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Proximity to China raising status of HK as fintech hub

City is fertile ground for startups to grow, attracts firms looking for gateway into and out of global fintech leader China
Monday, January 23, 2017 - 05:50

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Hong Kong's financial technology (fintech) sector is heating up and analysts say the city can benefit from its proximity to China, the current global leader in fintech.

Hong Kong

HONG Kong's financial technology (fintech) sector is heating up and analysts say the city can benefit from its proximity to China, the current global leader in fintech.

Hong Kong aims to establish itself "as a hub for the application and setting of standards for cutting-edge fintech", said city chief executive Leung Chun Ying last week in his annual policy address, during which he noted that the government has invested HK$18 billion (S$3.3 billion) to enhance the innovation and technology ecosystem.

"The (fintech) sector as well as research institutions and regulatory authorities are actively studying a number of projects on cyber security and blockchain, and building a pool of talent," said Mr Leung.

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The growing buzz around fintech is visible - Hong Kong in November hosted its inaugural Fintech Festival Week, and just recently held the Fintech Finals 2017, a two-day event featuring panels with international industry experts and a competition for fintech startups.

The government has also made regulatory changes and increased support amid growing consumer adoption of such technologies.

The Hong Kong Monetary Authority (HKMA) in August granted the first batch of five licences to issuers of stored-value facilities to better regulate the expanding electronic payment business.

A month later, HKMA unveiled a Fintech Innovation Hub with the aim of bringing banks, startups and central bank representatives together to develop and test fintech ideas. "The Hong Kong fintech community has matured substantially in the past three years," said PwC fintech and regtech (regulatory technology) leader for China/HK Henri Arslanian.

"We used to be a small group of passionate folks meeting around dinners or drinks. Now we have an entire ecosystem from regulators and government to banks and entrepreneurs who are all very active in shaping the broader community."

Hong Kong offers a fertile ground for fintech startups to grow, said Charles Ng, the associate director-general of Invest Hong Kong - a government department tasked with attracting foreign direct investment - last Thursday at the conclusion of the Fintech Finals 2017.

"It has a robust and market-driven fintech fundraising centre, with different accelerators and innovation labs in town and the largest Smart Space Fintech located in Cyberport," he said.

James Lloyd, Ernst & Young's Asia-Pacific fintech leader, said that Hong Kong has all the right ingredients to make it a competitive international hub for the sector. "In Hong Kong, we have a global financial centre which is top three in the world . . . and Hong Kong is looking to develop technology talent locally and leverage technology talent across the border in China," Mr Lloyd told The Business Times.

The availability of capital is strong, and as a global trading hub, there are many opportunities for new technology such as blockchain - which can be used to create secure and trusted digital contracts - to make trading processes more cost efficient, he added.

An advantage unique to Hong Kong is its position as a gateway into and out of China, home to some of the most valuable fintech companies.

These include Ant Financial Services Group, the financial-services affiliate of e-commerce giant Alibaba Group Holding that operates China's online-payments platform Alipay; Lufax, the mainland's largest peer-to-peer lender; and e-commerce company JD.com's consumer finance subsidiary, JD Finance.

Hong Kong attracts international fintech enterprises looking to enter the Chinese market, a key driver of fintech in the Asia-Pacific region.

In the first three quarters of 2016, fintech investments in the Asia-Pacific reached nearly US$10.5 billion - more than double the US$4.2 billion for the whole of 2015 - most of it in investments involving Greater China companies, said Albert Chan, head of Accenture's financial services business in China. "This is more than Europe, which attracted US$2 billion in investments, and more than the US, which attracted US$6 billion in investments in the same period," Mr Chan told BT.

Research by Accenture showed that for the first seven months of 2016, the top 10 investments in Asia-Pacific fintech ventures occurred in China and Hong Kong, accounting for 90 per cent of overall Asia-Pacific investments and valued at US$8.75 billion.

Mr Lloyd said that mainland China is undoubtedly the global leader in fintech - and that bodes well for Hong Kong, which can serve as a launchpad out of China for some of the big companies.

"Traditionally, we've thought of Hong Kong as a gateway to China . . . but when it comes to fintech, I think the big opportunity for Hong Kong is as a gateway out of China," he said.

He cited the example of how Alipay Wallet made its first step out of the mainland in Hong Kong as one of the first five stored-value providers to receive a stored-value facilities licence here, enabling it to explore setting up its services in convenience stores and other offline avenues.

Also among the five licence holders is WeChat Pay, an integrated payment system inside the social and messaging application of another mainland internet behemoth, Tencent.

Said Mr Lloyd: "It's a good indication of the potential in Hong Kong. As these mainland companies seek to go international, can Hong Kong be a stepping stone? There are huge opportunities there."

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