The trailblazing, going-against-the-grain spirit of fintech has swept through the financial and banking sectors, entirely reshaping the landscape of financial products and services. Against the backdrop of the COVID-19 pandemic, the fintech industry may have bucked the downward trend: 2021 saw a record number of fintech deals globally, with 5,684 deals amounting to USD$210 billion in total investment. Ushering in the future of work and a new mode of living, the pandemic has also expedited a broader acceptance and adoption of fintech solutions.
Designated the world’s third most important financial centre, Asia’s top fintech city in the Global Fintech Ecosystem Rankings 2021, and ranked second in Digital Competitiveness, Hong Kong has made giant strides as a key international fintech hub and is poised to make further inroads in the booming fintech scene. Hong Kong is home to more than 600 fintech companies; 11 unicorns including Airwallex, Amber Group, BitMEX, TNG and WeLab; over 160 banks (with eight virtual banks); over 160 insurers (with four virtual insurers); over 800 wealth and asset managers; and more than 700 securities and futures dealers. Although the pandemic has hit the economy hard, 41% of Hong Kong fintech start-ups succeeded in scaling up at the Series-A fundraising round or at a further stage.
Hong Kong has a very vibrant and mature fintech ecosystem in that the different players including government organisations, market players and education providers, would very often join forces and collaborate with one another. According to a study conducted by the Hong Kong University of Science and Technology in 2022, the different activities in which the participants in the ecosystem engage can be categorised into four main types: regulation, government support, business environment and talent.
Key role of regulatory bodies in promoting fintech development
Hong Kong does not have an all-encompassing statute that is specific to the regulation of fintech activities; rather, such activities are governed by a host of existing laws and regulations, such as the Banking Ordinance, Anti-Money Laundering and Counter-Terrorist Financing Ordinance, Money Lenders Ordinance, Payment Systems and Stored Value Facilities Ordinance, and Insurance Ordinance. Having said that, the highly regulated nature of financial activities in Hong Kong means that all fintech-related businesses will almost certainly fall under the supervisory remit of the Securities and Futures Commission (“SFC”) and be subject to the Securities and Futures Ordinance.
Generally speaking, regulatory bodies in Hong Kong are risk-focused and technology-neutral, opting for a disclosure-based approach. This allows for more flexibility in developing new fintech products and services, as well as refraining from unnecessarily stifling innovation with excessive regulation. Under a disclosure-based approach, fintech companies are obligated to provide correct and reliable information so that consumers can make an informed decision when choosing financial products and services.
It is noteworthy that regulatory bodies have also spearheaded collaborative initiatives with local and overseas counterparts to enhance Hong Kong’s competitiveness as a global fintech hub. In addition, regulatory sandboxes have been set up to offer a safe platform for pilot testing, helping entrepreneurs commercialise their fintech innovations. After London and Singapore, Hong Kong is among the first international financial centres to introduce sandbox initiatives. The SFC, Insurance Authority and Hong Kong Monetary Authority (“HKMA”) have all established sandboxes. As of January 2022, the HKMA sandbox had trialled 236 products compared to 199 in the previous year. It was announced in the 2020-21 Budget that the HKMA would be upgrading its sandbox programme by speeding up the launch of products and putting in place one-stop vetting and funding arrangements.
In June 2021, the HKMA unveiled its “Fintech 2025” strategy that marks another milestone in Hong Kong’s fintech development. Its aim is to encourage organisations in the financial sector to adopt technology comprehensively by 2025 and to promote the provision of fair and efficient financial services. As Eddie Yue, the Chief Executive of the HKMA, observes, “Fintech is, without doubt, a key growth engine for the financial industry in the post-pandemic era, and now is the right time to double down on our efforts to grasp the opportunities. Fintech 2025 sets out our vision in this regard.” The strategy comprises five main areas:
- “All banks go fintech”: the HKMA shall continue its efforts in promoting an across-the-board adoption of fintech and digitalisation – from front-end to back-end;
- “Future-proofing Hong Kong for Central Bank Digital Currencies (“CBDCs”)”: through consolidation of its research work, the HKMA shall improve Hong Kong’s readiness in issuing CBDCs in both wholesale and retail trade;
- “Creating the next-generation data infrastructure”: the HKMA shall be at the forefront of strengthening Hong Kong’s data infrastructure as well as constructing new ones, such as a Commercial Data Interchange, digital corporate entity and DLT-based credit data sharing platform;
- “Expanding the fintech-savvy workforce”: To address the shortage of fintech talent, the HKMA shall collaborate with different strategic partners to cultivate the next generation of fintech talent by launching various initiatives and programmes;
- “Nurturing the ecosystem with funding and policies”: the HKMA along with other key industry players shall set up a new Fintech Cross-Agency Co-Ordination Group to draw up policies conducive to the fintech ecosystem.
