Positioning Hong Kong as a financial technology (FinTech) hub would fortify its status as an international finance center, but hurdles in the regulatory framework, venture funding and human resources fronts need to be addressed. Oswald Chan reports.

After six years of working in financial institutions in Hong Kong, banker Mukesh Bubna established Monexo in March this year to assist individuals and small- and medium-sized enterprises (SMEs) across Asia in securing much-needed funding, requests for which are often rejected by traditional banks. Cyberport-incubated Monexo found backers in angel investors to start its online peer-to-peer (P2P) lending business.

The Monexo platform connects potential lenders - who list loans to earn higher returns, as monthly loan repayments offer better returns than bond investments or bank deposits - with potential borrowers who own rental properties and want to pay lower interest rates on loans than offered by traditional banks. Borrowers' credit ratings will be assessed based on the values of their rental properties.

All the money is kept in a third-party account held with the Hong Kong Trust Company, and services provided include legal documentation work, loan insurance coverage and anti-money laundering checks. The lenders must commit a minimum of HK$100,000 for at least six months to make a diversified loan portfolio that includes different borrowers to maximize target-risk returns.

Monexo's income comes from a 2.5 percent commission it charges borrowers and a 1.5 percent commission from lenders. It plans to extend its product range to business receivables (loans based on assessing credit scores of borrowers based on their business receivables) later in 2015 and take on new markets across Asia, with India, and Singapore and other Southeast Asian countries all likely targets.

Time to step on it

"If Hong Kong cannot evolve from the status of a financial center into a financial technology hub, it will lag behind world development. See how London is striving to transform itself to become a financial technology hub to attract talents and capital from all over the world," Bubna said in an interview with China Daily.

"As a metropolis without much land space and natural resources, the future of Hong Kong lies in taking advantage of its financial services sector to develop the FinTech industry and to make itself stay competitive."

Ex-investment bank and hedge fund manager Riccardo Capelvenere established Currenxie in 2014 to provide cheap funding for SMEs across Asia. The company provides clients with same-day, spot and forward foreign-exchange (forex) services, complemented by a P2P forex platform that empowers companies to deal with each other anonymously, in real time and at a transparent mid-market rate, resulting in 50 percent forex transaction cost savings compared to traditional banking providers.

Currenxie currently has 20 clients and wants to expand the number to 2,000. The online forex trader estimates there are 300,000 SMEs in Hong Kong and a third of those have forex needs. Currenxie is bullish on market prospects as it believes it can compete with banks by providing cheaper forex services to clients.

"We need to develop the FinTech industry to reduce the city's reliance on the retail and banking industry for economic development," Capelvenere told China Daily.

FinTech refers to the application of technology within the financial industry and covers a wide range of activities, from financial data and analysis to financial software, digitized processes and payment platforms.

The government recognizes how the FinTech industry can change the city's financial industry landscape. The first opportunity FinTech offers to Hong Kong is that companies in the sector can complement the city's existing strengths as an international finance center. Second, FinTech development in Hong Kong includes crypto-currencies, data analytics, wealth management and alternative funding, and this can help diversify the city's financial industry.

Based on a proposal in Financial Secretary John Tsang Chun-wah's 2015-16 Budget, the Steering Group on Financial Technologies was set up in March this year to advise the government on the potential for, and gaps in, the development of Hong Kong into a FinTech hub; and the measures needed to promote Hong Kong as such a hub.

Hong Kong has the attributes to become a FinTech center, given the city's hard-working and well-educated talent pool, a spirit of entrepreneurship, low-tax regime, a transparent and sophisticated banking system, a strong tradition of the rule of law, an efficient infrastructure network, position as a gateway to the mainland and other Asian markets, and a cultural melting pot that blends the best of the East and West.

However, despite the advantages, the city must grapple with several impediments if it wants to win the race for the title of FinTech hub of the Asia Pacific.

First, local financial regulations do not make specific provisions to cater for the FinTech sector in terms of set-up, licensing requirements, regulatory supervision, and legal and compliance obligations. FinTech startups in the city find it difficult to understand the legal requirements applicable to them and build a compliance framework appropriate for their size and operational model.

The non-profit Hong Kong Internet Finance Council (HKIFC) cites the example of crowdfunding, a sector where major economies in the Asia Pacific, with the sole exception of Hong Kong, have either issued consultation papers, or issued guidelines or passed legislation on the related regulatory framework.

Another area of concern is the city's lack of talents specializing in the arts and humanities to complement the strong presence of science and mathematical talents, to bring more innovative FinTech products and services, HKIFC noted.

Simon Squibb, chief executive officer at Nest, a local startup incubator and angel investor, said mindset changes are essential.

"If Hong Kong wants to transform from a services economy to a knowledge-based economy, the city must embrace the international mindset. That is to say, Hong Kong should promote more Hong Kong startup brands to go global, by exporting Hong Kong brands to the world," Squibb told China Daily.

"If Hong Kong does not believe it can promote startups, then they will not be supported and (successfully) solicit investment, and eventually talents will leave Hong Kong. The city has to change the social mindset to fight for talents."

Cash crunch jam

The third hurdle is financing. Hong Kong still lags behind top economies in access to venture capital, as it has no presence in the top 20, which is led by Silicon Valley and has Singapore at No 10. This is despite Hong Kong's large number of high-net-worth individuals (HNWIs) and deep-pocketed financial institutions.

According to the Global Startup Ecosystem Ranking 2015 from startup research firm Compass, Hong Kong provides significantly lower access to venture investments than other startup ecosystems, because HNWIs still favor traditional investment options rather than investing in startups.

"The Hong Kong government needs to showcase more startup venture companies as much as possible. When these startups gain more exposure, more angel investors can get to know about these companies and they will invest in them. Hong Kong never lacks capital. The priority is to channel the angel funds into the startups," Squibb said.

"Hong Kong should do more overseas marketing efforts to make more "heroes" - to promote more successful startup companies to kindle the passion among young people to become entrepreneurs."

Lastly, Hong Kong's notoriously high property costs also present a major headache for many startups. However, the recent mushrooming of many co-working spaces in Hong Kong has alleviated the problem to a certain extent.

"Hong Kong will need to establish a clear strategy that will capitalize on its current advantages (infrastructure, financial focus and human resources), but also address some of the identified gaps (access to risk capital and fostering innovation). Finally, it is important to identify the Asia-Pacific region's specific demands and needs to drive FinTech innovation," said Janos Barberis, founder of FinTech HK, a local think tank that seeks to promote Hong Kong as a FinTech center.

Contact the writer at oswald@chinadailyhk.com

Currenxie aims to channel funding to small-and medium-sized enterprises across Asia and offers same-day, spot and forward forex services, complemented by a P2P platform.

(HK Edition 10/23/2015 page9)