FinTech startups are booming in number and winning big name backers here in the SAR, but is the current momentum sustainable. Katie Scott talks to the innovators to find out.
In January 2016, thousands of people from within the finance sector will meet at the annual Asian Financial Forum in Hong Kong, and business innovation and disruption is high up on the agenda.
Financial Technology or FinTech is a relatively new term for centuries of innovation. The ATM, credit card and online banking are all technologies we take for granted. FinTech is now booming, its sweep is wide and it is innovating in the limelight. Startups are talking about their visions, whether to industry peers, universities or to the press, and governments and the traditional financial institutions are listening and engaging with them.
Last year we saw the establishment of three successful accelerator programmes – the DBS and Nest Accelerator, Accenture’s FinTech Innovation Lab and Swire’s Blueprint. The fruits of the Standard Chartered, Tuspark Global Network and Baidu Supercharger accelerator, will be showcased in April 2016 with a demo day in Hong Kong. Next month we will also see startups compete in the FinTech Finals at which 24 businesses get to present their ideas to a select and powerful panel of bankers, entrepreneurs, VCs and designers. With innovations and collaborations, co-working spaces, mentorships, panels, debates and newly established university courses on the topic – it is, undeniably, an electrifying time for FinTech innovators in the SAR.
Dramatic growth, huge potential
FinTech takes in everything from RegTech to crowdfunding to Bitcoin exchanges. Chloe Wang of Channel News Asia wrote that the sector boasted “more than US$12 billion in investments worldwide in 2014”, which, according to Accenture, was triple the figure from the year before. Growth has been dramatic and global. However, Asia Pacific claimed just $800 million of this figure. Janos Barberis is the founder of FinTech.hk, an organisation he terms the “Yellow Pages of FinTech in Hong Kong”. It supports the industry by listing companies, events and relevant papers as well as producing content, including videos, to heighten awareness. He argues that there is still a huge margin for growth as the FinTech industry here has “nowhere near the same amount of investment as the USA and Europe”.
The drivers behind the industry are also different, Barberis continues. “FinTech development in USA and Europe was pushed by the financial crisis. Here in Asia, it has been about market reform. It’s about how we can make credit available to the SMEs who couldn’t get credit before; or how we provide bank accounts to people so that they can pay their bills. It’s market driven. For example, the India government has the goal that every single Indian person has a bank account by 2017.”
Closer to home, Accenture stated in a report called Every Day Bank in China: “Over the past three years in China, there have been 111 million new internet banking customers, which is a 19 percent increase in new personal bank accounts, and a 24 percent increase in online payments.” Of those in the online sphere, AliPay and Alibaba are titans. In a paper entitled The Evolution of FinTech: A New Post-Crisis Paradigm? Barberis and his co-authors write: “China’s AliPay processes over one million transactions each day without being a bank… Alibaba has fulfilled two main government policy objectives by creating 2.87 million direct and indirect job opportunities, and providing over 400,000 SMEs with loans ranging from $3000 to $5000.”
A word of warning
In Hong Kong, there is excitement and caution. In April, the Government created the Steering Group on Financial Technologies. Six months later, at the Thomson Reuters Sixth Annual Pan Asian Regulatory Summit, the Secretary for Financial Services and the Treasury, Professor K. C. Chan lauded the growth: “…the number of startups registered has jumped 46 percent to more than 1500 in a space of less than a year. Around 90 of them are engaged in FinTech, and this figure could well be out of date even now,” he stated. However, he added a word of caution: “An efficient and trustworthy financial services industry must be underpinned by a regulatory regime that makes customer protection one of its pillars.”
The value of Bitcoin
Leonhard Weese, President of the Bitcoin Association of Hong Kong, is acutely aware of this guardedness. Bitcoin is termed a digital commodity in Hong Kong as opposed to a currency (crypto or otherwise), and banks are barred from offering Bitcoin products. In November, Bitcoin was declared illegal in Taiwan. Weese is pessimistic that this will change anytime soon. He says: “Two American Bitcoin service providers, BitPay and CoinBase, would love to come to Hong Kong but no one will partner with them or give them a bank account.” Indeed, Chan pointedly said in his speech: “When the payment platforms are turned into de facto deposit institutions, this could raise prudential and systemic concerns as well as conduct risks like frauds and cybercrimes. How to welcome these new neighbours into the house of financial regulations that was originally built for financial institutions is no small matter.”
One solution is creating different licensing models for different businesses. Barberis writes of the “light license” models being deployed in some countries, “…that aim to minimise regulatory and compliance costs for firms seeking to deliver specific banking activities to certain population segments” – South Korea and India are among them.
Aurélien Menant says Hong Kong Customs and Excises Department understood the business model for his startup, Gatecoin, and granted it a Money Service Operator license. “This has been a big boost for our young startup since it gave us more credibility and legitimacy towards customers and financial partners”. However, the general lack of regulation will be a disadvantage in the longer term. Menant says: “Bitcoin and Blockchain have become trendy words in the banking space over the past 10 months. Even in Hong Kong, most financial institutions are starting to have a broad idea of what they are, but lots of them still have a very blurred picture of it. Some misconceptions remain. The fact that Hong Kong Monetary Authority does not regulate or state anything about it does not encourage them to dig deeper into it.”
He is confident that regulation will help quieten some of the fears: “In the USA and Europe, we observed a growing understanding of Bitcoin by law enforcers and regulators, which triggered a considerable decrease in its unlawful use. Hopefully this understanding and regulation will come to Asia one day.
“I do not know if Bitcoin will ever be a unit of account, but within the next two to three years, it is bound to become a major remittance and payment solution, as well as a common clearing system, since lots of solutions offer cash to cash remittances using Bitcoin in the back end. To give you an example, we are currently integrating with an international bank that will offer this kind of services between Europe and Africa, using our platform in the backend.”
