InnovationHongKong Insights

Smart banks offer win-win for regulators, incumbents

A surge in the pace of change in financial technology (fintech) has the potential to stimulate greater cooperation between banks and create new product categories that benefit the consumer.

The key is how to ensure that regulators are comfortable with it, and to create a business environment where incumbent banks are willing to share some information with online peers, says Sebastien Taveau, chief technologist of Zelle.

Zelle is a person-to-person payments network from a firm called Early Warning Services LLC, that is available in the United States. It collaborates with some established U.S. banks in order to offer a new way to move money across international borders in real time, via a digital mobile device.

The Hong Kong Monetary Authority announced in September last year initiatives that it said would open up “a new era of smart banking” in the city.

“The upgrading of our banking system to a new and higher level of smart banking is not just something nice to have, but a must,” Norman Chan the Monetary Authority’s chief executive was quoted as saying at the time.

In late January, the Monetary Authority said it would shortly publish revised guidelines for so-called virtual banks – businesses that offer services with some characteristics of traditional banks, but without necessarily having a physical presence in a market. A licensing system for such banks may follow, it said.

ITF Corp is a financial services company that chose to be based at Cyberport in Hong Kong. The company’s name stands for “IntoTheFuture”, and the firm has attracted the backing of U.S.-based investor Jim Rogers. The company announced in October last year that it would set up an E-bank offering online and mobile banking and financial services.

ITF was established by Lim Hui Jie, who was previously chief executive of Australia-listed technology company Digimatic Group Ltd, a Singapore-based investor in computer software and digital programming.

Mr Lim has been quoted saying that initially ITF will focus on Singapore to tap the Southeast Asia market. According to ITF’s website it is already collaborating with traditional providers of financial services, including CIMB Niaga, described as the largest payment bank in transaction value under the Indonesian Central Securities Depository, and said to be the third-largest mortgage provider in Indonesia.

In the longer term, ITF aims to tap the China market, hence its decision to base itself in Hong Kong.

Zelle’s Mr Taveau, says that a banking regulator’s idea of innovation in the sector may not always be the same as a digital technology company.

In the banking sector, “the regulator talks about innovation, when they are really thinking of integration,” Mr Taveau told Innovation Hong Kong.

Nonetheless, virtual and traditional banks can and do collaborate for the benefit of those parties and the consumer, he stated.

“How do you get the banks to work together? They are going to integrate by making some of their assets together,” he added.

Mr Taveau was speaking on the sidelines of Next Money Asia’s Fintech Finals 2018, an event for StartmeupHK Festival 2018, coordinated by InvestHK.

He stated: “The financial industry and third parties that have nothing necessarily to do with the financial industry, can together create new services. These new services may make the life of a consumer – or user – easier.”

Such innovation required a “mindset of open innovation, open infrastructure, and open API,” said Mr Taveau referring latterly to a protocol known as application programming interface, a set of clearly-defined methods of communication between various software components.

“Banks are not necessarily seeing a threat from fintech, but are looking at it in terms of, ‘How can we work together?’ ‘How can we present new services, that can create a new market?’”

Key advantages for the banks – as incumbents in the financial services sector – are “trust” and high-quality data, suggested the technology expert.

An era of what he termed “open banking” driven by technological change might even bring about an integration of payment systems for a range of financial services, such as insurance, stated Mr Taveau.