Hong Kong looks to the future

As banks in Hong Kong plan for the future, the two overarching factors that they must consider are advances in technology and the risks posed by climate change. Banks must stay ahead of developments in both these areas if they are to survive and thrive in an uncertain and fast-changing landscape.

In terms of technology, the HKMA’s Fintech 2025 strategy is an important driver of the city’s efforts to future-proof the financial sector. Launched in 2021, its focus areas are: encouraging all banks go fintech, creating new data infrastructure, expanding the fintech workforce and preparing for Central Bank Digital Currencies (CBDCs) -- and providing the funding and policies needed to develop the fintech ecosystem.

The Fintech 2025 strategy provides an overall framework to support banks in adopting the technology that will enable them to better serve their customers and improve their operational efficiency. Ultimately, the timely adoption of fintech across the financial services sector will reinforce Hong Kong’s status as a major global financial centre.

Under “All banks go fintech,” solutions such as wealthtech, insurtech and Greentech are being rolled out. The HKMA also expects banks to continue to adopt appropriate regtech solutions to better identify risks and improve efficiency in regulatory reporting.  

Last year, as the Fintech 2025 initiative approached the halfway stage, KPMG worked with the HKMA and Quinlan & Associates to produce an updated Fintech Promotion Roadmap, which was launched in August 2023¹. This report summarised the HKMA’s work to date on Fintech 2025, and shared the results of a survey of banks and fintech firms on adoption of fintech solutions.

The report highlighted areas where stumbling blocks remain. For example, it found that there was often a mismatch in expectations between the banks and fintech solutions providers. To address these issues, the HKMA has organised a series of webinars and training sessions so both sides can gain a better understanding of the solutions available and also the processes involved in implementing them.

Another challenge for fintech firms is the protracted onboarding process and extensive amount of documentation that is usually required by banks. However, some banks have successfully tackled this issue by separating the documentation requirements into different risk categories, and enabling fintech solutions providers with lower risk profiles to undergo a fast-track onboarding process.

Fintech 2025 also promotes greater adoption of emerging technologies, particularly artificial intelligence (AI) and distributed ledger technology (DLT). Areas where challenges have emerged, highlighted in the Fintech Promotion Roadmap, include the integration of new AI-based solutions with banks’ legacy systems, as well as a lack of technical expertise among staff. More training of in-house staff, and ongoing communication with fintech firms after their solutions have been deployed, should help to iron out some of these issues.

KPMG is continuing to support the HKMA to refine and roll out the Fintech 2025 initiative, and a follow-up report focusing on DLT, blockchain and tokenisation will be launched later this summer.

Two other areas of focus in Fintech 2025 strategy are creating next-generation data infrastructure and expanding the fintech-savvy workforce. There have been some successes in both of these aspects.

As economies become increasingly driven by data, it is crucial that Hong Kong has the infrastructure in place to collate and review the increasing volume of information that is available about business transactions. The Commercial Data Interchange (CDI), launched in October 2022, makes it easier for banks to access data about potential customers, and to speed up the process of reviewing and granting loan applications.

As of March 2024, more than 40 banks were participating in the CDI scheme, and around 19,000 loan applications and reviews had been carried out with an estimated HK$17 billion in credit approvals granted². However, there is still scope for greater participation in this scheme, which can help banks to expand their client base, particularly to the underserved SME sector.

Talent schemes under the Fintech 2025 platform include the Fintech Career Accelerator Scheme, which has a variety of programmes for students and graduates, and the Industry Project Masters Network for post-graduates. These have helped to increase the pool of skilled fintech staff. But given that shortages in technology talent is a long-term and global issue, further support for training and recruitment will always be welcome to ensure that the industry has the right people available to implement the technology.

Hong Kong has made considerable efforts on the topic of CBDCs by participating in global and local projects exploring different use cases including cross-border payments, as well as local plans to develop an eHKD (see our article on CBDCs elsewhere in this report).

Besides CBDCs, banks are also exploring how blockchain and other types of DLT can help them streamline their processes, facilitate integration, and reduce errors and save costs by minimising manual intervention. Banks first need to ensure that the DLT is compatible with their current banking infrastructure and that they have the resources and skills available to integrate the new solutions.

