The Hong Kong Institute for Monetary and Financial Research (HKIMR), the research arm and subsidiary of the Hong Kong Academy of Finance (AoF), on 20 May 2020, released a report, titled “Fintech Adoption and Innovation in the Hong Kong Banking Industry”.
It is the first in a series of Applied Research reports on topics that are highly relevant to the financial industry and regulators in Hong Kong, and they provide insights on the long-term development strategy and direction of Hong Kong’s financial industry.
The report is based on an industry-wide survey carried out by the HKMA Market Research Division, which aims to assess the current status of Fintech adoption in the Hong Kong banking industry and understand banks’ views on the prospect of Fintech development in the next ten years.
The report states that in recent years, waves of Fintech innovations, enabled by rapid developments in telecommunications and information technology, have led to an increasing degree of digitalisation and the emergence of various new technological applications and solutions in the global financial sector.
These developments promise to have profound implications for banks’ business operations and the structure of the banking industry.
Depending on banks’ ability to adapt and adjust their business models, Fintech could be viewed as a competitive threat, or as an opportunity to leverage technologies to promote financial innovations, enhance customer experiences, facilitate financial inclusion and achieve greater cost efficiencies.
Given their relative importance in Hong Kong’s financial sector and their integral role in intermediating funds for the economy, the effect of Fintech on banks’ business operations is expected to be of keen interest to the financial industry, regulators, and academia in Hong Kong.
The survey results indicate that Fintech is viewed as a complement and enabling technology by the Hong Kong banking industry.
Fintech has been widely applied across all types of financial services by incumbent banks, with about half or more of them adopting the innovations in payment and fund transfer, personal finance, savings and deposit account services, investment and wealth management services, back-office operations and IT security systems.
As for virtual banks, most of them indicate that they would apply Fintech innovations in almost all the services that they plan to operate.
Innovations relating to “mobile banking”, “open banking (APIs)”, “machine learning and predictive analytics”, “customer identification and authentication” and “cloud computing” have been commonly applied by over 40% to up to two-thirds of the incumbent banks.
While related applications for “robo-advisory”, “regtech solution”, “distributed ledger” and “smart contracts” have been less widely used, most respondents have plans to apply them in the future. As for virtual banks, they have shown keen interest in almost all identified solutions.
The incumbent banks have taken a pragmatic approach, adopting a wide range of Fintech innovations across financial services whilst eschewing applications of marketplace platforms that could facilitate a shift to disintermediation.
This is in contrast to virtual banks, about 40% to half of which indicate likely adoption of these applications.
Overall, the incumbents view Fintech more as an opportunity than a threat to their business operations, now and in the next five years.
Notably, a higher percentage of the incumbent banks see Fintech as presenting opportunities across all financial services in the next five years (ranging from 50% to 77%) compared to now (ranging from 35% to 56%).
The Senior Executive Director of the HKMA stated that it is encouraging to note from the survey results that banks see Fintech development more as an opportunity than a threat to their business operations, now and in the next five years, with risk management services having the greatest potential.
Meanwhile, 86% of banks have adopted or plan to adopt Fintech solutions across all types of financial services. Preliminary results also show that increased cost efficiency and improved profitability are associated with more extensive Fintech adoption by banks.
Over the next ten years, banks are confident that they will continue to play a key role through adaptation and innovation. Banks would not be displaced by new competitors as technological changes would help enhance business models and maintain core banking services.
