A silent revolution is underway in Hong Kong's fintech industry, helping city catch up to Greater Bay Area neighbours

·10 min read

As an international financial centre, Hong Kong has been surprisingly traditional when it comes to the local economy.

Shopkeepers, crammed into wardrobe-size stores filled with ceiling-high stacks of clothing, hardware or toys, track their accounts in notebooks, often putting price stickers next to their sales records. Handwritten invoices are common, and cash remains king in Asia's second-largest financial market.

It is a different world 14 minutes away by high-speed train across the border in southern China's technology metropolis Shenzhen. Cash is rarely used, and everything from dumplings to a luxury watch can be bought with the scan of a QR code on a smartphone.

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Still, Hong Kong is quietly catching up to Shenzhen, as the city aspires to become a fintech innovation hub for every application from day-to-day payments to the technology pipelines that carry trillions of dollars of capital freely across the world everyday, industry leaders and government officials said.

"Hong Kong is a super connector and the most international city in China, playing a special role to connect the East and the West, and acting as the fusion reactor for fintech from the Greater Bay Area," AMTD Group's chairman Calvin Choi said during the 2021 Hong Kong FinTech Week conference this week.

A sign of the revolution underway: an electronic consumption voucher programme introduced in April to support battered retailers and restaurants added more than 3 million sign-ups to stored value facilities (SVF) in the city of 7.5 million residents. Grocers, taxi drivers and wet market vendors - among the most ardent holdouts against anything but cash - were among more than 80,000 merchants who began to accept electronic payments, according to Financial Secretary Paul Chan Mo-po. As a result, paper notebooks are being replaced by QR codes and readers for the Octopus card, Hong Kong's very own reusable SVF, launched in 1997.

Grocers at the Sai Ying Pun wet market are now allowing customers to pay with QR codes as part of the city's e-voucher programme. Photo: Xiaomei Chen alt=Grocers at the Sai Ying Pun wet market are now allowing customers to pay with QR codes as part of the city's e-voucher programme. Photo: Xiaomei Chen

"[The voucher scheme] has helped promote the fintech industry and speed up the economic recovery of Hong Kong," said Jim Lai, vice-president of Tencent Holdings and chairman of Tencent-backed Fusion Bank, one of eight virtual banks licenced in the city.

Tencent's WeChat Pay HK is one of the four e-wallets alongside the AlipayHK e-wallet by this newspaper's owner, taking part in the e-voucher programme.

Hong Kong has introduced a number of measures in the past three years to attract fintech start-ups as the city tried to keep pace with Silicon Valley, Singapore and Shenzhen in financial innovation. A landmark move was the 2018 launch of the Faster Payment System (FPS), which allows users to transfer money instantly to friends and family and selected merchants.

What does a QR code work? SCMP Graphic alt=What does a QR code work? SCMP Graphic

About 740,000 daily transactions worth more than HK$5.2 billion (US$668 million) were conducted via FPS as of September, more than Singapore's Fast and Secure Transfers (FAST) system and the 24-year-old Octopus combined.

Another sign of the changing times in the world's most over- banked city - 165 licensed banks for 7.5 million residents - is the establishment of eight virtual banks. These financial institutions, which must operate entirely online without bricks-and-mortar physical branches, have attracted more than 1 million accounts between them since beginning operating in earnest last year.

Last month, the city debuted Wealth Management Connect - the latest transborder investment channel for investors in mainland China and Hong Kong to dabble in each other's markets - and announced a new one-stop sandbox to develop cross-border financial products.

