Fintech A Bank Regulator’s Perspective

Fintech – A Bank Regulator’s Perspective

Mr Arthur Yuen, JP Deputy Chief Executive

Hong Kong Monetary Authority

25 September 2015

Fintech – What Does It Comprise?

Customers and

investors

Customers and

investors

Regulated sector Partially regulated /

unregulated sectors

Alternative financial

service providers

Fin. services via Fintech


Technology

vendors or

service

providers

Financial services via

trad. channels


trad. channels







Stored Value

Facilities

Stored Value

Facilities

P2P lending

P2P lending

Equity Crowd-funding


Other financial services



Fintech


Fintech


Fintech

Banks and regulated

firms

Banks and regulated

firms

Fintech Fintech

Fintech Fintech

Mainstream technologies Mainstream technologies

Innovative & emerging technologies






Stored Value

Facilities

P2P lending



Banks and regulated

firms

Fintech

Fintech

Mainstream technologies


Fintech – Common Criticisms of Hong Kong

• Fintech development lags behind other markets

• Financial regulators and investor protection regulations are too conservative

• Lack of regulations catered for Fintech firms

• P2P payments are not innovative while channels of crowdfunding are limited

• Hong Kong is risk averse when it comes to virtual commodities such as Bitcoin







Fintech – Key Role of Regulated Firms

• Fintech commentaries usually focus on whether new entrants and startups are vibrant or not

• However, we should not lose sight of the fact that regulated firms play a key role in Fintech

– Being Fintech firms as well

– Differentiating realities from hypes in Fintech, thereby improving the Fintech ecosystem

– Maintaining public confidence in using Fintech

– Countering financial frauds in Fintech

Fintech – Growth of Regulated Firms (1)

• Hong Kong banking sector – Substantial growth in both “Fin” …

End-2005 (HK$) End-2014 (HK$)

– Total assets 7,247bn 18,442bn – Loans to customers 2,312bn 7,276bn

(Outside Hong Kong) (240bn) (2,217bn) – Customers deposits 4,068bn 10,073bn – Net external claims 1,604bn 2,272bn

Fintech – Growth of Regulated Firms (2)

• Hong Kong banking sector – Substantial growth in both “Fin” and “tech”

2005 2014 f

– Internet banking accounts (personal) 3.3mn 9.6mn – Internet banking accounts (business) 162k 848k – Monthly Internet banking txns (count) 4.1mn 14.8mn – Monthly Internet banking txns (HK$) 318bn 6,255bn







Fintech – Success Factors of Regulated Firms (1)

• “Fin” – an appropriate balance is needed

• It is important regardless of delivery channels but it also depends on products risks, customers’ sophistication and public consensus

Customer protection

Freedom in offering financial

products

Fintech – Success Factors of Regulated Firms (2)

• “tech” – another balancing act from time to time

• The balance needs to keep pace with technological advancement, cyber fraud trends and industry developments

• Public consensus and customers’ general security awareness are also key

Safety and stability

Convenience when using

technologies







Fintech – New Entrants and Startups (1)

• Around 10 operators of Stored Value Facilities (SVF) are already in service in Hong Kong

• Clearing and Settlement Systems (Amendment) Bill 2015 brings regulations tailored for SVF – Introduced to LegCo – To establish a regulatory regime for SVF and retail

payment systems in Hong Kong


• Other Fintech new entrants and startups also exist in Hong Kong, though not very popular

– Equity crowd-funding and P2P lending – Bitcoin-related remittance services or exchanges – Credit data analytics for SME or personal lending – Software for financial advisors/wealth management

• In a free market, they need to convince customers/investors that their products/services can meet the needs of customers/investors


• To earn the trust of customers and investors, they also need to get the balance right

Source: South China Morning Post Source: www.crowdfundinsider.com

Fintech – Cyber Security

• For incumbents and new Fintech firms, cyber threats are real and growing significantly

– Dramatic increase of malwares and cyber threats

– Increase in sophistication of cyber attacks

– Growth of cyber attacks and data breaches:

• 83 million bank accounts of a US bank were compromised • 40 million credit and debit card account data were

breached in an overseas case involving a department store

– Sign of rising cyber attacks locally as well

The HKMA’s Regulatory Stance (1)

• The HKMA’s banking supervisory mandates are conducive to the sound development of Fintech

– To provide a measure of protection to depositors

– To promote the general stability and effective working of the banking system

• The HKMA shall, among others, ensure that any business carried on by banks is carried on (i) with integrity, prudence and the appropriate degree of professional competence; and (ii) in a manner which is not detrimental, or likely to be detrimental, to the interests of depositors or potential depositors

The HKMA’s Regulatory Stance (2)

• Philosophy and principles regarding Fintech

– Channel-neutral perspective

– Keeping pace with technologies

– Technology-neutral approach

– Collaboration with the industry

Initiatives Related to Fintech (1)

• What flexibility is allowed in e-banking?

– A revised guidance was issued on 2 September, with emphasis on risk governance/culture and risk controls

– Flexibility for a range of new e-banking services: • Small-value payments (or P2P payments) • More transactions via mobile devices • Internet banking via social media • Innovative Fintech services

– Banks are encouraged to make the best use of the flexibility, such as for offering interbank P2P payments


• How to deal with cyber threats?

– A new circular on cyber security risk management was issued on 15 September, focusing on banks’ risk governance and risk culture

– Banks’ concrete progress is expected by early next year

– Other short-term and medium-term regulatory and industry initiatives are in the pipeline


• Can banks engage cloud computing?

– A principle-based pilot approach has been introduced since Q2 2014

– More than 10 public cloud projects have been rolled out so far

• Industry is welcome to discuss with the HKMA on supervisory stance regarding emerging technologies

Concluding Thoughts

• Fintech will enrich financial services by empowering customers and intensifying competition

• Development of Fintech entails appropriate balance: – Customer protection vs freedom of financial products/services – Safety/stability vs convenience

• Other policy responses are underway: – A Steering Group on Fintech chaired by Secretary for Financial

Services and the Treasury – e-Cheque, Electronic Bill Presentment and Payment and different e-

initiatives

Documents

Fintech A Bank Regulator’s Perspective