Hong Kong should be a leading global fintech hub, given its locational and connectivity advantages, but it is not, at least not now. According to a study conducted by KPMG in 2019, none of the Hong Kong fintech service firms made it onto the top 10 list. 

However, Singapore’s Grab and the Chinese mainland’s Ant Financial, JD Digits, and Du Xiaoman Financial are among the top 10 fintech firms in the world in terms of the number of digital payments and transactions. To become a global fintech leader, Hong Kong needs to leverage its existing pedigree in financial services to develop a cross-border payment system and further embrace blockchain-based financial innovation.

Hong Kong has many strategic advantages that can propel the development and adoption of fintech services. It is ranked among the top 10 global financial centers with high consumer fintech adoption rates in the world, and it has a high B2B adoption rate of fintech, with 66 percent of fintech companies focusing on the B2B market. In addition to Hong Kong’s homegrown virtual WeLab bank, eight new virtual banking services were launched in Hong Kong in 2020.

Despite these advantages, Hong Kong faces stiff competition from Singapore. Recognizing that fintech is a key strategic growth area that Singapore can lead in Southeast Asia, the Singapore government encouraged the development of fintech services by offering tax incentives, allowing looser regulatory requirements, and providing more “hands-on” government assistance. To support Singapore’s innovation hub agenda, the Singapore Monetary Authority is encouraging the establishment of more fintech firms.

Besides Singapore, Hong Kong is falling behind the Chinese mainland in terms of digital payments pioneered by mainland tech giants such as Alibaba/Ant Financial and Tencent. Different from Hong Kong, which has a well-established financial service system, the Chinese mainland leapfrogged the traditional credit card system in favor of mobile, with an estimated 852 million mobile payment users in 2020. Research firm eMarketer expects that close to 80 percent of Chinese mainland smartphone users will be using their devices for payments by the end of 2021. When it comes to pitching fintech products, it helps to have a user base that is already experienced with similar technologies.

In 2016, almost 90 percent of fintech investment in Asia-Pacific went to the Chinese mainland. Yet the Hong Kong Monetary Authority was still in wait-and-see mode, mulling how (and even whether) to support the fintech industry in Hong Kong. As a latecomer, what can Hong Kong do to gain some lost ground in the fintech sector?

Yet the Hong Kong Monetary Authority was still in wait-and-see mode, mulling how (and even whether) to support the fintech industry in Hong Kong. As a latecomer, what can Hong Kong do to gain some lost ground in the fintech sector

The fintech race is far from over, and Hong Kong has a window of opportunity to take the lead by making two strategic moves.

First, Hong Kong needs to leverage its existing regulatory framework to take a leading role in the development of a global cross-border payment system. The Chinese government has taken a rather nuanced regulatory stance, encouraging development of blockchain technology, but clamping down on digital currencies built on top of it. In May, China banned crypto exchanges and announced that financial institutions can no longer offer crypto services to clients. While the government cites consumer protection concerns as a rationale, there may very well be other reasons behind this, including China’s efforts to launch its own central bank digital currency, a digital version of the yuan.

This is an opportune time for Hong Kong to play a critical role to facilitate cross-border payments by leveraging the digital yuan. Currently, Hong Kong is already serving as one of the main testing grounds for digital yuan cross-border payments. The city’s Financial Services and the Treasury Bureau is also showing a little more open-mindedness beyond the digital yuan. Though it recently announced a ban on crypto trading for retail customers, it still allows licensed crypto exchanges to operate and market their products to professional investors — those who have over US$1 million in investible assets.

Second, Hong Kong should explore the strategic value of decentralized finance: a blockchain-based form of financial services that relies on automated smart contracts, bypassing the need for central financial intermediaries such as brokerages, exchanges, and banks. Decentralized finance has the potential to significantly disrupt traditional financial infrastructure, touting innovations such as “automated market makers”, which bypass traditional centralized exchanges. The self-proclaimed mission of this booming industry is none other than to take power (and fees) away from financial intermediaries and put it back into the hands of retail, making the entire process more time-efficient, cost-effective, and transparent.

Despite growing competition from Singapore and the Chinese mainland, Hong Kong has the capability to lead in the fintech sector. It is certainly a positive first step for the Hong Kong Special Administrative Region government to provide funding of over US$51 billion to support the fintech industry. But to compete with Singapore and the Chinese mainland, the HKSAR government needs to find ways to push progressive legislation, particularly in the crypto space, with a renewed sense of urgency.

Christopher Tang is a distinguished professor at the University of California, Los Angeles. 

Gerry Tsoukalas is an associate professor at Boston University, Questrom School of Business, and a fellow of the Luohan Academy.

The views do not necessarily reflect those of China Daily.