Abstract
People's Republic of China-Hong Kong Special Administrative Region-Selected Issues
Fintech in Hong Kong SAR–Developments, Challenges and Opportunities1
Fintech development in Hong Kong SAR has garnered considerable interest in recent years and is seen as presenting a unique growth opportunity for the economy. This note assesses current fintech developments in Hong Kong SAR, takes stock of government support initiatives, and outlines regulatory challenges for an industry that has no border and crosses traditional institutional boundaries. Finally, it seeks to map out fintech development opportunities for Hong Kong SAR that can complement and bolster its role as an international financial center. In this regard, government policies can play an important role.
A. Background – A Summary of Fintech Developments in Hong Kong SAR
1. Financial technology, or “fintech”, the application of information technology to the provision of financial services, has surged in recent years, attracting considerable attention. The scope of venture-capital backed investment globally totaled over US$13 billion in 2016, more than five times the amount invested four years earlier.2 In Hong Kong SAR, dedicated government efforts to promote fintech has led to an increase in the number of fintech startups in the city, from 86 in mid-2015 to 138 in August 2016. Venture capital invested in Hong Kong SAR fintech totaled US$394 million between early 2014 and late 2016. Notwithstanding these welcome developments, Hong Kong SAR is competing against other financial centers in an industry that is evolving rapidly. To succeed, Hong Kong SAR needs to continue its concerted efforts. Government policies, in this regard, can play a crucial role to support strategic development and help harness fintech’s role in bolstering Hong Kong SAR’s standing as a global financial center.
2. Current government initiatives include multi-prong efforts to advance fintech development. These efforts seek to create an fintech ecosystem that leverages Hong Kong SAR’s financial center status and its proximity to China; the goal is that with a supportive environment, research, development and business incubation can take place.
The government created the Steering Group on Financial Technologies in 2015 for one year to advise the government on fintech development; its report was released in 2016. Currently, there is a dedicated fintech team under InvestHK – the government entity that supports business development.
The Fintech Facilitation Office (FFO) was set up by the HKMA in March 2016 to facilitate fintech development in Hong Kong SAR and to promote it as a fintech hub in Asia. Its efforts include the Cybersecurity Fortification Initiative (CFI), which looks to secure its banking system’s cyber resilience and ongoing research on the deployment and regulatory framework for Distributed Ledger Technology (DLT). Additionally, the HKMA is coordinating the development of a trade finance platform with private banks and is discussing with the Monetary Authority of Singapore on building a cross-border infrastructure to connect the platforms across the two economies.
To boost its technology competitiveness through applied research, the Hong Kong SAR government created several innovation hubs, including Cyberport, a government-sponsored digital hub and ASTRI - Applied Science Technology Research Institute.
The 2017/18 budget allocated resources to the HKMA for the development of a new Faster Payment System (FPS), support blockchain technology development by ASTRI and the HKMA, and boost resources for the HKMA’s cybersecurity program. Funding for government support includes a HK$2 billion Innovation and Technology Venture Fund as well as various Funds under Cyberport.
The HKMA undertook the first phase of its central bank digital currency project in March 2017 to assess the feasibility and implications of such a currency. At the same time, the government is exploring new payment channels for settling government bills and fees.
B. Fintech Opportunities to Enhance Hong Kong SAR’s Role as a Financial Center
3. Financial services make up one of the largest industries in Hong Kong SAR and offer rich opportunities for fintech development. By one estimate, the sector accounts for 18 percent of Hong Kong SAR’s GDP and 6 percent of its employment.3 Hong Kong SAR has homegrown advantage as the large number of financial institutions offer an existing platform for collaboration and financial industry knowledge. Broadening the adaptation of fintech across different industries and regulatory bodies could thus have a considerable impact on service provision, employment and regulatory oversight. More importantly, fintech development is crucial to ensure that Hong Kong SAR remains a global financial center.
4. Many financial centers have carved out their market niche in fintech: Israel has a focus on cybersecurity, the Netherlands and Belgium on payments, Ireland, with Dublin as its hub, focuses on fund administration, Malta and the Isle of Man on cryptocurrencies, and Estonia on financial identity. Toronto, which has gained traction as a cybersecurity hub, ranks fifth in a January 2017 Survey in which London ranked first and Hong Kong SAR seventh.4
5. The challenge for Hong Kong SAR is to find its comparative advantage relative to other financial centers. Rather than focusing on one area, Hong Kong SAR is aiming to take a comprehensive approach and is looking to develop an “ecosystem” that is based on domestic and international collaboration, while leveraging its status as a leading international financial center and its proximity to Mainland China. HKMA recently signed an agreement with the Monetary Authority of Singapore on development collaboration; it is also discussing development opportunities with Mainland authorities on initiatives involved in the Guangdong-Hong Kong SAR-Macao SAR-Bay Area Development.
6. A government advisory group highlighted business-to-business (“B2B”) transactions as an area ripe for Hong Kong SAR fintech investment and development.5 These areas include cybersecurity, big data and analytics, RegTech and blockchain-related financial services, including payments and securities settlements. Specifically, payments and settlement systems at the interbank (i.e. B2B) level can support Hong Kong SAR’s role in foreign exchange trading and international banking. Initiatives that facilitate payments and settlement, support cybersecurity, widen digital ID utility to address know-your-customer (KYC) requirements can all boost Hong Kong SAR’s role as a financial center. Meanwhile, the advisory group noted that “RegTech” – fintech applied by financial institutions to improve their regulatory compliance – as well as “SupTech” – fintech applied by supervisory agencies to improve their internal processes, reporting arrangements, and supervision – can support Hong Kong SAR’s well-respected regulatory and supervisory capabilities, particularly given the large presence of regional financial institutions and other business headquarters in Hong Kong SAR. As a security hub, Hong Kong SAR can set the standard for the region and cement its solid reputation.
