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A digital transformation in Hong Kong banking

Dan Warelis
Dan Warelis
Government and Regulatory Affairs, APAC

With the newly authorized virtual banks and a city-wide digital identity program, the benefits of fintech could soon ripple across Hong Kong, transforming how citizens interact with banks. Will account opening for SMEs and consumers soon be as quick as ordering your morning coffee?

  1. Hong Kong banking is being transformed by the authorization of new virtual banks and a government-led electronic identification program.
  2. The rise of virtual banking will require high-quality KYC screening and data analytics to ensure a seamless experience for users.
  3. Our Pan Asian Regulatory Summit on 9 & 10 October will discuss the rise of virtual banking and its anticipated impact on the traditional Hong Kong banking model.

Hong Kong is the third most important financial hub globally and number one in Asia, but the advantages of this leadership are not always felt by its residents in their interactions with the financial system.

The Asia/Pacific top 15 centres in GFCI 23. A digital revolution in Hong Kong banking
Source: The Global Financial Centres Index

Over the past few years, the de-risking of bank accounts has made accessing basic banking services for local residents and SMEs increasingly challenging.

Two developments in particular — the authorization of new virtual banks and the roll-out of a government-led electronic identification (eID) program — should address these issues, while simultaneously helping to drive the growth of Hong Kong’s fintech ecosystem.

Will 2019 be the year that Hong Kong residents begin to reap the benefits of some of the government’s most recent smart city and fintech initiatives?

Challenges in Hong Kong banking

Those who have gone through the process of opening a bank account in Hong Kong in recent years will be familiar with the extensive paperwork, signatures and information needed for them to simply confirm their identity.

A recent survey by the Hong Kong Institute of Chartered Secretaries found that 76 percent of members said bank account-opening procedures were getting more difficult, with accounts for start-ups and SMEs singled out as problematic.

The single largest problem highlighted by respondents in opening an account was in meeting bank documentary requirements. Other problems included delays in processing and high account opening fees.

The rise of digital banking services

Imagine then, a bank account-opening process that takes as much time as ordering a cup of coffee.

You approach the counter in your local coffee shop and see an advertisement for a brand new app for digital banking services.

Within the time it takes the barista to make your cappuccino, you download the app, scan your fingerprint on a countertop scanner, take a picture of your ID with your smartphone and have a brand new online bank account capable of basic banking activities.

This seemingly far-off future in Hong Kong banking already exists in other countries, notably in India where the provision of digital banking services, coupled with a government-issued ID, Aadhaar, has facilitated partnerships like the one described above between a coffee chain and a fully digital banking service.

New players in Hong Kong banking

With the forthcoming authorization of Hong Kong’s first fully virtual banking licenses, the competition between incumbents and new players in the financial sector is expected to get fierce.

The diversity of companies that confirmed they applied for virtual banking licenses is a telling sign of what this competition may look like in the future. Applicants include an incumbent bank, Standard Chartered; a lending operator, WeLab; and a joint venture between an established bank, Bank of East Asia, an international payments service, Airwallex, and a venture capital firm, Sequoia Capital China.

Each applicant will offer different benefits, and could target different sections of the digital banking markets according to their potential strengths.

It is also expected that larger financial institutions and technology companies will partner with smaller fintech companies to apply for virtual banking licenses, though it remains to be seen who will have applied and — in due course — who is actually licensed.

The Hong Kong Monetary Authority has promised a level playing field with regards to licensing requirements between traditional and digital banks.

Any digital bank will have to meet specific criteria to demonstrate they are viable, including the existence of a robust business plan and exit strategy, as well as customer protection rights and obligations.

There is clearly no one-size-fits-all model for a digital banking services provider, and all will compete equally on quality of services, cost, and products specifically tailored to their target customers’ needs.

A digital identity ecosystem

That brings us to the importance of the eID initiative.

The 2017 Policy Address announced the provision of an eID for all Hong Kong residents as part of Hong Kong’s Smart City Blueprint, and the government expects to have the new digital identification cards issued by 2020.

For a population of over 7.3 million people, Hong Kong has a mobile subscriber penetration rate of almost 250 percent and over 17 million mobile subscribers with 3G/4G capability.

While larger banks have their own mobile banking options to complement their existing banking services, there is a considerable market potential still to be exploited on mobile phones.

While eID will be functionally different compared to other government Smart ID initiatives (e.g. India’s Aadhaar identification), it will become an important part of the city’s financial infrastructure, allowing residents to use a single digital identity and authentication to conduct government and commercial transactions online.

Coupled with innovative verification technologies, eID should facilitate the introduction of financial services and products that can be accessed via smart phones anywhere, 24 hours a day.

KYC and financial crime risks

As Hong Kong prepares for its fourth Financial Action Task Force Mutual Evaluation, it would be remiss not to note the importance of back-end technology that can mitigate financial crime risks without negatively impacting the user experience.

If digital banks are held up by the same issues that cause de-risking at traditional banks, the benefits for SMEs and certain underserved sectors of society to bank with them could be limited.

Digital banks that can incorporate accurate identity verification services on mobile phones with the help of Hong Kong’s eID, and combine that with high-quality KYC screening functionality and data analytics technologies, will be in the best position to take advantage of these government initiatives.

Back-end technologies that allow these new digital providers to facilitate a seamless experience for the user will be integral to their success.

Importance of financial innovation in Hong Kong

Hong Kong has been working hard to develop a new start-up culture in the financial services sector and these initiatives will lower barriers towards that goal.

In their March 2018 report, the Global Financial Centres Index noted that respondents referenced Shanghai, Qingdao and Singapore more than Hong Kong when asked which financial hubs will increase in significance in the future.

The 15 financial centres likely to become more significant. A digital revolution in Hong Kong banking
Source: The Global Financial Centres Index

Investments in financial infrastructure and technology ecosystems made now will help ensure that Hong Kong not only remains a world-class financial hub, but also that these benefits filter throughout the economy to residents and SMEs currently experiencing barriers to access.