Technology wave breaks over financial sector

What a difference a year makes, even for a conservatively regulated financial center like Hong Kong. The emergence of disintermediating technologies that reach large groups of users armed with cheap computing power has vaulted technology companies ahead of traditional property developers and conglomerates, and has compelled financial bureaucrats to expand into banking, listing and financing new industries. Taking on governance and regulatory risk has become a predicate for survival as Hong Kong must compete with other centers for financial leadership.

Financial regulators in major banking centers, including Hong Kong, have been forced to reconsider the concept of what constitutes a bank or financial institution. Banks have rapidly evolved from traditional bricks-and-mortar, branch-driven entities into virtual or exclusively online service providers. Only a few years ago, online banking was limited to websites of large, established banks and peer-to-peer lending.

The growing dominance of digital commerce, cryptocurrencies and encroachment of online payment processing firms threaten to upturn key, profitable functions of traditional banks. Rather than let the new entrants rampage through the financial industry or ban them outright, the Hong Kong Monetary Authority (HKMA) has developed prudent policies to introduce them into the system.

This year, the HKMA published a policy describing their definition of a virtual banking license. It includes initial guidelines for capital size and requirements for operations and security. While the policies are conservative in terms of demanding a relationship with an established bank, it recognizes the need to begin redefining how banks work in the new economy.

Perhaps regulators and politicians around the world have only reluctantly accepted the compromised relationship of “too big to fail” big banks that revealed itself after the 2008 global financial crisis. The inability to alter banks’ inseparable role in economies and societies has been a source of frustration as the cycle of regulation, enforcement and fines has not relented.

So trying to cultivate an alternative form of financial institution without the burden of all the traditional big-bank legacy of structures and operational cultures arose when startups and customers were enabled through new technology. Yet, while big banks in Hong Kong and around the world have made large investments in technology they are not financial technology companies and are unable to make a radical transformation. Sometimes, you have to start from scratch — as a “startup” — in order to truly do something innovative.

Hong Kong’s role as a financial center has evolved since its beginning in trade and shipping. From the initial phase of the Chinese mainland’s economic opening and development — when State-owned companies introduced private ownership through public listings in Hong Kong — to the current new-economy technology companies, Hong Kong’s financial service industry has had to find the next frontier.

Chasing billion-dollar unicorn technology listings has become Hong Kong Exchanges and Clearing Ltd’s (HKEx) current mission as the city’s property developers and conglomerates no longer need to raise money on the exchange and Hong Kong has become a financial service provider to the mainland.

Today, the newest challenges the popularity and threat of cryptocurrencies. How HKEx will deal with or profit from a technological development that is a clear threat to governments and financial systems everywhere will define its future. Central bankers and regulators understand that historically no country and economy can survive if it lets a parallel currency flourish as an alternative and undermine its fiat currency.

The HKMA has not expressly banned crypto trading but Hong Kong banks have assiduously avoided financing and servicing crypto-exchanges and related businesses, driving them to open accounts in places like Tokyo and Paris. The city’s strict anti-money laundering and know-your-client regimes make it almost impossible for a crypto exchange to open a bank account or receive a credit line — all vital for brokers.

But HKEx has set itself up for its riskiest wave this year — attempting to attract and promote itself as a venue for biotech companies. This is a bold initiative but does not represent a historically natural or obvious industry with any synergies for Hong Kong’s economy and financial sectors. Biotech requires a highly specialized ecosystem of lawyers, venture capitalists, regulators and analysts and a backyard of supporting industries like pharmaceuticals.

Hong Kong still needs to push harder at financial reform. The introduction of dual-class share listings was an important and overdue move to improve competitiveness. But the delay was costly as large-cap companies like Alibaba moved their listings to the New York Stock Exchange. HKEx and the Securities and Futures Commission also face the problem of protecting minority shareholders under such governance structure.

The future never approaches us in a friendly, easy-to-comprehend way. Rather, it confronts us with difficult decisions that demand bold thinking.

This article provided by NewsEdge.