Fintech Innovations are Far Reaching
Citation: IMF Staff Country Reports 2018, 017; 10.5089/9781484338377.002.A003
Source: IMF Staff Discussion Note SDN/17/05; Staff estimates.C. Regulatory Responses and Policy Recommendations
7. Regulatory Responses. Fintech regulation efforts in Hong Kong SAR are carried out by multiple regulators and government departments. The HKMA established a Fintech Supervisory Sandbox in September 2016 to facilitate pilot trials of fintech and other technology initiatives. The Payment System and Stored Value Facilities Ordinance, which became fully operational two months later, empowers the Monetary Authority to license and supervise Stored value facilities (SVF)6. There are also dedicated liaison platforms set up by the HKMA, Securities and Futures Commission (SFC) and the Insurance Authority (IA) for communication across different agencies related to fintech regulatory and development efforts. Within the HKMA, the liaison responsibility falls onto the Fintech Facilitation Office; in SFC, Fintech Contact Point; and in IA, Insurtech Facilitation Team. The Coordination Group on Implementation of Financial Technologies Initiatives is in place at the Financial Services and the Treasury Bureau to coordinate among the regulators.
8. Policy Challenges. Regulation should continue to evolve to address challenges from fintech businesses that have fluid borders and cut across multiple business lines. The presence of multiple regulatory fintech bodies arose in large part because regulation has traditionally been institution based. Specifically, bank regulation is under the purview of the HKMA, securities brokers under the SFC, and insurers, IA. But fintech business models cut across traditional business lines; regulations therefore need to shift focus to be more “activity-based” for fintech businesses. For example, licensing regimes will need to be redesigned to bring new types of service providers within the regulatory perimeter where appropriate (e.g. P2P lending). Meanwhile, Hong Kong SAR’s regulatory process is based on the principle of “Know Your Clients” (“KYC”); but fintech firms operate with fluid borders, making it difficult to verify customer identity. In response to these challenges, the authorities have introduced several initiatives:
The HKMA introduced the Cybersecurity Fortification Initiative (CFI) in 2016, which includes an assessment framework for banks on cyber resilience, the Professional Development Program to foster fintech talent and the Cyber Intelligence Sharing Platform for intelligence sharing.
Regulators introduced supervisory sandboxes where new technologies are rolled out to a limited audience on a trial basis. At the end of 2017, the HKMA introduced a FinTech Supervisory Chatroom for prompt feedback to banks and tech firms at the early stage of their fintech development; meanwhile, different regulators’ sandboxes were linked to provide a single point of entry for pilot trials of cross-sector fintech products.
Stored value facility providers are required by the HKMA to have a capital of HK$25 million to ensure sufficient user protection. Currently, SVF licenses are granted to 13 non-banks and 3 banks.
9. Policy Recommendations. Continuing to strengthen interagency cooperation to explicitly encompass regulating, licensing, and supervising fintech activities and the involvement of other relevant governmental bodies. At the current juncture, continued strong interagency coordination is crucial, including between the HKMA and SFC, so that regulators can better manage vulnerabilities originating from financial market infrastructures. Meanwhile, legal rules and regulations that have clarified the rights and obligations within the new landscape (e.g., the legal interpretation of digital tokens and their underlying activities) helped to ensure that the oversight and supervisory framework remains effective. A stronger regulatory and supervisory focus on “activities”, in addition to “entities” are necessary. The HKMA’s plan to launch the Enhanced Fintech Supervisory Sandbox by the end of 2017 and a single point of entry that integrates different agencies’ regulatory sandboxes for pilot trials are welcome developments. Future considerations to involve other relevant authorities would also be beneficial as the nature of activities of fintech firms continue to evolve (e.g., the issuance of money service operator licenses by the Customs and Excise Department to firms providing innovative remittance services).
10. As a global financial center, Hong Kong SAR can set the fintech standard for the region and carve out its market niche. As a major center for offshore RMB transactions, Hong Kong SAR can leverage its position as a payments hub. With no clear leader in digital ID, Hong Kong SAR can step in, particularly as it looks to boost its KYC efforts. As new technologies disrupt existing business platforms and traditional boundaries, financial centers – along with its technology, human capital and regulatory response – need to evolve. For Hong Kong SAR, the opportunities – and challenges – are abundant. Government policies can play a crucial role to encourage fintech development in Hong Kong SAR and capture the potential these new technologies offer. As the sector grows, continued vigilance and regulatory changes will be warranted to ensure continued financial stability and resilience.
References
Ernst & Young, 2017, “Unleashing the potential of FinTech in banking.”
Hong Kong Financial Services Development Council, 2017, “The Future of Fintech in Hong Kong,” FSDC Paper No. 29, Hong Kong.
He, D., R. Leckow, V. Haksar, T. Mancini-Griffoli, N. Jenkinson, M. Kashima, T. Khiaonarong, C. Rochon, and H. Tourpe, 2017, “Fintech and Financial Services: Initial Considerations.” Staff Discussion Note 17/05, International Monetary Fund, Washington, DC.
Toronto Financial Services Alliance & Z/Yen Group, 2017, “Trends and Innovation in Financial Services,” Toronto, Canada.
Prepared by Sally Chen (MCM)
Ernst & Young (2017) Unleashing the potential of Fintech in banking
HK Financial Services Development Council (2017) The Future of Fintech in Hong Kong
Ibid; Toronto Financial Services Alliance & Z/Yen Group (2017) Trends and Innovation in Financial Services
HK Financial Services Development Council (2017) The Future of Fintech in Hong Kong
Stored value facility (SVF) is a form of prepared electronic cash, which can be used as means of payment for goods and serviced provided by participating merchants.