Fintech: SAR can be world's 'digital super-connector'

This article appeared originally in the China Daily on 30 Oct,2019.
Authors: Stephen Wong, Deputy Executive Director and Head of Public Policy Institute at Our Hong Kong Foundation, Anne Li, Researcher at Our Hong Kong Foundation

In this digital age, finance is very much intertwined with the digital world. Financial technology, or fintech, is now key to the transformation of the traditional financial sector, leading to new phenomena such as modular banking, whereby financial products and services are divided in more detail. Different fintech companies all focus on certain categories of products or services, such as payment or investment, in order to stay ahead in particular areas. This concept is quite different from the comprehensive financial services provided by traditional banks.

With our distinct advantages, Hong Kong could become the “digital super-connector”, acting as both the international pilot testing ground for mainland fintech enterprises and a gateway for global digital citizens, thanks to our excellent infrastructure

Modular banking will lead to more market competition, but it also brings more financial services and more choices for consumers. In order to increase their competitiveness, traditional banks will cooperate more with technology firms to bring innovative and effective services. However, with the modular banking trend, traditional banks and the ever-increasing number of third-party service providers are becoming more interdependent, and the management and application of huge amounts of data will increase the risk of security and data protection. Unless there are timely regulations and guidance, these challenges will threaten the stability of the financial system.

Many countries have realized the need for effective policies and regulatory measures for modular banking, which is now a global phenomenon. But policies and regulations need to provide both the space for innovation and trial-and-error, and the monitoring and regulation of risks. As such, the United Kingdom, the European Union, Singapore and other economies have launched open-banking initiatives and other policies that support innovation and competition on the one hand while strengthening risk management and protection measures on the other.

Open banking can be regarded as a collaborative model, with banks sharing data with third-party organizations using technologies such as an application programming interface, or API; for example, the European Union’s revised Payment Services Directive, or PSD2, which requires banks to open data to third parties using open API. With customer consent, banks can use the API format to supply a third-party service provider with account information and transaction data, which means the breaking up of the longtime monopoly of banks of customers’ data, thereby returning the control of data to customers.

Open banking enables consumers to choose which banks or third-party organizations can access their data, which in turn allows the banks to provide more services using such data. Many startups have access to bank data through API and have built platforms to help consumers compare different financial products. In the UK, HSBC introduced a mobile phone app called Connected Money, which links up data from different banks, making it convenient for account holders to check their balances across different banks, facilitating a centralized financial analysis. All these create a win-win, open ecosystem for the new financial sector, with traditional banks, technology giants and startups all prospering, underpinned by a balance between innovation and risk.

As a global financial center, Hong Kong should gear up and be prepared for both the opportunities and challenges of the digital era. With our distinct advantages, Hong Kong could become the “digital super-connector”, acting as both the international pilot testing ground for mainland fintech enterprises and a gateway for global digital citizens, thanks to our excellent infrastructure.

The booming financial industry in Hong Kong provides plenty of fintech application scenarios, while the government has taken reference of overseas standards when setting out fintech policies. As such, Hong Kong has the potential to become a pilot testing ground and launch a platform for fintech firms preparing for international expansion. The city is now building open banking standards and other fintech regulatory measures, such as the Hong Kong Monetary Authority’s Open API Framework for the Banking Sector, announced in July 2018. It recommended the use of technical standards that are already widely used internationally while providing guidance for the cooperation of banks and third-party service providers in order to provide adequate protection to consumers. Hong Kong also embraces international practice in the policies and regulatory measures of payment tools and virtual banking, with a licensing system that accesses issues such as operation models and financial strength.

In contrast, detailed fintech segments like open banking do not have regulatory frameworks or supervisory requirements on the mainland, so major fintech corporations usually collect data independently and make deals and tie-ups with traditional banks. Although fintech giants are doing well both in terms of innovation and market share, an open, win-win ecosystem that also involves other startups has not been created, which may not be good for the overall development of fintech. If mainland fintech companies want to expand to overseas markets like Europe, they will need to familiarize themselves with regulations and standards such as PSD2. Fintech standards are different across different countries, and what Hong Kong is doing is setting up a framework and strategy that match international standards so as to provide a fintech pilot testing ground that connects with the world, one which provides a springboard for mainland enterprises’ “going global”.

As an established global financial center, Hong Kong is blessed with many qualities to develop fintech. As new opportunities continue to arise, Hong Kong should further open up its mind and broaden its vision to prepare for its role as the “digital super-connector” that links up the world.