The Bottom Line.
In this Asia-Pacific Insight, Fintech & transformation expert Nick Grenham explores recent developments related to open banking, virtual banks, Open API policy and financial inclusion in Hong Kong. While Hong Kong has made significant efforts lately to further develop its fintech policy framework, indeed questions remain as to whether recent initiatives will have enough teeth to change the lives of the many who still have limited access to finance in one of Asia’s major financial cities. Open banking won’t bring financial inclusion to Hong Kong, Grenham writes, unless…
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Open Banking Won’t Bring Financial Inclusion to Hong Kong unless…
[By Nick Grenham]
With Antoine Martin
Open Banking is a significant trend in Hong Kong these days, and with it come many expectations. Over the past year, the Hong Kong Monetary Authority (HKMA) has particularly worked on promoting Virtual banks as well as Open APIs, and in both cases, the main goal has been to support innovation in financial services.
Interestingly, Hong Kong’s Smart Banking policies have put the city under the spotlights for a variety of reasons. Some good, some not so much.
Considering that financial technologies are part of the government strategic plans, promoting two policies in favor of Fintech development obviously has particularly put Hong Kong into a strong position as far as leadership is concerned. At the same time, some questions have also been raised as to the efficiency of some of the suggestions formulated by the regulator.
Among these, the choices made in relation to the Open API framework suggest that significant risks have been left onto the banks’ shoulders. More generally, questions may also be raised as to whether virtual banks will actually be able to promote financial innovation.
While Fintech Policy often puts Hong Kong in competition with Singapore, these developments overall have more to contribute than regional politics, however. Beyond influence games, the idea of promoting financial innovation and to foster the development of new financial services has one major purpose, and that is financial inclusion. The question, therefore, is to determine whether these policies will in practice alleviate financial inclusion at all.
Recent open banking developments.
The year 2018 and 2019 have witnessed many changes from a smart banking perspective. Following the announcement by the HKMA of the introduction of a ‘Smart Banking Era’, various opportunities to modernize Hong Kong’s financial industry have been considered, with particular attention being given to virtual banking and Open APIs.
Open banking via Virtual banking.
Efforts towards developing a new generation of (virtual) banks have been introduced in 2018 with a view to helping Hong Kong to take a financial leadership position in the region.
Interestingly, while virtual banks are largely present in Europe, they were still very rare in Asia at the time, therefore the HKMA saw an opportunity for Hong Kong to rise and shine.
Several virtual banks were being developed in different Asian countries at the time, yet the trend was only beginning and there was no real competition to be seen. Neither Hong Kong or Singapore had virtual banks at the time, which meant that Hong Kong had a chance to take a lead in the virtual banking field.
By calling for applications, the regulator hoped to attract financial services providers from the region – particularly China – and most likely considered that, once licenses would be granted, Hong Kong would mathematically become a de facto leader regionally.
Though the Hong Kong market is relatively small and rather saturated, the government’s strategic focus on the Greater Bay Area, with its population of around 70 million, could also present a significant opportunity for the virtual banks, subject to regulatory cooperation.
If you consider that an average of 675,000 border crossings takes place a day between Hong Kong and Shenzhen, plus the thousands of border crossings from Macau, chances are that savvy and customer-centric banks would be able to capitalize on the opportunity.
Open banking via Open APIs.
The development of an Open API Framework and market in Hong Kong has been another major development lately. In the main, the purpose of the Open API initiative was multilayered.
First, the Open API Framework consisted in building bridges between banks and Third-party Service Providers (TSPs) with a view to increasing the offer of digital financial services. By creating more connectivity between the banks and their users, TSPs would indeed have a chance to increase people’s access to financial services they would not otherwise consider.
Second, and perhaps more importantly, the Open API Framework also had a very political aspect. While Hong Kong is permanently compared to Singapore when it comes to financial services, it has a very competitive agenda on the matter. In the field, however, Singapore is far more advanced when it comes to Open APIs and has been running tests for several years. In 2016, in particular, the Monetary Authority of Singapore (MAS) released its so-called API Playbook (regrouping over 400 APIs) and has thus been historically far ahead.
Alleviating financial inclusion issues: some doubts.
Despite some progress, questions overall remain as to the ability of financial reforms to effectively alleviate financial inclusion issues in Hong Kong.
In essence, one might for instance be legitimate in asking whether simply allowing people to open virtual bank accounts will make a difference at all. Especially when the licenses are in the end granted to the historical actors of the market…
Virtual banking: from paper to innovative banking?
