Partnerships Newsletter

FinTech: Changing the World We Live In

No longer a buzzword, FinTech continues to rapidly open up a world of possibilities across every industry sector and multiple aspects of daily life: from contactless payments and transitions to automating the delivery and use of financial services and streamlining financial operations and processes.

FinTech has already delivered widespread changes that would have been difficult to envision just a few years ago. Benjamin Quinlan, CEO & Managing Partner, Quinlan & Associates and Chairman, FinTech Association of Hong Kong, sees considerably more potential around FinTech innovations in Hong Kong and the rest of the world. "As FinTech becomes more embedded in our daily lives, it is changing the way we spend, save, invest and transact," he says.

The impact of the COVID-19 pandemic is accelerating a trend that was already well under way. FinTech is widely considered one of the few potential beneficiaries of the COVID-19 outbreak, which has resulted in a spike in demand for online consumption and technologies that can help reduce face-to-face interaction. In response to the disruption caused by the pandemic, financial institutions and businesses have accelerated adoption of new technologies and protocols. For example, as consumers quickly adapted their preferences to remote or cashless transactions, traditional banking and finance services in Hong Kong have been supplemented with FinTech-driven digital payment platforms and personal financial services options.

From a business perspective, Quinlan points out it is important for Hong Kong companies operating in the FinTech environment to be aware of where the city fits in the FinTech international development arena. "In addition to the problems they are trying to solve, FinTechs need to work out where they fit in the ecosystem and what makes them unique." The reality is that Hong Kong FinTech businesses are not just competing locally; they are competing with firms all over the world. "They need to be aware of who their competition is in London and New York." He also highlights that, in spite of Hong Kong's strengths as an international financial centre, the city is a relatively small market in terms of building a Direct-to-Consumer (D2C) FinTech customer base.

According to Quinlan, another pain point Hong Kong FinTech developers need to be aware of is the vendor on-boarding processes used by global financial institutions. With roughly 70 percent of Hong Kong's FinTech firms focused on building business-to-business (B2B) solutions geared towards international financial institutions, the FinTech global supplier landscape is a particularly important area Hong Kong FinTechs should keep a close watch on.

Quinlan explains, while global financial institutions generally share a high percentage of similar vendor on-boarding requirements and processes, it can take up to six to twelve months to complete the procedure. "The bottom line is this can be a cash-flow challenge for FinTechs that are not well funded or take time to find traction with customers." He recommends that FinTech developers focus on finding ways to align with their customers' needs. "They need to look for ways that allow the buyer to feel comfortable with the product or service so they can streamline the on-boarding process. To this end, understanding financial institution compliance processes and ensuring robust data security is critical."

Shaping the future

Philippa Martinelli, Advisor and FinTech Specialist at the UK Department for International Trade (UKDIT) works with governments, regulators and business in the UK and the Asia Pacific region on ways to reduce market, policy and regulatory barriers for international businesses. She also believes that the on-going upsurge of consumer e-commerce activities and digitised B2B transitions has created a plethora of inflection points for FinTechs to capture. "The key for FinTech companies is to explore and understand what is happening across the global landscape so they can tap into emerging opportunities," she says. As business and consumer adoption of FinTech solutions increases, Martinelli notes how FinTech is playing an expanding enabler role in process efficiencies and data insights, reducing risks and complexities. Examples include services and products designed for particular functions inside the financial ecosystem like RegTech. Other applications include AI for digital identity authentication, compliance and regulatory requirements, and tracking and generating carbon footprint reports as an integral part of sustainability and net zero strategies. Martinelli also highlights that FinTech is not only confined to what might be perceived as the mainstream financial markets. "Many start-ups are motivated to change the world for the better, and as such are focused on sustainable development and ecological conservation."

