FinTech has become the topic du jour of both the financial and technology worlds, threatening to bring changes to traditional banking. As a long-standing financial center, how will this affect Hong Kong? Leon Lee takes a deep look at the industry in the city right now and its potential impact
By Leon Lee
In the last year or so, the term ‘FinTech’ has become more and more commonly seen and heard in financial and technology discussions as well as in the media. The term, short for financial technology, has become a popular buzzword that has many excited about its potential for the rebounding financial sector.
The hype is certainly warranted as last year, global investment in FinTech jumped more than 200 percent, totalling US$12.2 billion. Eighty percent of that was in the United States, while Asia saw just over six percent. London and New York are leading the charge as FinTech leaders accounting for 90 percent of FinTech investment and revenues. But Asia, with Hong Kong leading the charge, is poised to put its name in the burgeoning industry.
To begin, it’s important to define what FinTech is. The most basic definition is the application of technology within the financial industry. Online payment, crowdsourcing and peer-to-peer lending are just some considered under the broad FinTech umbrella.
Janos Barberis, founder of the local FinTech-monitoring organization FinTech HK, has narrowed it down to five specifications – financing, operations and risk management, payments, customer interface and data monetisation and security – reflecting the core areas of finance.
While the growing interest and attention in FinTech is newfound, according to Barberis, it has been in existence for some time.
“E-banking started in the 1980s in the US; Nasdaq in the 90s – the first fully electronic stock exchange; the creation of SWIFT for international electronic payments. The point to be made is what we’re currently witnessing when it comes to financial technology is a new era of financial technology.”
“Financial technology before 2007 was really driven by financial institutions themselves. After 2007, we were into what I call FinTech 2.0 where the products and services are delivered by start-ups directly to the public.”
This new wave of FinTech has already been showing up in our everyday lives. Online and mobile payment platforms like Paypal, Alipay and Apple Pay, China’s first online-only bank, Tencent’s WeBank, crowdsourcing platforms like Kickstarter and Hong Kong’s contactless payment system, the Octopus card, are just a few well-known examples.
However, FinTech goes beyond commercial and retail applications. There are those who focus on the institutional businesses and wholesale markets such as fixed income market solutions network company, Algomi.
“The more niche, but potentially more relevant for businesses companies are more specialized. They’re really focused on solving some very specific problems,” Jesper Bruun-Olsen, Head of Asia-Pacific, explains.
“When you look at the investment bank and asset management sectors who are managing billions of dollars, it’s different to solve immediate problems there. They might not be getting as much attention in the media but it’s providing real benefits to that niche sector and the monetary impact is probably bigger because these companies are managing tens of billions of dollars.”
FinTech in Hong Kong today
When asked about the current FinTech environment in Hong Kong, KPMG China’s FinTech Partner James McKeogh summed it up with three words: buoyant, vibrant and increasing.
“The investment that’s going on from the corporate community in FinTech, the support coming from the government and the establishing of a variety of accelerators and incubators is the perfect storm for creating an extremely healthy and vibrant FinTech market.”
He sees growth through every aspect of the community from retail solutions to commercial and corporate banking as well as in the investment banking and trading sectors. In the start-up community, the number of new companies in the city has increased about 10 percent from last year to about 50.
According to the Start Me Up HK website, there are currently 13 accelerators and incubators in the city drawing plenty of interest from both local and foreign companies. The most recent DBS Accelerator chose the 10 participating start-ups out of 140 applications from 34 countries.
The Hong Kong Government has been doing its part in ushering the emerging sector.
“There is clear government support for FinTech within Hong Kong. And they’re actually show-ing it by the creation of the specialist startup visa for working in Hong Kong,” McKeogh explains.
“If you got an existing accelerator and corporate here that is interested in promoting and sup-porting somebody’s developable work in Hong Kong, they can actually provide the oversight and sign-off in order to have them come in and get a work visa.”
FinTech + start-up
It makes sense for the Hong Kong Government to support FinTech. As with most technology companies, FinTech ones start as hungry start-ups with innovative solutions and thinking.
“The FinTech sector, you can call it as a subset of the start-up ecosystem in general. And the Hong Kong Government has really been pushing for the start-up ecosystem to emerge for the last few years. I think now what’s happening is that they found a perfect match. It’s start-up and also financial. It’s a match made in heaven for Hong Kong. It hits two major points, it hits the start-up and it hits the financial center strength of Hong Kong,” FinTech HK’s Barberis says.