Hong Kong's Undersecretary for Financial Services and the Treasury Joseph Chan (second left), Fusion Bank's Chairman Jim Lai (third left), AMTD Group's Chairman Calvin Choi (second right) and BitRock Capital's chief executive Alfred Shang (first right) during a panel discussion at the 2021 Hong Kong FinTech Week on November 3, 2021. Photo: K.Y. Cheng alt=Hong Kong's Undersecretary for Financial Services and the Treasury Joseph Chan (second left), Fusion Bank's Chairman Jim Lai (third left), AMTD Group's Chairman Calvin Choi (second right) and BitRock Capital's chief executive Alfred Shang (first right) during a panel discussion at the 2021 Hong Kong FinTech Week on November 3, 2021. Photo: K.Y. Cheng

In a far reaching development, the Hong Kong Monetary Authority (HKMA) is testing a digital yuan in the city, aiming to create more convenient payments between Hongkongers and mainland residents even as it fuels the prospect of launching the e-HKD, Hong Kong's own central bank digital currency.

Global cross-border payments may soar to US$156 trillion by 2022, with business-to-business transactions accounting for the bulk of those payments, according to EY's report.

Hong Kong, which maintains a fully convertible currency separate from the renminbi, can also serve as the springboard to help the Chinese government globalise the yuan by pushing for the e-yuan's use in the Middle East and Southeast Asia. A digital currency platform prototype that links up multiple central banks called the "mBridge" is being tested, with the People's Bank of China (PBOC) and the central bank of the United Arab Emirates being the latest entrants in February, alongside HKMA and the central bank of Thailand.

The quartet are exploring the use of blockchain to smooth out cross-border fund transfers in capital market transactions, e-commerce, insurance payments, trade finance settlement and wealth management transactions.

"Hong Kong's position as an international financial centre can contribute significantly to development of the mBridge platform," said the HKMA's financial infrastructure executive director Colin Pou, at the Fintech Week on Thursday. "Hong Kong would be a heavy user of this link, which would reinforce its status as an international financial centre."

Undated photo of the e-yuan's signage at a self checkout counter in a Shenzhen supermarket. Photo: Bloomberg alt=Undated photo of the e-yuan's signage at a self checkout counter in a Shenzhen supermarket. Photo: Bloomberg

Hong Kong is catching up in fintech as authorities push for the city's integration into the Greater Bay Area (GBA), the cluster of 11 cities in southern China with more than 86 million residents and a combined economy of US$1.7 trillion.

"We are very positive about the development of the GBA, and specifically on the role for Hong Kong, which will increasingly be important in terms of helping Chinese companies and customers to expand in overseas markets," said BitRock Capital's founding partner Alfred Shang.

Supply chain finance is an area that could see some of the highest growth in the GBA in the coming years as the industry becomes more digitised, said Shang, a Hongkonger who lives in Shanghai.

"With AI and blockchain, we will see more opportunities for financial services to catch up and [serve] these companies," he said. "The funding gap for SMEs in China is about 20 trillion yuan (US$3.12 trillion) so there are a lot of opportunities in supply chain finance."

Screen grabs from HSBC's PayMe app. Photo: Handout alt=Screen grabs from HSBC's PayMe app. Photo: Handout

The biggest of Hong Kong's three currency-issuing banks, HSBC spent US$5.5 billion last year on technology to digitise even more of its operations. About 85 per cent of its transactions in Hong Kong are done digitally and HSBC's own PayMe payment application has attracted more than 2 million users since 2019, giving the bank the confidence to not pursue a virtual bank licence.

Hong Kong's proximity to China and its traditional role as the gateway to the mainland also makes it an attractive location for international start-ups, according to executives from the United Kingdom, northern Europe and South Korea.

"The city is the top choice for Nordic start-ups in fintech and other sectors that want to expand their business in China and Asia," said Binh Johansson, community director of Nordic Innovation House, which helps companies and start-ups develop in Hong Kong, Singapore, Japan and the US.

"Hong Kong has a good pool of talents and English is widely spoken, which makes it easy for Nordic start-ups to operate here," she added. "More importantly, the rest of the GBA is within close travel distance and Hong Kong is also close to other Asian markets by air."

Still, Hong Kong faces challenges in moving to the forefront of fintech. Mobile banking apps by traditional lenders and virtual banks scored 10 per cent lower than their European peers, according to Sia Partners' 2021 Mobile Banking Benchmark report, an annual ranking of 114 mobile banking apps worldwide.

