SFC Takes Crypto Stand; Lufax on China Fintech; Cryptos and BC Group; Fintech Role in Financial Inclusion; Tech and Trade; Open APIs
[November 1, 2018] The fourth day of Hong Kong Fintech Week, organised by Invest Hong Kong (InvestHK) at Hong Kong Convention and Exhibition Centre, continued at full tilt right to the very end, thanks partly to a regulatory announcement on cryptocurrencies and partly to the quality of the speakers and panel sessions. Day 5 sees the event go cross-border as it takes the high-speed train to Shenzhen for the first time.
The day started with keynote speech by Ashley Alder, CEO, Securities and Futures Commission (SFC), on the main stage started proceedings Thursday with a speech that gave context for an important SFC announcement on cryptocurrencies later in the day. He also reminded the audience of the SFC remit and approach to regulation.
Mr. Alder said the SFC takes a facilitator approach to innovation, but adopts a “far more cautious stance” where risks arise, particularly when it comes to crypto assets, which have come under spotlight among international regulators.
“There are some risks inherent in the very nature of the virtual assets themselves. They have no intrinsic value and are generally not backed by physical assets. They are not guaranteed by any government,” Mr. Alder said. “They are not currency.”
Mr. Alder said it is too early for Hong Kong legislate new laws to regulate crypto assets and exchanges, which are “changing too fast” and lacking in international consensus on regulatory framework. However, he said the SFC has decided to step up to protect the sizeable pool of Hong Kong investors within its existing legal remit.
The SFC said those fund managers supervised by the SFC who intend to invest more than 10% of their portfolio in virtual assets will need to observe the regulatory requirements for cryptocurrency irrespective of the amount of securities and future contracts in the said portfolio. This will not extend to fund managers of pure crypto assets funds.
The SFC issued another statement on how to regulate virtual assets trading platforms, or crypto exchanges, with many of the most active in Hong Kong. Unlike crypto-asset funds, a significant part of their trading activities do not fall within the regulatory parameters of SFC, or any other local regulators.
“We are still not sure whether virtual assets trading platforms are suitable for regulation,” Mr. Alder said. “They are technically, structurally and qualitatively different from the traditional stock and future exchanges.”
The SFC announced it will use the SFC Regulatory Sandbox to monitor the activities of virtual assets exchanges. The aim to explore how they should be regulated. “I believe that their conduct, resilience and financial soundness should be the same, if not higher that the existing automated trading platforms such as dark pool,” Mr. Alder said.
The goal, he said, is to set up framework for potential regulation and licensing, and to pave the way for providers that have “the willingness and ability to keep to high standards.”
The jury is still out on whether virtual asset still serve a useful social function. But they should be held to the same standards as other assets. It is too early to set a legal framework for it. International consensus on legal standards is year to emerge.
Mr. Alder said the SFC will be announcing a regulatory framework for robo-advisory in April next year.
China Fintech Summit – Lufax CEO in Fireside Chat
A key theme for the day was China. The so-called China Fintech Summit kicked off with a fireside chat between Greg Gibb, Co-Chairman and CEO of Lufax and Shai Oster, Asia Pacific Editor of The Information. Mr. Gibb said seven-year-old Lufax has 35 million registered customers, with 10 million active ones. He said about a third of its investors come via the Ping An ecosystem, a third from online searches and browsing, and a third via word of mouth.
Mr. Gibb said while it started as a peer-to-peer (P2P) lender, it has moved on and is now essentially a curator of financial products, so customers can decide how they want to invest. Its fastest growing products over the past two years are alternative investment products. He said he noted growth in demand for equity products.
He said Lufax remains 99% a China play, but it is heading overseas. Earlier this year, he said China’s regulator finally outlined 108 criteria for a compliant platform, with the ones on banks to ensure compliance – Lufax works with PingAn Bank and 20 other banks. “Finding a bank to work with raises the bar – a challenge for many companies,” said Gibb.
Mr. Gibb estimated the size of the market to be worth about RMB 1.5 trillion (US$2 billion), making up about 3% of China’s financial sector. He added that in 4-5 years it will be 10%. Commenting on the driving forces, he said that retail banking is relatively young in China (“about 15 years”), so there are none of those 20- to 30-year relationships between customer and bank that you see in the west, making the market more receptive to new types of player.