Embracing strengths and similarities

As global financial centres with vibrant FinTech ecosystems and strong digital adoption across consumer and business sectors, Martinelli sees opportunities in the FinTech space for both Hong Kong and the UK. While the two destinations have different strengths and structures, she says as centres for FinTech enablers, huge opportunities exist for FinTech companies expanding between the two jurisdictions. Martinelli notes how Hong Kong pioneered one of the world’s first smart contactless payment systems, the Octopus card, which set an early benchmark for similar payment systems implemented elsewhere. She also notes how Hong Kong has successfully attracted FinTech firms to list on the Hong Kong Stock Exchange. Home to over 600 FinTech companies and start-ups, Hong Kong is also the base for eight unicorn companies (start-ups valued over US$1 billion). At the same time, FinTech is more than a subsector in the UK. The UK’s FinTech ecosystem is based on world-class talent, a forward-thinking approach to regulation, access to capital, and proximity to an innovative financial services sector. This has put the UK at the cutting-edge of FinTech innovation in areas such as peer-to-peer lending, challenger banks, cybersecurity, RegTech, as well as client-centric and innovative products, services and solutions.

Building bridges

Signed in September 2017, the Hong Kong-UK FinTech Bridge is designed to enable closer and stronger collaboration at government, financial regulator and businesses levels. The co-operation agreement enables the UK regulator to refer FinTech firms to its Hong Kong counterpart, and vice versa, making it easier for companies to scale between the jurisdictions. "There is great FinTech collaboration between the UK and Hong Kong," says Martinelli who explains the FinTech Bridge acts as a catalyst that promotes the sharing of knowledge while reducing barriers. "The Bridge provides help with the practical aspects of the FinTech journey, reduces complexities and enables companies to find out what the journey looks like." Trade bodies, FinTech organisations and facilities including the Hong Kong Science and Technology Park (HKSTP) have played a key enabling role in supporting and developing Hong Kong's Fintech ecosystem. The HKSTP provides research and development infrastructure across the city, as well as value-added services, to help start-ups build, test and scale their solutions.

Hong Kong's FinTech ecosystem built on sound foundations

Meanwhile, in terms of expanding and strengthening Hong Kong's FinTech ecosystem, Quinlan explains there has been a succession of strategic game-changing developments in recent years. "Faster Payment System (FPS) and Stored Value Facility (SVF) are two few examples of initiatives by the Hong Kong Monetary Authority (HKMA) that have been making an impact. In addition, the launch of the FinTech Career Accelerator Scheme, the establishment of a FinTech Supervisory Sandbox (FFS), and the granting of eight virtual banking licenses and four virtual insurance licences, have created an ecosystem for Hong Kong FinTechs to flourish.”

Launched by the Hong Kong Monetary Authority (HKMA) in 2018, another FinTech ecosystem game-changer, according to Quinlan, was the introduction of the Open Banking Application Programming Interface (API) Framework for the Hong Kong banking sector. The API initiative allows financial institutions to open up their internal IT systems and data for programmatic access by third-party service providers (TSPs) or their counterparts. More recently, the Fintech Proof-of-Concept Subsidy Scheme was also set up to encourage traditional financial institutions to work with FinTech companies to develop Proof-of Concept (PoC) projects. Furthermore, the Fintech Anti-Epidemic Scheme for Talent Development (FAST), a US$15.5 million subsidy plan, has been launched to enrich Hong Kong’s talent pool.

From a fund-raising perspective, Quinlan says Hong Kong has deep liquidity pools and a large investor base keen on investing in the sector. "Hong Kong's methodical and sequential approach to developing its FinTech ecosystem has set the right tone for infrastructure, education, and talent development," says Quinlan. "With FinTech ecosystem levers in place, Hong Kong is positioned to further push the city's status as a global FinTech hub."

A unique feature of Hong Kong's Fintech ecosystem is a diverse range of FinTech companies operating in sectors including virtual banking, insurance technology, asset management, robo-advisory, blockchain, digital trading, payments and cybersecurity. Hong Kong's FinTech companies also benefit from being in close proximity to the world’s largest financial institutions across banking, insurance, asset management and payments. Moreover, as Hong Kong becomes more active in participating in the development of the Greater Bay Area (GBA), regulators and the Hong Kong and Mainland governments alike are making the most of Hong Kong’s unique position to scale up FinTech and technology as a whole. The GBA's FinTech goals include a connecting infrastructure for mutual financial market access including wealth management and insurance, a cross-border trade finance blockchain platform, and mechanisms that support in-depth FinTech collaboration.

