I went to Shenzhen earlier this month to visit the Office of Financial Development Service under the People’s Government of Shenzhen Municipality and the People’s Bank of China (PBOC) Shenzhen Central Sub-branch. I also paid a visit to two companies, Ping An Technology and WeBank, which have leading roles in the development and application of fintech. Benefitting a lot from this one-day visit and gaining an in-depth understanding of the rapid development of fintech on the Mainland, I would like to share with you my thoughts and inspiration taken from this trip.
Will fintech turn the conventional financial industry upside down?
With the remarkable advancement of fintech in recent years, in particular in payment services, a great number of operators have emerged, offering novel and convenient payment platforms which have been well received by the public, and are threatening the dominant position banks have been occupying over the years. The speed at which fintech has developed has led some to think that if the trend continues, it will completely change the conventional banking and financial industries, or even render them obsolete. I have repeatedly given this question some serious thought and came to a view that while the conventional financial industry is currently facing unprecedented challenges, it will not be turned upside down or become obsolete as a result of fintech for two main reasons:
Most conventional banks are financially strong with abundant resources. Although they might not have paid much attention to fintech in the past, as time passes, their traditional mode of operation and level of efficiency can no longer satisfy the needs of their customers. Coupled with intensified external competition, many banks have been driven to speed up the development and application of fintech. The most notable example is their active participation in the research and application of the latest biometric identification technology, such as fingerprints, facial and voice recognition, as well as distributed ledger technology. The new fintech solutions, either developed internally or provided by third parties, are expected to be used extensively by banks to maintain their competitiveness and to meet customer demands. Having said that, one cannot rule out that for various reasons a small number of banks are unable to keep up with technological advancements and may therefore risk losing customers.
Whatever technology a bank uses to serve its customers and compete with other banks, the important fundamental element of banking remains the same: the need to protect customers’ deposits and their interests in financial transactions. Whether an abacus, a calculator, a computer or a mobile phone is used to conduct a financial transaction, it is only a means to an end and will not alter the substance of the transaction. When our society demands protection, the government is obliged to regulate. Fintech certainly enables customers to enjoy more efficient and convenient financial services. For example, the use of mobile phones to make payments and manage finances has become very popular. However, whether the selling of investment products is done face-to-face or through mobile phones, it is still necessary for investors to think carefully, read the terms and conditions clearly and understand the associated risks before making an investment decision. The question is how to make sure that the convenience offered by fintech will not lead customers into making hasty decisions that may result in a material loss when investment products are sold with the use of fintech. Another question is how to ensure that investors understand the terms and conditions and the risks involved when financial products with a complex structure or high risk are sold online. These questions show that there is a need to strike a reasonable balance between convenience and investor protection.
Fintech vs Techfin: which one will come out on top?
Recently, there has been discussion that techfin (which refers to technology firms entering the financial field) will erode or even replace the conventional financial industry. Let’s look at some well-known corporations on the Mainland. One of these corporations started as an e-commerce firm. After dominating the online shopping market, it established a payment platform. Within just a few years, it has become a new force in the field of electronic payment services and is now making inroads into the financial sector. Another corporation began as a social messaging platform. Leveraging on its enormous internet resources, it went on to develop a payment platform and established a bank specialising in microfinance. There is also a company which has expanded its business from insurance to various financial sectors. With the enormous support of technology, it has now become a corporation that combines financial services and technology.
If these corporations can be described as techfin companies, can they render conventional financial institutions obsolete? After much deliberation, I am inclined to believe that while the techfin sector will undoubtedly create immense competitive pressure on the traditional financial industry and change the mode and ecology of the provision of financial services, it will be hard to replace the latter altogether.
The reason is simple. The sky is the limit for technology firms’ creativity when it comes to developing new platforms and applications to bring more convenient and diversified services for customers in doing business, shopping, making payments, socialising, and daily lives. Yet, when entering the financial realm, they cannot, and should not, shrug off the society’s demands for protection for depositors and investors as the substance of financial transactions remains the same no matter how advanced the technology is. However, it does not mean that techfin companies will lose its competitiveness once they are regulated. Quite the contrary, I envisage great opportunities and potential for further development by these companies. As the design of their services and technology platforms have been geared, first and foremost, at enhancing customers’ experience in such things as spending, shopping, socialising and daily lives, techfin firms can easily upgrade to a comprehensive, one-stop platform by incorporating customers’ needs for investment, wealth management and insurance. A yardstick will be whether a firm can provide an all-encompassing platform capable of taking care of all the basic necessities of the daily lives of their customers, such as clothing, food, accommodation, transport, health care, payments, bill settlements and wealth management. Imagine the ease and convenience of managing your basic needs for the day by simply clicking on one single app! While conventional banks and financial institutions have yet to meet that yardstick, some banks are attempting their first step. It’s always better late than never. Many banks, for one reason or another, have difficulties in developing their own one-stop platform. They can however partner up with some fintech or techfin firms to reduce costs and time and to strive for an earlier enhancement of their competitive edge. Competition brings efficiency and advancement, which will benefit consumers and investors alike.
I would also like to point out that Hong Kong and Shenzhen can complement each other in fintech development. Hong Kong is Asia’s premier international financial centre which is home to a multitude of banks and financial institutions and is renowned for its sound and robust financial regulatory system. It is an ideal springboard and hub for both international companies expanding into the Mainland and Mainland enterprises going global. Shenzhen has a fast growing financial sector well supported by a strong fintech industry and a rich pool of fintech talent. Director-General He Xiaojun (Office of Financial Development Service under the People’s Government of Shenzhen Municipality) and I both agreed that Hong Kong and Shenzhen should strengthen co-operation and achieve a win-win situation by jointly promoting mutual access in the fintech arena.
In addition, President Xing Yujing (PBOC Shenzhen Central Sub-Branch) and I agreed that Shenzhen and Hong Kong should strengthen the connection between our two financial sectors and endeavour to consider embarking on pilot schemes under appropriate circumstances to contribute to the process of the nation’s reform and opening-up.
The HKMA’s supervisory principles are “risk-based” and “technology-neutral”. So, no matter how the new technologies are applied to financial activities or transactions, there should be appropriate supervision whenever there is a need to protect depositors and investors. However, the relevant supervisory means and tools may differ from those conventionally used. What I want to stress is that under the risk-based principle, the HKMA supports and embraces technology and innovation as it brings greater convenience, efficiency and security for the public. This underpins a series of measures we have introduced in recent years, including the licensing regime for stored value facilities, the establishment of a Fintech Facilitation Office, the promotion of fintech development by working with the Hong Kong Science and Technology Parks and Cyberport, and the launch of the Fintech Supervisory Sandbox for banks. Going forward, I will continue to discuss and report on the progress of the HKMA’s work in the fintech arena.
Hong Kong Monetary Authority
14 June 2017