How is Hong Kong preparing for the future, given that the city's regulatory approach to open banking scored only sixth on EY's Open Banking Opportunity Index? finews.asia explores the topic with EY's Marc Entwistle. 

Marc Entwistle, Hong Kong is not within the top 5 in your EY Open Banking Opportunity Index. Probably due to its low score in terms of consumer sentiment (6) and innovation environment (7). Any chance for it to move up the ranks perhaps this year?

There are a number of factors that are likely to contribute to Hong Kong’s adoption of open banking over the year. These include:

  • the mandate for retail banks to adopt open APIs in a phased approach, beginning January 2019.
  • the authorizations of a range of new, branchless retail banks starting from March 2019, with several new market entrants
  • the facilitation of faster payment systems (FPS) to support less costly and immediate payment transfers across ecosystem players.

Where is Hong Kong in terms of digital banking journey versus other financial hubs like Singapore and London?

Hong Kong is just at the tipping point from being a traditional banking market to becoming a more digital one. Despite being a strong global hub for financial services, it’s a relatively small market from a population standpoint. There's a high dependency on branch-based banking.

«This is a new era for smart banking initiatives»

The transformation we have seen from digital banking is slowly gaining traction. We haven’t seen a lot of measurable impact at this point, but this is likely to change very soon. The Hong Kong Monetary Authority (HKMA) has put in a lot of effort into regulatory-led initiatives. This is a new era for smart banking initiatives, of which open banking is just one example. The rollout of faster FPS that allows instant transfer of funds for free, or at low cost, is another.

The impact of digital initiatives is just starting now. We have seen the HKMA make the first authorizations in virtual banking licenses on 27 March, with more to follow.

Hong Kong consumers are not active mobile banking users, why?

It’s probably a mix of cultural factors and a highly-banked population. Hong Kong has recently experienced an uplift in consumers using a mobile phone versus walking to the branch for basic banking services. But the need for digital banking services has lagged behind other countries.

At the same time, there is a global shift towards digital banking, which also makes sense in the Hong Kong market given the population is digitally savvy and has high levels of smartphone ownership. From a regulatory stance, historically, it's been a private sector-driven market. They usually put in the general building blocks, and then leave it to the private market to develop.

«Banks face new competitors who are building on new technology stacks»

However, we are in a bit of a turning point now, and the regulators are choosing to be more hands-on, though not to the extent of Singapore. Hong Kong regulators are engaging more with the participants in the ecosystem.

Can you elaborate on Hong Kong's regulatory stance versus other finance hubs?

Hong Kong’s digital banking approach is inspired by international learnings, such as Europe’s PSD2 regulation. Their FPS and virtual open banking policies are not being rolled out in isolation. Virtual banking licenses are also being introduced, along with a range of other initiatives.

Hence, banks face new competitors who are building on new technology stacks, with real-time processing capabilities, open API readiness, and so on. The competitive pressure and pressure to innovate is high. The likelihood of change is high.

The U.K. currently has the most strongly defined form of open banking regulation. The nine biggest banks in that market were mandated to roll out open API, and have now been joined by other market participants, including smaller startup players. 

Singapore has recognized open API and set guidelines, but left it to the open market to follow through. Hong Kong does not currently have an implementation standardization for open API, but there are expectations that all the banks should be rolling it out. It is probably too early in the cycle to say whether this approach is advantageous or not.

«We are expecting a certain amount of disruption in the market»

The banks have to agree on the standards, but the regulator has not defined what they should be. Top banks have published their implementation roadmaps, but they are asking: «Should they build it for the next generation or run fast?» 

Virtual banks are likely to disrupt the industry, so what should we expect for the rest of 2019?

Hong Kong’s virtual banking licenses are not substantially different licenses per se., they are still full banking licenses, with the key difference being eligibility and expectations. For example, the virtual banking licenses could now enable a bank or technology firm in another market from another market, could now for the first time to enter Hong Kong without the need for a physical footprint. Therefore we expect the banking services they create will be very different. We are expecting a certain amount of disruption in the market and for interesting solutions to appear.

Regulators still want the new players to have familiarity with how to set up and run a virtual bank – it has to be safe, provide stable service to end consumers, and so forth. Within the leadership teams, the regulators are looking for technology experience plus financial services experience. As such, many of the applications have been from multi-party joint ventures between traditional finance firms, startups, fintechs, incumbent banks, and large technology players, or a variety of combinations of these. 

Marc Entwistle is senior manager of Asia-Pacific FinTech Strategy & Operations at EY and a founding board member at Fintech Association of Hong Kong. The EY Open Banking Opportunity Index shows how thriving open banking requires a balance between regulation, security, trust innovation. It reveals that the U.K. and China, ranked #1 and #2 respectively, are leading the world in Open Banking potential, despite significantly different regulatory regimes and contrasting consumer sentiment.