On paper, the idea of promoting virtual banks in Hong Kong was – is – interesting. In fact, in a city in which one part of the population is systemically underbanked and where the other part of it struggles to keep its bank accounts open, the question made a lot of sense.
If new actors gained access to the Hong Kong financial market, some innovative technologies capable of alleviating a general account shortage might develop. At the time, however, some questions were raised as to whether the relatively high financial requirements imposed on the new actors would allow for disruptive businesses to enter the game at all.
The HKMA has since then answered that question. In March 2019, it attributed the first four licenses to WeLab (the lending giant), Standard Chartered, Bank of China, and Zhong An. On May 10th, the second batch of licenses was released and again major groups won the prize: Ping An Insurance, Ant Financial (Alibaba), a Xiaomi group and a consortium involving Tencent (WeChat), ICBC (another banking giant) and the Hong Kong exchange (HKEX).
A year later, to say things differently, it therefore seems that the hypothesis that the virtual bank initiative would mainly benefit large Mainland investors and large Hong Kong entries has been verified.
Ironically, the historical banks which already offered internet portals will now offer virtual banking. Meanwhile, the small market entrants have been left aside. In fact, whilst one of the applicants (Neat) offered a very simple and efficient onboarding process which could have dramatically increased people’s access to banking, the business has not been given any license, so far anyway.
Far from that, many of Neat’s customers – which accounts used to be hosted by Standard Chartered prior to the license application period – have recently, unexpectedly and inexplicably seen their bank accounts blocked, perhaps due to a complication between both institutions.
We will wait to see, therefore, how innovative the ‘new’ banks really are and whether or not they live up to the expectations of higher savings interest rates, AI-driven credit scoring for low-income workers and SMEs, or low-cost protection through their partner ecosystems.
The real innovation, perhaps, will come from the tech giants which have now gained a rather unique access to the market.
Meanwhile, the above brings the question of whether Hong Kong’s policy has been focusing on the wrong aspects. Ultimately, whether the new virtual banks will help solve financial inclusion problems is not only a matter of increasing the number of banks.
In reality, most of the banks present Hong Kong propose online access to their account anyway, so the impact of simply making new market entrants virtual is in itself limited.
Open banking with better due diligence.
One of the key issues is due diligence and the way it is conducted. Opening a bank account in Hong Kong has been a challenge for years, but if the HKMA and the SFC stopped arguing that the availability of bank accounts is merely a commercial matter to be managed by the banks, chances are that the problem would be solved already.
Open banking with resilience.
Another key issue is the stability of the banking ecosystem itself. As just mentioned, many people (and businesses) in Hong Kong face account closures on a daily basis. No explanations, nothing to do but wait and die. Or both. To that extent, the financial inclusion challenge is thus not just about opening accounts, it is also about keeping accounts open.
Open banking with better access to credit.
The third issue for a significant proportion of low-income workers and small businesses in Hong Kong is the availability of credit. Whilst many small businesses own a checking/simple bank account, they are often unable to borrow money and to obtain credit lines from their financial institutions.
We are not talking about car loans or mortgages here. We are talking about small microloans of a few hundred US dollars. For instance, take a look at the 370,000 foreign domestic workers in Hong Kong – where can they obtain a loan in case of an unexpected emergency back home? The luckiest might get some help from their employer or from a licensed consumer finance business. But most would turn to unscrupulous lenders and loan sharks who would eventually charge them exorbitant interest rates and fees.
Banks, however, would not be the typical lender. Should the newcomers include lending services and a more flexible approach to credit scoring into their offering, there might however be room for significant positive change. Time will tell…
Open APIs: some financial inclusion potential?
Open APIs could possibly represent a much more significant opportunity for open banking development and financial inclusion improvement.
Financial inclusion through E-wallets.
When we look at Mainland China, for instance, there is very little doubt that electronic wallets have become a new norm. Just try paying for a taxi with a 100RMB note! In Hong Kong, paying with an e-wallet is just as difficult, however – which ironically means that virtual banks (especially when backed by tech giants) only have an opportunity to improve financial inclusion.
Whilst there has been a massive growth in e-wallets in recent years – look at TNG’s 1.2 billion customer base – in Hong Kong Stored Value Facility (SVF) or e-wallet licensees are still unable to offer any type of lending services. In fact, the HKMA even frowns on licensed lenders advertising within the SVF operators’ ecosystems.
This is precisely where the virtual banks have an opportunity to step in.