Traditional banks that understand technology, have financial DNA and focus on retail will be major players. “Fintech is a race to get that right,” he said. “The hardest part is the culture. You can hire tech guys and industry know-how, and then you’ve got to get them to work together.”
Commenting on a big theme of the day, Mr. Gibb gave a zero to cryptocurrencies – Lufax has no plans there. He was bullish on blockchain, though, saying it will significantly increase transparency.
Hong Kong Fintech and the Greater Bay Area
Charles d’Haussy, Head of Fintech at InvestHK, presented on Hong Kong, setting it in the context of the Greater Bay Area. He said that Hong Kong’s fintech sector has grown organically driven by the private sector and supported by the government, making it very resilient, he said.
Mr. d’Haussy listed a string of recent developments such as the Faster Payments Service, common QR code, blockchain trade finance infrastructure launched with 21 banks, and 29 companies reported to have applied for virtual banking license. He also spotlighted Hong Kong’s tech voucher scheme which offers HK$200,000 to Hong Kong SMEs to buy technology.
Financial Inclusion with Grab Financial, PayPal and International Agencies
The morning featured a session on financial inclusion. Reuben Lai, Managing Director, Grab Financial spoke about how Grab created more than one million bank accounts for drivers over the past six years – driver who were previously locked out of the financial system. The drivers, he said, act as agents – they drive, but also act as mobile ATMs and mobile branches.
He said Grab had helped empower 8 million micro entrepreneurs across 50-plus cities, typically helping them to increase revenues 30%-50%. He said that through data and insights, Grab can make loans with low risk and significantly lower interest rates.
Richard Nash, Vice President and Head of Global Government Relations at PayPal said the company has 254 million active accounts. He said fintech advances haven’t reached a huge number of people – there are still 1.7 billion unbanked, with 85% of transactions by cash or cheque. He added at more than 200 million business are financially excluded and, in the US, one-in-three households underserved by the financial system.
Legacy infrastructure, the difficulty reaching remote areas, collateral needs, interest rates, regulation and other things all hinder economic growth and opportunity. “Tech innovation should go further,” he said. “The good news is that two-thirds of the unbanked have mobile phones.” This can help drive not just financial inclusion, but also financial health, such as insurance, investment for education or retirement.
In a panel session that followed, Jaspreet Singh, Digital Finance and Innovation at the UN Capital Development Fund, said fintech and financial services are not an end in themselves. “Tech shouldn’t be centre stage, it’s an enabler,” he said. “The focus should be on consumer. Usage is important – dormant accounts are no good.
Rachel Freeman, Financial Institutions, APAC, International Finance Corporation, stressed that it’s important to help people to get the right type of finance. “Deposits and saving are more valuable than credit – something that’s often forgotten with financial inclusion.” She disagreed that some new players are exploiting the situation, saying some business models are not so good and worst ones will get crowded out. “It’s all normal for a new industry.”
Regulation needed for cryptos
In the early afternoon on the AMTD stage, talking about digital assets, Ken Lo, CEO of Branding China Group, gave his perspective on where the sector is heading. “In the future, it will touch every part of our lives,” he said. “That is why collaboration and effective regulation globally will be crucial for this to be integrated smoothly.”
Having commented on regulatory developments in Japan and the company’s involvement there, Mr. Lo added: “We absolutely understand what the regulators need. We need the same thing too. We all want the market to be secure, liquid, transparent and efficient… Without that, the market can’t grow. What we’d like to have is an opportunity to collaborate and bring our industry experience to help create effective regulation.”
AMTD, Tiger Broker announce strategic partnership
On the Hong Kong Stage in the afternoon, AMTD Group announced the establishment of its strategic partnership with Tiger Broker on capital markets services and technological innovation. Calvin Choi, Chairman and President of AMTD Group, and Mr. Wu Tianhua, CEO and Co-Founder of Tiger Broker, signed the agreement for a partnership that aims to bring disruptive changes to the securities brokerage and investment banking industry, generating a better user experience for global capital markets clients and helping to upgrade traditional financial services.
Open APIs panel discussion
Regulators and experts from UK, Australia and Hong Kong congregated for a panel session on open APIs.
Imran Gulamhuseinwala, Implementation Trustee, UK Open Banking which is responsible for implementing a unified set of API standards across the banking industry, described the process as painful despite the positive outcome. “There is a saying that the pioneers are those who take the arrows,” he said. “We have learnt an awful lot. I would urge Hong Kong to leverage other countries’ experience. You will find that banking around the world is not so different.”
