While we all thought that the 2008 Global Financial Crisis would lead to a complete revamp of the financial industry, incumbents have been at first sight very clever at teaming up with regulators to introduce the most bureaucratic regulatory framework. They thought they would thereby raise barriers for new entrants, maintaining their traditional cartel, even if their resulting dismal return on equity would now struggle to cover their cost of capital. After all, traditional bankers had all been educated according to the well established principle that we were all more likely to change wife or husband, rather than banks. So, the key was to maintain the old order.
Fortunately, for us, what these blinded bankers did not see coming is the dramatic technological revolution we are going through, with the rise of data and smartphones. Instead, they have been drawing comfort from the lack of any really sizeable successful ‘FinTech’ both in the US and Europe. They have overlooked mainland China, where the most advanced part of the FinTech action is now taking place, best illustrated by the recently announced IPO of Ant Financial Services with a targeted US$150 billion market capitalisation.
Mainland leads the way
The new ‘3D’ revolutionary experience in financial services is indeed first happening in the mainland: Deconstruction of the value chain; Dematerialisation of the offering; Disintermediation of the distribution.
The Deconstruction led to the rise of highly targeted business models attacking the most overpriced and inefficient niches of the financial industry, like transfer payments, small and medium enterprise lending, or asset management. The dematerialisation was best exemplified by mobile payments, where two new entrants — Alipay and TencentPay very swiftly cornered 90% of a market now 10 times bigger than that of the United States. The Disintermediation gave rise to peer- to-peer distributors replacing the ‘pire en pire’ (worse and worse) brick and mortar horror experience of traditional banking and insurance.
Unfortunately, it’s fair to say that Hong Kong so far has largely missed the boat. A globally significant Hong Kong-based FinTech is still yet to emerge, while Singapore’s PR engine is keen on regularly stressing its superior progress versus its traditional rival in financial services.
So, what should Hong Kong do?
One possible stance would draw comfort from the city’s well-established undisputed strengths: the only rule-of-law environment within a four-hour flight circle, encompassing close to a US$20 trillion annual GDP; and the necessary gateway for the mainland to get the convertibility of the Yuan at some stage in the future.
A more productive approach would be to learn lessons from the drivers of the success of the mainland at reinventing its financial services industry: like a proactive regulatory framework for new entrants, a careful selection of new champions backed by exceptional entrepreneurs in targeted industry segments; and a cultural change encouraging young talents to join these new startups rather than the traditional industry incumbents.
Hong Kong is therefore in a unique position through the development of the Great Bay Area to build a ‘Special Financial Zone’ over the next decade
At the same time, Hong Kong should think about the role model it could be for the mainland, helping it address the remaining numerous weaknesses of its financial system: the US$1.5 trillion estimated losses from Non-Performing Loans by the IMF remind us of how much the mainland remains in dire need of decent credit risk mechanisms. Meanwhile the very slow start of the China-backed Asian Infrastructure Investment Bank — having granted only a mere US$4 billion in loans since its inception — is a great illustration of how the mainland remains incapable of meeting international financing standards, like in sustainability or ‘green finance’ requirements.
Hong Kong is therefore in a unique position through the development of the Great Bay Area in Guangdong to exploit the ‘Hong-Kong-Shenzhen Connect’ to build a ‘Special Financial Zone’ over the next decade that could serve as a template for the whole country.
If not, no doubt, it will be Shenzhen’s FinTech start-uppers who will be every bit keen to launch their own revolution and carve out their own ‘Shenzhen- Hong-Kong Connect’.