Looking ahead, with central banks globally – including Hong Kong and Mainland China – conducting central bank digital currency (CBDC) trials, Quinlan sees new opportunities for Hong Kong's FinTech sector. At the same time, while cryptocurrencies have not reached anything like mainstream consumer acceptance yet, Quinlan also believes that cryptocurrency usage will unlock new FinTech markets, particularly in the institutional space.

Fragmented regulation landscape

While FinTech is by nature a global sector, countries and jurisdictions have set in place a wide range of compliance and operation regulations. Martinelli says a challenge for governments and regulators seeking to collaborate is the difference between their domestic legislation and regulations. She explains that, while ensuring compliance of cross-border FinTech projects can slow down time-to-market, government and regulators are rightly focused on protecting end-users and the integrity of their markets. "Obviously from a FinTech's perspective, standardised compliance and regulations would be a huge enabler for scaling up a business while reducing costs, but there is still a long way to go to get to a point where common standards are widely adopted" she says. However, she adds as FinTech continues to rapidly expand its footprint, finding ways to create interoperability and shared approaches are areas where governments and regulatory bodies will be focusing more attention.

Sharing a similar view, Quinlan says because FinTech vendor on-boarding compliance processes are comparable across the majority of financial institutions, regardless of where they are located, a utopian compliance view would include standardised regulations. "This is an area where governments and regulators have a bigger role to play in streamlining existing processes," he says. If an industry-wide vendor-approved regulatory system was in place, even traditionally risk-adverse financial institutions could feel comfortable using the B2B product or service. "Financial institutions would not need to worry about getting into trouble for using a vendor's product because it would not only have been endorsed; it would be regulatory approved."

A diverse and engaged talent pool drives FinTech success

When it comes to attracting, developing and retaining talent to keep up with the ever-growing demand of the local and global FinTech sector, Martinelli and Quinlan agree: it is vital to engage people early and aim for diversity. "It's important to let young people know that a career in the FinTech sector provides a diversity of options so they can keep their future career paths open," Martinelli says. Overall, the UK takes a broad approach to talent development and management. This includes public and private sector partnerships and collaboration with academia and research sectors. In addition to university programmes, banks and companies associated with FinTech offer apprenticeship schemes and on-the-job training. Martinelli explains that flexible learning environments allow individuals and employers to apply learning and skills development that align with goals and desired outcomes. In addition to coders, developers and engineers, Martinelli says legal, marketing and business development skill sets all serve to bolster the talent mix within a FinTech hub. The goal, she says, is to demonstrate you don't necessarily need to have a technical background to have a fantastic job in the FinTech industry. To nurture a pipeline of talent, UK schools offer interdisciplinary STEM (science, technology, engineering and mathematics) education, which sets out to stimulate interest by demonstrating how the modern world of discovery relies on innovation and entrepreneurial skill sets. Given the fast development of FinTech and its many applications, entrepreneurial skills help individuals to contribute an important element of the unusual to the industry, says Martinelli.

Quinlan also believes that in addition to academic institutions, it is important for players in Hong Kong’s FinTech sector to contribute to the education landscape. As the world becomes increasingly digital dependent, he says it is vital for education providers to provide young people with the support they need to understand that digital skill sets are fundamental to their future. "They need to understand the digital landscape and how everything feeds into it,” says Quinlan who teaches Masters in Business Analytics and Digital Transformation as an Adjunct Professor at the Asian Institute of Technology (AIT). "It doesn't matter if someone is a developer, strategy lead or project officer; understanding the digital language of FinTech, big data and analytics will be a big part of their future," he says. The growth of FinTech will exponentially drive Hong Kong's and the global economy for decades to come, and so Hong Kong's future success will ultimately rely on the capabilities of the next generation.

 

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