Besides playing to its strength as an existing financial center, Hong Kong’s relatively low cost for starting a business, the ease of its regulatory environment and proximity to China and other big Asian cities are reasons that the number of start-ups in the city is rapidly increasing.
It’s those very reasons amongst others that Thomas J. DeLuca started AMP Credit Technologies (formerly known as Advanced Merchants Payments) in Hong Kong in May 2009.
He came to the city in a previous entrepreneurial venture whose first Asian clients were banks in Hong Kong before eventually making way into the Chinese market and rest of the region. He is looking to repeat the same success with his loan-lending platform which serves banks that he will enjoy easy access to in Hong Kong.
“It depends on the market you’re in and what you’re trying to achieve. We’re looking at a very technology-savvy market [in Hong Kong], a lot of upper middle-class, growing economy, people like technology and gadgets. It’s certainly a great sector to launch products and test markets,” DeLuca explains.
In December 2014, AMP was selected to participate in Accenture’s first APAC FinTech Innovation Lab at Cyberport. Since then, they have raised US$5 million dollars in institutional financing and the company has recently expanded to the UK.
Another FinTech start-up that took advantage of Hong Kong’s ease of starting a company and its great environment to test products is crowd-funding company Investable.
“There is a mindset [here] that’s slightly different. There’s just more openness to looking at different ways [of doing things]. Hong Kong is built on efficiency and connection and technology just suits that,” says Jennifer Carver, founder of Investable.
When Carver started the company in mid-2014, it was Asia’s first equity crowdfunding platform. The UK and US had them but not in Asia. Besides being the founder of Investable, she is also the CIO of investment incubator Nest where she saw the need for a local crowdfunding platform.
“[Nest] spend a lot of time investing in companies, helping them with their marketing, legal, financial structuring and accounting needs. But often times, they need more money than we have. We’ll invest a small amount but we only invest our own proprietary capital which is limited. We’re always trying to find co-investors for these companies so we thought if we had an equity crowd-funding platform, it would automate that process to an extent.”
Carver believes there is a huge market of investors in Hong Kong, looking for different ways to do interesting things with their money besides putting them in property and stocks.
Investable carefully selects the companies they make available on the platform and due to SFC guidelines, they can only put companies that Nest has invested in. Since they are not a traditional securities department, they are forbidden to advertising to professional investors, hindering the growth of the company.
However, they have been spending time with regulators and the Hong Kong Government to come up with solutions to the changing market. A group of equity crowdfunders and peer-to-peer lenders have recently formed the Hong Kong Internet Finance Council. “We’ve pulled ourselves together because [the Government] pulled us in, at one stage, to ask us our opinions on what the government should do to help crowdfunding. Through InvestHK, they reached out to us which was really refreshing. The Financial Services and the Treasury Bureau (FSTB) has been working with us just to help understand what they need to do to help make things better for us,” says Carver.
Overseas interest as well
Overseas FinTech companies have recognized Hong Kong’s potential and its favorable geographic location as well.
Algomi, which started in London three years ago, opened its Hong Kong office earlier this year after opening offices in the United States in 2014.
“Asia absolutely is a place you need to be, there’s no question about it. At the end of the day, if you’re running a serious business, you need to be in Asia. And of course, Hong Kong is extremely well-positioned to be that place,” says Bruun-Olsen.
He illustrated this point with the example of a three-legged stool that’s missing a leg after having offices in the US and London. For Algomi, it was essential that they established a presence in Hong Kong as they needed to be close to their clients which are mostly investment banks with offices here.
But besides the banks in the city, the potential of China is always an added bonus. KPMG’s McKeogh says Hong Kong is the “gateway to 20 percent of the world’s population in a single market.”
According to FinTech HK’s Barberis, it’s because of China that it can lead Hong Kong to become Asia’s leading FinTech center
“Just by its border, you have China which has one of the biggest world market opportunities when it comes to financial services. They have to totally reform their financial market and they will use technology to do this.”
Is it disruption, revolution or evolution?
One common notion of FinTech is that it will cause disruption to traditional banking and compete against it. This is true with some FinTech companies but not all. And in
some ways, it is not necessarily a bad thing. Big banks have become too rigid and bureaucratic to meet the changing needs of their customers.
“If we look at it from a threat perspective, should banks be worried? Absolutely. Because [the FinTech companies] are going to be providing the same services that they do but they’re going to be doing it cheaper and leaner,” says KPMG’s McKeogh.
