensee, WeLab, says it is reinventing traditional financial services by creating seamless mobile experiences with proprietary risk-management technology and artificial intelligence (AI) capabilities. The start-up has become the first home-grown Hong Kong fintech company to establish a virtual bank. Simon Loong co-founded WeLab with his wife, Frances Kang, and another partner, Kelly Wong, in 2013. It now services tens of millions of customers in Hong Kong and mainland China. “The virtual banking licence allows us to evolve from building technology and providing online lending into offering full spectrum banking products to an underserved customer sector and further our mission of financial inclusion,” says Mr Loong.

Mr Loong stresses that virtual banking is not merely about switching from bricks-and-mortar to mobile phones. “It’s about reinventing the banking experience,” he says. “Virtual banks are rewriting the playbook by focusing on customer journeys and finding solutions to address customer pain points, which will result in new products and services, adding more depth to the current banking ecosystem.”

Hong Kong is a major global wealth management centre and is introducing new technology to improve such services. Wealthtech focuses on enhancing wealth management and the retail investment process, and Futu Securities, a Hong Kong-based fintech company, is now one of Asia’s top-ranked online brokers.

“We do think we are really driving financial innovation inclusion in this region and we are very optimistic about the opportunities in Hong Kong.”

Daniel Yuan
chief of staff, Futu Securities

“We do think we are really driving financial innovation inclusion in this region and we are very optimistic about the opportunities in Hong Kong,” says Daniel Yuan, Futu’s chief of staff. “About 70% of our paying clients are from mainland China and 30% from Hong Kong, but our Hong Kong market is actually growing at a much more rapid speed.”

Mr Yuan says financial innovation makes trading platforms such as Futu easy and affordable. “When people find [services] much more convenient and cheaper than what the traditional incumbents can offer,” he says, “I think there is this inevitable switch that people will make.”

While fintech helps individuals control their personal finances, it can also support small businesses. “For a business targeting young companies, Hong Kong is a great location,” says David Rosa, chief executive of Neat, a fintech company aimed at entrepreneurs. “It’s the second largest market in the world for new offshore company incorporations and 150,000 new companies get incorporated each year in the city.”

Mr Rosa says the city has witnessed a “huge” take-up of local fintech companies such as P2P payment apps like PayMe and expense tracking apps like Planto. “In our experience, consumers and businesses are definitely willing to try out fintech apps if they are providing a new or value-added service or solving a real issue,” he says.

“We have a very strong community that is not afraid to share, co-create and move the innovation needle forward together.”

Alex Medana
chief executive of FinFabrik

One of Hong Kong’s fintech strengths is the level of collaboration and cross-fertilisation within the sector. “We have a very strong community that is not afraid to share, co-create and move the innovation needle forward together,” says Alex Medana, chief executive of FinFabrik, a capital markets fintech startup that uses blockchain technology to create a new opportunities in private markets.

Distributed ledger technology, Mr Medana notes, are already in use in trade surveillance, credit scoring and know-your-customer protocols. “All of these are also using AI to analyse huge datasets,” he says. “The question is not about whether to adopt or not these new technologies but one about testing, learning and trying. Not knowing about blockchain and AI is not an option in 2019.”

Hong Kong’s fintech sector, in partnership with the regulatory organisations, will engage and promote fintech and map out the strategic direction for development. Mr Lloyd sees continuing innovation as new start-ups enter Hong Kong, buoyed by the market-friendly ecosystem. “New players and new business models are just as important as regulatory change,” he says. “I see cross-boundary regulatory coordination in the Guangdong-Hong Kong-Macao Greater Bay Area as a significant driver.”