4 minute read 17 Dec 2018
Hong Kong China dense urban buildings

How open banking could fast track Hong Kong’s Fintech innovation

By

James Lloyd

EY Asia-Pacific FinTech Leader

Dubliner in Asia. Passionate about early-stage, growth-stage and non-traditional financial services. Husband. Father.

4 minute read 17 Dec 2018

Open APIs and other digital banking initiatives offer opportunities for Hong Kong’s traditional financial sector to become a global leader.

This article is part of our Open Banking Opportunity Index.

Hong Kong may be an international financial services hub, but it has not yet reached the heights of FinTech innovation seen in some of its Asia-Pacific neighbors. That may be about to change, following the launch of a series of potentially transformational regulatory and infrastructure initiatives. These include moves from the Hong Kong Monetary Authority (HKMA) to:

  • Mandate retail banks to adopt open application programing interfaces (APIs) in a phased approach beginning January 2019.
  • Authorize a range of new, branchless (or virtual), retail banks starting in Q1 2019, with several new market entrants expected by the end of 2019.
  • Facilitate a faster payment system (FPS) to support less costly and immediate payment transfers across ecosystem players.

Hong Kong's approach to open banking may be inspired by the UK’s Open Banking initiative, as well as the European Union’s (EU’s) second Payment Services Directive (PDS2), but it is clearly being adapted for local market conditions. The HKMA launched its own “Open API” (application interface program) initiative in July 2018 to kick off the rollout described by its chief executive, Norman Chan, as: “One small step for a bank, but a milestone for financial innovation in the banking sector.”

Chan’s statement highlights the ambitions for Hong Kong’s financial sector, which are driving this progress in the territory’s regulatory environment. It is currently ranked fifth in EY’s Open Banking Opportunity Index.

open banking opportunity index hongkong ranking

Virtual banks will disrupt Hong Kong’s incumbents

It’s the combination of several initiatives that differentiates Hong Kong’s introduction of open banking from that seen in other markets. In particular, the entrance of new “virtual” banks – including well-capitalized multi-party joint ventures – is likely to bring the disruptive innovation the industry has long needed.

In addition to local market opportunities, newcomers are expected to look beyond the territory’s borders – leveraging Hong Kong’s status as a highly credible regulatory market to help launch innovative propositions with regional or even global ambitions.

The ability of these banks to leverage Open APIs and faster payments servies will allow them to create a powerful digital offering for Hong Kong consumers, who appear increasingly envious of the more innovative financial solutions available in Mainland China. It’s likely that these new online-only banks will use open banking-inspired services to build extended ecosystems beyond the financial sector, integrating other parts of a consumer’s digital life – such as retail, transportation, travel, and telecommunications.

For traditional banks, Open APIs also bring new opportunities – as well as a significant program of work. Incumbents have begun to upgrade legacy technology systems, deploy more digital tools and adopt a more competitive mindset, but progress is often slow and timelines can be tight.

Huge consumer adoption potential

Consumers are to be the big winners as Hong Kong’s banking sector opens up and signs are strong that they will take full advantage of the changes.

Compared to other markets, Hong Kong consumers are not active mobile banking users, however, they show huge adoption potential. They are some of the world’s most digitally-active banking customers, with 98% owning a smartphone and 78% using social media. Consumers in Hong Kong ranked third (after mainland China and the US), for their propensity to share transaction data with FinTechs in return for better services.

open banking consumer sentiment hong kong

Strategic choices will determine future success

Open banking in Hong Kong will intensify competition within a historically staid retail banking sector. Several virtual bank entrants are likely to come to market around the same time in mid-to-late 2019. Winning in this environment, whether for traditional or challenger banks, will require the development of truly differentiated value propositions.

Partnership strategies may be a smart way forward – offering incumbents the opportunity to integrate non-financial products into their offerings and giving newcomers the ability to build a customer base for their new digital offerings more rapidly. Hong Kong customers are eager for more innovative products, and strong customer engagement to explore exactly what services consumers want will be critical to success.

With aggressive timelines to meet, Hong Kong’s financial institutions will need to move fast to take advantage of emerging open banking initiatives and stay relevant in a changing competitive landscape. Making the right strategic choices now will determine their own future success and help fuel Hong Kong’s ambitions to become a global leader in financial innovation.

  • The EY Open Banking Opportunity Index assesses the conduciveness of open banking to thrive across 10 selected markets. Success is viewed as the potential for consumers to adopt open banking-enabled services within a market.

    Our model uses a wide range of measures — 22 indicators and 13 sub-indicators — to assess each country’s potential, across four key conditions needed for the success of open banking: regulatory environment; adoption potential; consumer sentiment; and innovation environment.

Summary

The progress of Hong Kong’s FinTech innovation has lagged its potential. Open APIs, combined with other in-flight initiatives, may be the catalysts that transform the territory’s financial sector into a global leader.

About this article

By

James Lloyd

EY Asia-Pacific FinTech Leader

Dubliner in Asia. Passionate about early-stage, growth-stage and non-traditional financial services. Husband. Father.