Investable’s Carver believes it is about time that this happens to the financial services as other areas have already been disrupted such as in media and communications with Twitter and Whatsapp.
But many people, like McKeogh, believes it’s more about evolution.
“[Banks] need to embrace it. FinTech isn’t about competition or disruption. It’s about developing new solutions to meet the demands of today’s customers,” says McKeogh.
Algomi’s Bruun-Olsen speaks similarly.
“Within the institutional wholesale segment, I think disruption is more about evolution. The financial market isn’t broken but as the world develops, there are new problems that appear and therefore [necessarily] to work with the existing structure to make that better, safer and solve the problems that have now appeared which didn’t exist before. That is not disruption, that is a partnership.”
Algomi’s network help investment banks identify the enormous amounts of bonds available to be traded to potential clients and intelligently link sellers to buyers without taking on the risk themselves.
AMP also works with banks as they provide an alternative lending platform for banks to provide loans to small businesses who don’t meet the requirements of the existing ones.
DeLuca absolutely sees more banks working together with FinTech companies in the future. From his 20-plus years’ experience in the payments business, he has been through previous talks of banks being pushed out and have learned that they eventually come around and survive.
“Financial technology helps you move much quicker than banks can react. But eventually those technology which are truly innovative and have the ability to move the needle, banks will come around to bring that in house … The banks will eventually get into the business lines of these disruptors and eventually look to buy the technology.”
In Hong Kong, banks have already begun to recognize this with their participation in the various incubators. They are looking for ways to incorporate solutions into their current models and FinTech companies are looking to work with them as well.
“That’s what’s been interesting with doing these accelerator programs,” Investable’s Carver explains. “You have the start-ups who want banks as clients because they want access to their client base or they have technology that banks can use but they don’t know how to approach a bank. We are that bridge in between so we can help corporations realize that we can bring in some best of class start-ups that will help your business.”
It’s a win-win situation as banks get new solutions for a relatively cheap price, rather than spending all their resources and time on developing their own.
Although Hong Kong has been steadily increasing its FinTech activities, it still has some ways to go with putting together a regulatory system to deal with issues like the ones Investable and other crowdfunding companies currently face.
FinTech HK’s Barberis suggested that it can look towards London as an example. Before the UK government stepped in with the desire to make London the FinTech capital of the world, much of the activity was driven by the private sector, resulting in what he says as “a very nice organized chaos”.
For those who fear that FinTech might be another dot.com bubble in the making, KPMG’s McKeogh refutes this by pointing out the amount of the investments made and that one of the first questions that people are asking now is how they’re going to be making money out of this.
Investable’s Carver is also very confident that it is no bubble.
“Technology is part of our infrastructure now. It wasn’t back then, it was something new and interesting. Things got a little carried away and the companies that got really highly-priced weren’t necessarily generating that much value or revenue. Now you look at guys like Alipay, they’re generating a lot of money. They’re real businesses.”
In five years’ time, McKeogh believes that some of the start-ups starting now will start to become part of our everyday lives. He sees the FinTech industry continuing to grow in Hong Kong and hopes that we’ll see our first unicorn.
But besides the obvious financial gains, there might also be a social gain with the growth of the FinTech industry in the city.
“The Hong Kong people, especially the young generation, it needs a new industry where it can work. The financial sector is downsizing and if you are able to get a job, you’re very likely to get a boring backend office job and you’re really fighting against the odds with your growth prospect,” Barberis says.
“Hong Kong needs to steer its economy towards something new. The great thing about financial technology is it’s not a radical change. It is just leveraging on the city’s historical position.”
As for Hong Kong’s potential as a FinTech center, KPMG’s McKeogh strongly emphasized that it already is one.
“It’s already recognized as one of the leading financial centers in the world and is a key hub in Asia especially with its connectivity with China. When you then add to that the exponential growth from the start-up community over the past three years with the rapid increase from two incubators to more than 50, that sort of combination has put Hong Kong firmly on the map.”
“Admittedly it’s no Silicon Valley, but I don’t think anything will ever be a Silicon Valley because it’s a very unique environment. But certainly 13they are very competitive areas and development hubs in their own rights.
I think you see that from the activities which is going on with what Accenture, the DBS accelator, AIA and their health and insurance accelerator in Hong Kong, they are prime examples that this really is a location to be reckoned with.”