Supportive of fintech companies from all stages, whether they be fledgling start-ups, those ready to scale-up or go global, the Hong Kong government has always been a fervent proponent of fintech. It earmarks a significant amount of funding to research and development. Since 2017, the government has provided funding to the tune of USD$12.8 billion to bolster innovation and technology development in Hong Kong. As of February 2021, 19,832 projects were given the go-ahead under the Innovation and Technology Fund with a total value of USD$29 million.
An example of a government-funded scheme is the Fintech Proof-of-Concept Subsidy Scheme launched by the Financial Services and Treasury Bureau in 2021, the aim of which is to foster collaboration between traditional financial institutions and fintech companies to encourage the development of proof-of-concept projects in furtherance of innovation. Subject to approval, each project can receive a grant of up to USD$20,000.
New track added to InvestHK’s Global Fast Track Programme
The Global Fast Track Programme is another notable example that provides eligible fintech start-ups with financial support of up to US$2.6 million, no matter what the outcome of the pitch is. Initially launched in 2020, it is a business-driven initiative, which aims to facilitate local and overseas fintech companies in leveraging Hong Kong’s market resilience and tapping into the myriad of fintech opportunities. Under the original initiative, eligible fintech start-ups were given the opportunity to pitch their innovative ideas to the HKMA alongside senior representatives of corporate champions, including the Hong Kong Exchanges and Clearing, Allianz Group Investors, Chow Tai Fook Jewellery Group, Mizuho Bank and Microsoft.
Most recently, a new Central Bank Digital Currency (“CBDC”) track has been added to the programme, calling fintech ventures from the following eight areas to submit applications: retail as well as wholesale CBDC adoption, programmable money, interoperability, privacy, cybersecurity, foreign exchange and liquid management, and offline payments. Shortlisted applicants will need to pitch their innovative ideas and vie for the Best Use Case Award, Best Technology Award and Best Ecosystem Award. Additionally, eligible candidates will be given the chance to collaborate with the HKMA on research work and pilots to contribute to the development of CBDCs in Hong Kong.
Business environment conducive to fintech growth
Hong Kong’s appeal to fintech companies lies in its mature start-up funding scene, robust financial and digital infrastructure, competitive and business-friendly tax regime, and free flow of capital with no foreign exchange controls. Furthermore, Hong Kong provides an environment that is conducive to co-creation and collaboration between traditional financial services providers and fintech players. Rather than viewing the advent of fintech as spelling its doom, the banking industry in Hong Kong has been very quick on the uptake as regards the necessity of embracing digitalisation. In fact, it plays a central role in steering fintech development. 86% of banks in Hong Kong have already adopted or are planning to adopt fintech solutions, which include the following: artificial intelligence, chatbots to boost customer service and experience, blockchain to enhance the security of transactions, and big data to help banks create a better picture of the market and their customers’ needs.
Attracting and cultivating fintech talent
The shortage of local qualified talent has unfortunately been a persistent issue, leading to a high turnover within the industry. To exacerbate matters, 60% of fintech companies prefer employing domestic talent. In a bid to attract international talent to Hong Kong, the government has launched various schemes, for example the Global STEM Professorship Scheme and Technology Talent Admission Scheme, but the COVID-19 pandemic has thrown a spanner in the works, hampering mobility and travel. As a result, the number of applicants from mainland China under the Mainland Talents and Professionals Scheme also decreased by half in 2020. Hong Kong’s closer economic integration with the Greater Bay Area (“GBA”) is, however, expected to have a positive impact on cross-border talent exchanges.
To cultivate the next generation of fintech talent, universities in Hong Kong have been offering more fintech-related undergraduate and postgraduate programmes. As of May 2021, there are 12 fintech-themed undergraduate and postgraduate courses being offered by the seven universities in Hong Kong, one of which is a pioneering fintech-related doctorate degree (DFinTech), offered by the Hong Kong Polytechnic University.