Banks must also demonstrate that they have taken action to counter the potential risks in areas including cybersecurity, data privacy and third-party management. The HKMA is supportive of banks in adopting DLT-based solutions so long as they are managing the potential risks, and is currently reviewing banks’ proposed adoption of DLT on a case-by-case basis.

To ensure that Hong Kong’s fintech plans become a reality, the government and regulators are offering a range of funding and policy support. For example, funds are available for fintech firms via the Fintech Supervisory Sandbox to conduct pilot trials of new solutions and then work with banks to promote commercialisation and adoption. Projects approved so far are in in areas including risk management and Chinese character name screening for AML.

Among the most noteworthy developments on the regulatory side have been the various measures to support the development of virtual assets with the aim of making Hong Kong a global hub for the sector.

Hong Kong is among the leading jurisdictions globally in terms of policy support for this sector, with a licencing scheme for virtual assets trading platforms becoming effective in June 2023. In addition, the regulators have shared guidelines on topics including risk management considerations related to the use of DLT, a proposed licencing scheme for issuers of stablecoins, and requirements for intermediaries that conduct activities related to tokenised securities.

Hong Kong’s proactive stance has captured the attention of the virtual assets industry globally. More generally, the willingness to explore such new developments is supportive of the city’s growing reputation as an innovative and forward-looking jurisdiction.

On the topic of Hong Kong’s image, the city’s annual Fintech Week has evolved into a major event on the global fintech calendar. Organised by the Financial Securities and Treasury Bureau, Invest HK and the three financial regulators in the city, the event plays host to around 35,000 industry players from more than 100 economies. The event not only provides a platform for industry players to meet and share ideas, but also allows visitors to experience Hong Kong’s dynamic financial services landscape at first hand.

While looking to the future often focuses mainly on the latest technology developments, planning ahead cannot be done without considering the impact of climate change. Banks have a crucial role to play in helping their customers to finance their transition to a low-carbon emissions environment, as well as offering green and sustainable products.

Besides protecting against the physical and transition risks banks must also deal with the evolving regulatory expectations -- in Hong Kong and in other locations where they operate -- as jurisdictions globally work towards meeting their commitments in the Paris Agreement. For Hong Kong, this means reaching carbon neutrality by 2050. Regulatory requirements are expected to continue to evolve and banks should prepare for greater scrutiny in the future

Hong Kong recently issued a taxonomy for sustainable finance, which will facilitate the greater adoption of ESG-related products, and also plans to develop a sustainability disclosure ecosystem. This structure also provides a strong foundation and impetus for Hong Kong to develop new and innovative green products, which will help the city to strengthen its standing as the leader in sustainability in the region.

The past few years have delivered a number of shocks to banks and their customers in Hong Kong and globally. The pandemic increased the pace of digital transformation, while inflation and central banks’ responses put an end to the long period of lower interest rates.

Meanwhile, the climate threat is only becoming more acute: 2023 was the hottest year on record, and the UN's World Meteorological Organization released a report in June saying that the earth’s temperate is rising more quickly than had previously been anticipated³.

It is impossible to predict the future, but it seems highly probable that technology will continue to evolve at a rapid pace while the risks associated with climate change will intensify. Banks cannot prepare for every possible event in the future, but there is a great deal that they can do to keep up to date with the latest developments.

Hong Kong’s banks have a crucial role to play helping their clients find the best ways to finance the crucial transition to a more sustainable way of operating and protect against the risks inherent in a warming planet. They also have a clear opportunity to strengthen their regional leading position in developing innovative green and sustainable financial products.

At the same time, banks should continue to adapt to technology changes and adopt the most appropriate solutions that will enable them to refine and reform their services and operations. Facilitating the development of technology and sustainability will ensure that banks and customers will be ready for whatever the future may bring.

[1] Fintech Promotion Roadmap:
https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2023/20230825e1a1.pdf

[2] HKMA Commercial Data Interchange:
https://cdi.hkma.gov.hk/

[3] WMO Global Annual to Decadal Climate Update (2024-2028):
https://wmo.int/publication-series/wmo-global-annual-decadal-climate-update-2024-2028