When chief executive Carrie Lam delivered Hong Kong’s policy address in late November, she put forward few surprises but did discuss the development of the international financial centre into an innovation hub alongside the Greater Bay Area (GBA).
The amount of time Lam dedicated to the subject of innovation in finance, and other areas, indicates how much emphasis governments, regulators, finance professionals, investors, entrepreneurs, innovators and other stakeholders in the GBA are putting on fintech and where it may be headed next.
Multiple paths
The GBA includes nine cities in southern mainland China, along with the Special Administrative Regions of Hong Kong and Macau. Plans for the development of the GBA include multiple paths to drive fintech innovation.
One example is the Wealth Management Connect scheme, launched last June to facilitate the distribution of wealth management products across the GBA. Another is the development of the Shenzhen-Hong Kong Innovation and Technology Co-operation Zone, while a third is the launch of a five-year Global STEM Professorship Scheme to attract overseas research and development (R&D) talent to Hong Kong.
The China Banking Regulatory Commission has developed a masterplan for the region that includes fintech as a major pillar. The plan calls for more crossborder investments, trade finance and encouraging the use of the renminbi as a global currency.
It also urges the use of the Bay Area Trade Finance Blockchain Platform (BATFBP); this has received RMB32.4m (US$4.9m) in government investment and is being developed by the People’s Bank of China’s digital currency research lab.
New markets
One area of focus for fintech is the private wealth management industry. The still-evolving industry in mainland China is looking to Hong Kong as a driver of innovation, which in turn is looking to mainland China for new markets. This relationship is translating into opportunities for fintech companies.
These schemes and ongoing financial reforms could ‘bolster the capital and private wealth market and strengthen the international financial hub status’ of Hong Kong, says Ken Lo, the co-founder and chief strategy officer of Hong Kong-based digital asset exchange HKbitEX.
Here comes regtech...
Fintech is growing within the Greater Bay Area (GBA) but another tech trend to watch out for in banking is the rise of regulatory technology (regtech).
KPMG’s Hong Kong Banking Outlook Report 2021 suggests that regtech adoption will be a necessity in 2021.
The firm says regulators are demanding more granular and near-real-time data from banks, and the use of regtech could transform risk management and compliance and present significant growth opportunities for banks.
‘In the year ahead, we expect many banks to actively consider the areas that can be addressed with regtech solutions, engage with regtech providers, trial new technologies in a controlled manner and co-invest in proofs of concept,’ says James O’Callaghan, partner and head of technology consulting in KPMG China’s Hong Kong office.
The more successful banks will be the ones that use regtech solutions to pursue their growth agenda. KPMG says that institutions should look beyond deploying regtech for purely defensive strategies, such as risk management and regulatory compliance.
‘Importantly, the successful banks in 2021 will be the ones that embrace innovation with regard to regtech, understanding that there will be success and failure along the way, and take bold steps to sponsor initiatives that can unleash the full potential of regtech throughout their organisation,’ says O’Callaghan.
Benefits and opportunities
The Covid-19 pandemic has helped drive acceptance of fintech solutions and accelerated digitalisation. This is particularly true of cities in mainland China where strict lockdowns and changing consumer patterns have accelerated the development and use of technologies that facilitate touchless and cashless transactions.
‘The use of app-based technology to track and trace, and otherwise facilitate Covid-19 prevention compliance, has also contributed to what has already been a common set of practices to use digital tools to transact,’ says Ross O’Brien, a consultant focused on the technology industry and managing director of Intercedent Asia.
It’s not about when to adopt fintech; it’s about how to adopt it in order to stay relevant
Consumers and businesses have experienced the change while financial institutions are looking to get ahead of the curve.
‘The opportunity lies in digitalisation as an agenda that remains at the heart of every organisation, hence embracing fintech solutions is a hot topic for a lot of traditional financial institutions,’ Lo says. ‘It’s not about when to adopt fintech; it’s about how to adopt it in order to stay relevant.’
‘The increase of fintech knowledge is key for accountants to adapt to the valuation of companies and assist investors to make more sound judgments,’ he adds.
Fortunately, most of the solutions that businesses need can already be found within the GBA.
‘There are numerous examples of fintech start-ups in the region, particularly Shenzhen and Hong Kong, and across many sectors, particularly mobile- or social media-enabled payment, processing and lending services at the consumer level, and in terms of virtual trading platforms and AI-enabled tools at the institutional level,’ O’Brien says.
Promote partnerships
To expedite the development of fintech, Hong Kong has also launched its FinTech Proof-of-Concept Subsidy Scheme that matches traditional financial institutions with promising start-ups on proof-of-concept projects.
There has also been a push to create a blockchain system to facilitate seamless payments throughout the GBA and remove barriers between jurisdictions. China Guangfa Bank, a commercial bank, has already launched a blockchain system that allows for seamless payment settlement by facilitating information verification.
Terence Fong, partner and head of Chinese banks at KPMG China’s Hong Kong office, predicts there will likely be an increasing number of partnerships between traditional banks and fintech players.
‘With Shenzhen identified as a key innovation and technology centre in the Greater Bay Area, there are significant opportunities for international banks expanding in the region to explore tie-ups and alliances with suitable local start-ups, fintech firms and technology companies,’ Fong says.
Major players
Lo believes that the largest lever might be whether fintech solutions can lower funding costs for SMEs, which are often empowered by China’s giant tech firms like Alibaba or Tencent.
Fong, meanwhile, suggests that conglomerates can leverage their licences linked to digital payments, lending or internet banking to provide micro-financing to SMEs and blockchain technology is a key piece of this puzzle.
But, in the short term, there could be some headwinds, as O’Brien notes: ‘New rules around how digitally native firms engage in lending and other financial services in China could, in the short term, create a drag on some forms of adoption.’