Case studies: Hong Kong as a launchpad for capturing opportunities in the GBA and beyond
Valued at US$5.5 billion and named to the Forbes Cloud 100 list for the third consecutive year, Airwallex is a fintech unicorn that provides cost-effective and efficient cross-border payment services, enabling businesses to set up multicurrency accounts, create multicurrency payment cards, synchronise expense data and transactions to Xero cloud accounting software, make fast and low-cost international payments, and generate links for instant payment.
International transactions have traditionally been stymied by barriers and high costs; it was, however, precisely this challenge that gave birth to Airwallex. Its mission is to facilitate the overseas expansion of marketplaces, online sellers and SMEs by building a global financial infrastructure with cutting-edge technology.
Initially founded in Australia in 2015, Airwallex moved its headquarters to Hong Kong in 2018. It has now grown to over 1,000 employees with 19 international offices in 11 territories. According to Jacky Zhang, Co-Founder and CEO of Airwallex: “We believe Hong Kong to be an ideal location to be our headquarters. Hong Kong is an international financial centre where we can serve our global clients worldwide.” Mr Zhang also names proximity to its clients as a reason for the relocation. From its base in Hong Kong, Airwallex can better cater to the needs of SMEs based in the Greater Bay Area that are trading on e-commerce platforms.
BYFIN (SBI Holdings)
Based in Hong Kong, BYFIN is a subsidiary of SBI Holdings – a Japanese financial services company group. In collaboration with a fintech company based in Singapore, BYFIN launched a deep-tier supply chain finance platform in 2021. The main driving force behind this new venture was the desire to address supply chain disruptions brought about by the pandemic, which caused delayed shipments, rising transportation costs and a squeeze on suppliers’ cash flow, according to Min Zhu, CEO of BYFIN. Their target market is mainly SMEs in mainland China and Hong Kong engaging in import and export trade. Mr Zhu adds that because supply chain finance ultimately revolves around the real economy, the practical application of this area of fintech is inextricably linked to Hong Kong’s role as an international trade and logistics hub.
BYFIN has presence in Hong Kong as well as in Shenzhen. Hong Kong’s first-class connectivity with the rest of the GBA is why BYFIN is headquartered in the city. Mr Zhu observes, “To us, Hong Kong is an excellent bridge for foreign investment into mainland China, especially in the GBA where business activities are thriving. The GDP of the Guangdong province alone already surpasses that of many countries. Hong Kong serves as a gateway to the GBA, helping financial firms like us capitalise on the business opportunities that arise.”
Futu Securities is a fintech company that primarily engages in stock trading, with its headquarters in Hong Kong and back-office operations in Shenzhen. According to Arthur Chen, Futu Securities’ Chief Financial Officer, Hong Kong was the obvious choice for a launchpad from which to expand globally, given its status as a leading international financial centre, its robust and efficient regulatory framework, as well as its transparent and sound legal system. Straddling both sides of the border, Futu Securities has been able to tap into the talent pools of both Hong Kong and Shenzhen. It currently has over 1000 employees, with the majority of its staff based in Shenzhen and those performing compliance, marketing, market development work based in Hong Kong.
Futu Securities has been SFC-licensed since 2012 and received its first batch of virtual banking licences issued by the HKMA in 2018. Its laudable efforts in promoting fintech development in Hong Kong together with local regulatory bodies have been an integral stepping stone to garnering attention and approval of investors from the US and beyond. Having established a sterling business and compliance record in Hong Kong has greatly facilitated its expansion into global markets.
Futu Securities boasts a wide business network across the GBA; the main users of its platform come from other cities in the GBA, who require assistance in managing their overseas assets. Mr Chen expresses optimism regarding the future development of the GBA and the role of Hong Kong in capturing opportunities of further growth within the GBA.
Going forward: Boosting Hong Kong’s competitiveness as a fintech hub
In order to maintain and enhance its competitive edge, Hong Kong will need to carefully consider how it manages the delicate balancing act between fostering innovation and promoting competition on the one hand – and protecting consumers and investors through imposing regulatory restrictions on the other hand. The role to which Hong Kong should aspire is an international fintech sandbox where fintech players from all corners of the world can develop, test and launch their innovative solutions.