None of Hong Kong's banking apps made the study's global top 15, while virtual banks in the United States, Japan and Europe scored 40 per cent higher on average than the city's digital-only lenders.

The gap "is still wide between the most innovative banks internationally and the most innovative ones in Hong Kong, and will remain for at least a couple of years," said Etienne Ranwez, a manager in Hong Kong of the Paris-based consultancy Sia Partners. "We expect the gap to narrow in the coming years as Hong Kong's virtual banks capitalise on lessons learned from their own operations and international best practices."

How do Hong Kong's digital banking services rank globally? SCMP Graphic alt=How do Hong Kong's digital banking services rank globally? SCMP Graphic

Singapore, with its own fintech festival beginning on Monday, is nipping at Hong Kong's heels to attract start-ups.

Hong Kong can compete, said Joseph Chan Ho-lim, the Under Secretary for Financial Services and the Treasury, citing the city's top Asia spot and third global rank in the Global Financial Centres Index published in September.

"Since many financial institutions set up their Asia's regional headquarters in Hong Kong, this is the ideal place for the development of fintech as they can enjoy tremendous access to potential clients, investors and business partners," Chan said.

Hong Kong ranked ninth among cities globally, just ahead of Singapore, in research and analytics firm Findexable's 2021 Global Fintech Rankings Report in June.

Singapore wants to position itself as a key player for cryptocurrency and the underlying technology, the Monetary Authority of Singapore's managing director Ravi Menon said on Bloomberg Television last week.

"We are developing cryptocurrency technology, understanding blockchains, smart contracts and preparing ourselves, so if 2030 [becomes] a tokenised economy," the central bank can answer the question of whether "Singapore is well-positioned," Menon said. "But it is not without risk."

SCMP Graphics alt=SCMP Graphics

China, which had kept severe curbs on cryptocurrencies since 2017, made trading of the tokens outright illegal in September, after banning all mining activities four months earlier.

Hong Kong has limited cryptocurrency transactions to professional investors, but the city's financial regulator said on Wednesday it was reviewing those rules to potentially allow individual retail investors to own exchange traded funds (ETFs) with exposure to virtual assets.

Hong Kong's zero-Covid pursuit, including a quarantine period of up to 21 days, even for fully vaccinated inbound travellers, has raised the ire of international business executives.

Nine out of 10 members surveyed by the Asia Securities Industry and Financial Markets Association (Asifma) said last month that they found it difficult to operate in the city because of its restrictive Covid-19 policies, with nearly half saying they were contemplating moving staff or functions away from the city as a result.

Soon after the survey results were released, city officials said they were dropping most exemptions that had allowed senior business executives and foreign diplomatic personnel to skip weeks of isolation when travelling to the city.

Vaccinated inbound passengers at Hong Kong International Airport face up to 21 days in quarantine on arrival, in one of strictest measures to control Covid-19 globally. Photo: Xiaomei Chen alt=Vaccinated inbound passengers at Hong Kong International Airport face up to 21 days in quarantine on arrival, in one of strictest measures to control Covid-19 globally. Photo: Xiaomei Chen

Hong Kong has pursued an aggressive policy to limit coronarvirus cases in hopes of spurring the reopening of the border with mainland China for quarantine-free travel, which could happen on a limited basis as soon as next month.

Johannson said the restrictive quarantine rules in Hong Kong, which require travellers to spend up to 21 days of quarantine, was a concern. "Many Nordic start-ups have shown a great interest in joining the Fintech Week in Hong Kong this year but decided not to as they found it hard to justify a 21-day quarantine for a two-day conference," she said.

Many Korean financial firms and start-ups are interested in opening operations in Hong Kong, but the quarantine measures are a concern, South Korea's Consul General in Hong Kong Baek Yongchun.

"We would like to see the restriction relaxed soon to [make it easier for] travellers to come to Hong Kong," he said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.

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