Weese uses Bitcoin himself for buying on Taobao, coupled with a Chinese exchange and an AliPay account. He says that friends who use it tend to be either ex-patriots living in China or digital nomads. He believes the biggest uptake in Hong Kong will be “online merchants who sell all over the world and are currently paying a five to eight percent fee to Paypal”. However, he agrees that more education is needed and this was why he set up the Bitcoin Association in 2014.
Share and share alike
For Cedric Jeannot, CEO of Information security and tracking service APrivacy, it is openness that would accelerate his company’s growth. He explains: “We have a lot of banks interested in our technology but the sale cycle is very long as each bank needs to test the security of the product and verify that it meets all of the compliance requirements. This process is similar for all banks but gets re-done for each institution. If one bank was to share its findings, it would save a lot of time and really propel our growth.”
This would require a shift in embedded practices but, in the meantime, banks and financial institutions are at least talking to startups. Nicole Denholder is the founder of Next Chapter, a crowdfunding platform that champions projects created by women. She recounts: “I went to see one of the banks and they wanted to learn about crowdfunding. It is interesting because people usually go to crowdfunding platforms to raise between USD 10,000- 100,000, which they might have traditionally approached a bank to get as a loan.”
The founding partner and mentor lists of the various accelerator programmes are an encouraging reflection on the level of engagement between the established and the fledgling businesses. The accelerators have allowed startups access to the right people.
Kevin Mak is director of IronFly Technologies, which is “a combined order and execution management system for equities and equity derivatives”. It was part of the Blueprint programme and the FinTech Innovation Lab. Says Mak: “The accelerators have allowed us to do more with less and much faster. We have benefited from access to key members of large organisations where we are now forming relationships. We have also received valuable advice from experts across numerous fields that has both helped us optimise our business, as well as avoid potential problems. All of these are aspects that small companies looking to grow are often unable to afford, both in terms of time and dollars.”
Most importantly, access was all that was needed to help defeat the indifference Mak says he came up against when he started talking to larger companies. He says: “…established institutions favour their own well understood set of processes that they are incentivised to follow. Where we have had success is in situations where there is a distinct, clearly defined need that an institution is unable to fulfil (such as a request from a client) that we have an effective solution for. In these situations, change can occur reasonably quickly and to the benefit of all parties.”
Once they have industry support and funding, startups can expand, but Igor Wos, co-founder of online payment processing solution TofuPay, argues that the talent pool in Hong Kong is limited. “There are many difficulties and challenges with starting a company in general,” he says, “but we feel hiring candidates locally is difficult as the culture here is still focused on younger people joining larger companies and climbing corporate ladders. Luckily more and more people get attracted to joining generally more risky, but also more exciting, startups.”
The Halls of Academia
Hong Kong University’s Master in Finance programme is soon to start its first FinTech Course – claimed to be unique in Asia. It will be headed up by Henri Arslanian, Head of corporate development and strategic partnerships at APrivacy. He told Jumpstart: “The course will provide students not only with the latest developments on FinTech and their practical impact on the financial world today but will also empower them with the knowledge and understanding of the impact it may have on their careers moving forward. The students will learn about all the different pillars of FinTech including robo advisers, Blockchain, digital currencies, cryptography, payments, big data, artificial intelligence, crowdfunding and P2P funding. Their final exam is to come up with a FinTech start-up idea, put together a marketing deck and pitch it to the class.”
The introduction of this course is timely, if not overdue. Barberis says: “Education in Hong Kong has always been conservative but lecturers are here to inspire the next generation of leaders. The corporate world is getting tougher and tougher, and they have realised that their students will have more of a chance if they buy or join a startup. Look at the number of MBA graduates in the USA who have joined a tech company or a startup instead of joining Goldman Sachs. It’s a dramatic change from ten years ago.” He adds that there has already been a boom in the numbers of home-grown entrepreneurs in FinTech: “I am seeing local teens coming up from the universities and local bankers saying, “Ok, the shift is coming, let’s be part of it.”
The course boasts 15 guest speakers from the FinTech world, as well as those from the traditional banking sector, who will talk about the challenges that they are facing. Arslanian says: “The fact that so many FinTech industry practitioners are happy to take time from their precious weekends to come and share with the students is very touching and demonstrates that the FinTech community cares about giving back to the community and in building the next generation of FinTech talent.”
TusPark has been a pioneer in building relations between academia and industry since 1994. Tsinghua University Science Park has 30 branches around China and has helped 1530 companies to date. It is running the Supercharger Accelerator, and was behind the TGN Bootcamp. The managing director and co-founder of TusPark Hong Kong is Joanna Cheung. Her organisation, she explains, builds bridges: “What we are trying to do is create a gateway both into and out of Hong Kong,” she states. “Many of the companies we help are looking to expand globally but especially into China. They require more of a partner rather than an investor, and access to guidance on the feasibility of their model and advice on capital flow. We help them find the appropriate business partners and access to the market research they need.”
The key is maintaining momentum. Accelerators offer access to practical help, financial support and guidance, but there are many organisations in Hong Kong that will step up after the programme has drawn to a close. As Barberis says: “I think the next 12 months is all about making sure that these businesses have selected a path to go. Otherwise, people will look back and say there have been too many events and too many startups launched, but what came out of it? Now it’s about converting that energy into success.”
Katie Scott is the former News Editor of Wired.co.uk in London. Now living in Hong Kong, she has written about everything from 3D nature documentaries to nanosatellites to the ramifications of Edward Snowden’s brief visit to the SAR, but is driven to find stories on innovation and innovators of any kind.