If you think about it, the reality behind the pure banking window dressing is that significant amounts of data can be generated through e-wallets. Data can be generated by market traders receiving payments through their day to day business. Data can also be generated by foreign domestic helpers sending money home every month through a remittance function.
This, coupled with the Hong Kong’s Faster Payment System – which went live in September 2018 and allows instant transfers between e-wallets and HK bank accounts – thus presents a great opportunity for virtual banks (and brick and mortar banks) to partner with innovative open banking operators in order to increase lending.
Now, imagine a scenario where the account holder gives their bank access to their e-wallet transaction data. In some cases, the scenario could provide credit scoring data which could be used to offer relatively low risk/interest loans to customers, who would otherwise have no choice but to go with more expensive lending options.
Naturally, this would require regulatory approval and customer consent, and there would obvious data privacy concerns to manage. Yet, these complications would not prevent disrupting Hong Kong’s lending market.
For virtual banks, the lack of access to physical premises and ATMs could also be mitigated through the use of convenience stores allowing customers to add value through their e-wallet and then transfer the balance to their bank account.
Similarly, insurance services could also be developed through Smart Banking, and so would tools aimed at helping consumers to manage their own money.
From open banking to financial inclusion: the issue of the regulatory burden.
This leads us back to Open APIs. As written previously on The Asia-Pacific Circle, the regulatory burden imposed on businesses could also be a major issue. While the Open API consultation had emphasized a call for common standards as well as a need for a centralized body in charge of coordinating the market, the reality has proved to be different.
To promote speediness, flexibility, and innovation, the HKMA has left it to the banks to set up their own framework(s). By refusing to act as a buffer, therefore, the HKMA has transferred the regulatory burden onto the banks’ shoulders.
Under the current framework, the banks will now have to assess market distortion risks and to manage the absence of a coordinating institution, which could also hamper sign-off of standards and limit access for challenger banks and innovative Fintech market entrants. As a result, more intermediaries will eventually appear, and with them some costs which ultimately will be passed onto customers.
Similar inefficiencies exist in other areas such as the Mandatory Provident Fund scheme, where there is no central platform to handle MPF scheme administration and related expenses. As of today, there are 30 MPF schemes with 14 trustees and an abundance of different data standards, business models and administration systems. The government is now taking steps to address this, but it will take time.
Open banking: A need for some real model change.
The topic is overall complex. Technology clearly provides solutions, and we have seen cases where robust Open API frameworks have allowed Fintech companies to bypass traditional banks. This was the case in areas like peer to peer transfers, whether between individuals or between different companies within the same ecosystem. Hence we can hope to see positive change happening sooner than later.
In January 2019, in fact, Jetco announced the release of JETCO APIX, an initiative described as “Hong Kong’s first open API exchange platform that supports cross-industry operation” and which made 200 APIs available to market actors.
At the moment, however, leaving it to the banks to manage the Open API frameworks presents some risks to the overall goal of increased financial inclusion and innovation within the HK financial services market.
What that means is overall (not that) simple: open banking is good but we need a real change in models. And we need it now.
If Hong Kong wants to position itself as a Fintech and financial inclusion leader, we need consistent open banking frameworks to allow new players to join the market. We also need to think about new ways to onboard customers and to score and lend money to those customers. We need, finally, to protect their data whilst being mindful that the data will provide certain institutions an opportunity to offer them more innovative products at lower prices.
As we wrote before, therefore, Open Banking won’t bring financial inclusion to Hong Kong unless…
Nick Grenham | Fintech & Transformation Expert Contributor.
Nick Grenham is a senior transformation consultant with over 20 years’ experience delivering technology change in financial services organizations and government bodies.
Focusing on performance improvement and regulatory compliance, he has a track record leading and coaching diverse, multi-disciplinary teams to deliver a common outcome, combined with strong technical programme management skills to measure performance and manage delivery risk, often across multiple markets and jurisdictions.
Following a 4 year term with Ernst & Young, culminating as the Asia-Pacific Financial Services Advisory Chief Operating Officer, Nick Grenham founded Keystone Strategic Partners, which provides advisory services to European government development agencies and FinTech firms seeking to grow their business in Asia, primarily in the RegTech and InsurTech spaces.
Nick is also a mentor at Accenture’s Asia-Pacific FinTech Innovation Lab and also advises private and NGO boards on strategy, culture and performance management.
Disclaimer: The views expressed are those of their author(s) only and do not reflect those of The Asia-Pacific Circle or of its editors unless otherwise stated.
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