One of the most painful experiences was how the UK had underestimated how difficult it was for banks to implement the API standards and how much central infrastructure needed to be built. It included how banks train the middle office, how to resolve disputes with customers in this more complicated system, and how to screen third parties.
“We have learnt that implementation is a big deal. It is not just about technical standards, but also about customer experience standards which need to be brought alongside,” he said.
He added that it is important to have regulation, and for there to be a single standard regarding APIs so that they lower the entry barrier for innovation – big and small banks alike would then have access to the same pool of offerings from third-party providers.
Scott Farrell, Chairman of the Australia Open Banking Review, shared how Australia utilised APIs to open a cross-sector data-sharing framework. Such a data ecosystem, he said, cuts through banking, energy, telecommunications and every aspect of life in order to offer customer choice, convenience, and confidence in the soundness of the ecosystem.
Participating banks, corporates and institutions in the system can offer customers better products and services. “Our vision is to build up a competitive data economy in Australia so that we become price-makers instead of takers,” he said, adding that banks can gain customer information from other industries, meaning they can provide services beyond their own.
Harjeet Baura, Financial Services Consulting Leader, Hong Kong, Partner, PwC, said regulator-driven, mandated open banking, such as in Japan and the UK, and market-driven open banking developments, such as in the US and Singapore, both have their merits. He said that traditional banks could no longer afford to hold onto their traditional business models – they need to think beyond just banking in terms of profits and fees. For example, banks should look less at fees from banking products and services, but more at referral fees as they become part of an open banking system that directs and generates business for everyone on board.
Angel Ng, CEO, Citi Hong Kong and Macau, welcomed the concept of open banking and API standards with open arms. “Why banks need to adapt open APIs? The reason is very simple: banking is very boring. Banking is no fun. Banking is transactional in nature, and the question is how do we offer this professional service without interrupting your life.”
She said they didn’t want to drag customers to their site, but “go to where customers hang around and make ourselves invisible so that they go through their life comfortably without feeling our existence. That is why we want to use open APIs, as it enables different partners to get involved to innovate to make banking part of the everyday process.”
Ms. Ng agreed that the implementation is a pain. Internally, she needs to convince her own people. “I cannot answer what is the financial benefit of using APIs, but I do believe that if we put our eyes on the customer and client journey, you create a lifetime relationship with your clients which is of far greater value.”
Sebastian Paredes, CEO, DBS Bank Hong Kong, pushed for another kind of level-playing field – he said the HKMA should also regulate fintech companies, holding them up to the same set of standards as the rest of the financial industry.
He also pushed back on the HKMA’s API initiatives, arguing that banks need to decide what they want. “As a bank, DBS has been working with third party providers to create value. We need to create our own ecosystem based what we want. If suddenly have an array of third parties knock on our door to drain our data, we cannot reciprocate,” he said.
China Fintech Summit – eight questions (and answers)
Late afternoon, the China Fintech Summit resumed with a panel discussion preceded by a short presentation by Paul Schulte, Founder and CEO, Schulte Research. He posed eight questions… and gave some answers:
- Q: Do we need AI to correct human bias?
A: Yes, because without it you get group-think, fear of authority, lack of imagination, polite is good and hyper-rationale (I cannot fail) plus other things. China is ahead on AI.
- Q: What kind of AI do we need?
We want it to be independent, logical, offering full vision, objective, without emotion and so on. “We would hate AI if it were a person.”
- Q: Is blockchain bullshit?
A: No. It’s free and it will succeed. It offers transparency and can become an auction house for anything that moves. It’s verifiable, immutable, traceable, automated, low cost, decentralized, IOT connected, secure etc. China is ahead.
- Q: Are Alibaba/Tencent the financial glue for One Belt One Road?
A: Yes, this is what we see from their footprint across the OBOR markets. Alibaba’s capex is “5x HSBC and 10x Standard Chartered.” Tencent is similar, he said, but taking smaller bets.
- Q: Will Amazon export India success to dominate GEMS?
A: Yes. Agriculture and agritech will be big buzzwords in 2019 and Amazon will lead the way and will take on the “cartel” that is the ABCD group (ADM, Bunge, Cargill, Dreyfus).
- Q: Will we need two of everything?
A: A bifurcation of technology is possible. The White House is taking out the old Cold War playbook. “We’re in an echo-chamber. The rhetoric and action will get more aggressive, not less.”
- Q: Is quantum computing equivalent of splitting the atom?
A: Yes, 1024-bit RSA encryption would take the fastest computer millions of years to crack. “Quantum computing can do it in 24 hours.” China leads on quantum computing.
- Q: Where is this going?
A: The US has a US$827 billion defence budget, making the Pentagon the world’s 19th largest economy. In China, the five-year plan is fixed; it can’t deviate and that could be restrictive.
China Fintech Summit – panel on US-China trade and other topics
The panel’s subject was The Future Role of China in the Global Financial Technology Industry
Jing Ulrich, MD & Vice Chairman of Asia Pacific, JP Morgan Chase said China leads the world in mobile payments. It’s now a cashless society. “Mobile payments have been growing at 40% a year over the last five years,” she said. “Even beggars on street don’t accept cash.”
She said that 90% of payments go through Alibaba and Tencent, and these companies are traveling overseas with Chinese travelers (150 million last year) and establish overseas, such as in Cambodia, Thailand and Philippines, all of which accept AliPay and WeChat Pay.
She said that AI and fintech is gravitating towards Asia from the West, and that China will lead for four reasons: abundant data, work ethic, expertise and massive government support. “If data is oil, China is Saudi Arabia,” she said, adding that it’s quality data that’s not fragmented like in the US, because it’s mostly owned by Alibaba and Tencent
Ting Li, CEO of Yunfeng said traditional financial institutions are waking up to fintech, while fintechs are seeing that the B2C model doesn’t work. “They need to partner.” Commenting on the trade dispute between the US and China, she said that: “China has priced in a long-term friction. It’s not about the trade deficit, it’s about competition going forward. In the US, they may not have adjusted to the impact of the trade war.”
Daniel Yu, ex-Group CIO, Ping An, added to Ms. Ting’s comment that the US has US$21.5 trillion of debt, much of it held by China. Meanwhile China’s debt stands at 278% of GDP which is huge. The impact of a trade war could be profound with the protagonists in straightjackets. The collateral damage is likely on the Belt & Road footprint, he said.
Looking forward, Mr. Yu said payments are unsexy, China has set the standard. “It skipped over [payment] cards and it now accounts for three-quarters of online lending.” Commenting on insurance, he sees China taking a lead in automotive and transport, healthcare and logistics.
He added that auto insurance will be interesting down the line with driverless cars, because the censors and data-gathering tools will belong to the automakers, who will therefore own the data. This would have ramifications for the insurers.
China is often criticized for inefficient use of capital – too much going to government-backed and risk-free state-owned enterprises at the expense of nimble innovative up-and-coming companies. Mr. Yu observed that in China they can now define risk based on data, and so redistribute capital more effectively on a large and micro level – to farmers or migrant workers.
Ms. Ulrich said “the trade friction is really about future dominance in tech sphere.” China has its vulnerabilities in that it has been long reliant on US semiconductors. Now Chinese companies are beginning to build AI chips. “So, the trade tensions may actually accelerate China’s tech development,” she said. “There may be two parallel ecosystems [down the line].”
Fireside chat on AI with Dr. Kai-Fu Lee
The day ended on a high with a fireside chat with Dr Kai Fu-Lee, founder and CEO of Sinovation Ventures, a Chinese venture capital firm that manages US$2 billion of AUM, and over 300 portfolio companies across the tech sector in China and US.
Dr. Kai-Fu Lee, Founder and CEO, Sinovation Ventures, one of the leading VC funds investing in technology companies in both China and the US, particularly in AI. It currently has an estimated US$2 billion AUM.
When comparing AI in China and the US, Dr. Lee said China has more data and entrepreneurs who are better and faster. The US, on the other hand, is much better in research than China.
When asked about whether Sinovation Ventures solely focuses on investing in Chinese companies, he said: “In an ideal world, we will invest in companies with US technology, China entrepreneurs and China data. However, if the US is intent on trade war, we will focus on investing on Chinese companies because that is the environment.”
Dr. Lee is very much against the view that AI may replace the human workforce or have its own free will and threaten to overrule human society. He pointed out that there had only been one breakthrough – deep learning – over a 65-year period of AI development and that was 10 years ago. He said it would take at least 20 more breakthroughs for such ideas to be feasible.
But he noted that AI would have the potential to displace jobs which are routine and single-domain – similar to jobs done by about 50% of people. He was also mindful of the undesirable side-effects of AI applications.