Can Hong Kong really become a fintech hub?

Jeffrey Broer has recently published a blog post called Fintech, the polarizing industry for Hong Kong. Through a bunch of interviews he shared the pros and cons for starting a fintech company in HK. Fintech is indeed a loaded topic in HK- the scene is small and people have strong opinions on its good, bad and ugly corners.

It’s no secret that HK lags behind London, NY and Singapore in fintech. Since HK has made it clear that it wants to be a fintech hub, let me ask more specifically: what’s standing in its way to become one? What’s going to really move the needle?

Let’s start with some things that people commonly think move the needle, but actually don’t:

  1. Number of accelerators– because great companies are not born in accelerators, they just get some value from them for a period of time
  2. Low number of VC’s– because great fintech companies in HK still find ways to get funded (8Securities, CompareAsia, WeLend)
  3. Government support– because anything but regulation changes is a top-down attempt to create great companies, and that doesn’t work well (see Singapore)

In my opinion, HK’s weakness lies 80% in an unusually low supply of founders- the important “power couple” of suit+techy. The remaining 20% come from unfriendly regulations. Let’s dive deeper:

80%: very low supply of founders (techies & suites)

Sure, every tech company happens where capable suites play with capable techies. But what I really love about fintech is that it imposes extremely high standards on both sides. The business intensity is just tangled up with the technical intensity: risk management, security, compliance, low latency, hard numbers. If you’re building a logistics startup you might be able to stand on a weaker technical leg. Fintech startups who tried to do it, like Japanese Bitcoin exchange Mt. Gox, simply collapsed. And PayPal wouldn’t have taken off without the vision of CEO Peter Thiel and the genius of CTO Max Levchin, combined (if you’re not sure how critical the technical side was in their early days, I strongly recommend the interview with Levchin at Founders at Work).

So we assume that you need a “power couple” of suit+techy to start a successful fintech company. How many such couples does HK have? Not many. There’s a shortage in both sides, for two different reasons.

Techies: HK’s soft underbelly. As I’ve written before, engineers are severely lacking in HK and this is by far the biggest obstacle in HK’s journey to sustain a startup scene. It can’t be overstated, and time works against HK as China and Singapore keep building up R&D forces. One interesting exception in HK is a well-connected scene of Bitcoin makers. But the authorities in HK don’t make it easy on them- more on that on the next section.

Suites: on the surface, this is HK’s unfair advantage. HK is an extremely well connected financial center. I’m constantly mindblown by how many people in HK make me feel stupid. I’ve met many dozens of people with the domain knowledge, relationships and business experience that can be extremely valuable to startup companies. Look at Simon Loong, the founder of P2P lending service WeLend, who was able to walk his way to funding his company and sourcing loans after 15 years in banking.

But Simon is actually the exception. HK is mostly a victim of its own success: very few talents step down from their well-paying jobs in hedge funds and investment banks to pursue a startup dream. For most locals, working for a startup is a huge sacrifice on the social and economic level (the risk-averse culture of HK views high-paying corporate jobs as the way to go). Talented expats may come from cultures that reward startup founders with some glamour. But how many senior figures will sacrifice their fat salary and money-burning living standards? (especially when they have a family). If that didn’t happen during the global startup euphoria of 2012-2015, it’s unlikely to happen now that the party is over. And that’s a major problem for fintech in HK.

It’s interesting to note that Israel has a complete opposite talent picture (when I moved from Tel Aviv to HK I actually traded all of my techy friends for suites :)). Yet Israel has been producing interesting fintech startups for nearly a decade, and especially in the last 2 years.

hsbc mobile banking
Mobile banking! Financial innovation in Hong Kong (1962)

20%: unfriendly regulations

Since fintech has become a term as wide as “B2B”, it’s important to note that not all fintech companies depend on regulators, or even have relationships with them. For each company like 8Securities, WeLend or GateCoin, who engage in monetary transactions and sit on top of customer funds, there are a few fintech companies that don’t depend on regulations at all. Examples are CompareAsia (B2C, content for financial planning) and even my company Leverate (B2B, SaaS for financial institutions).

Let’s take a look at those who really care about regulations. In theory, HK wants to be more flexible and accommodate them. In practice, thing aren’t really peachy keen.

In a quest to understand what’s broken, I posted a question to Quora: what are some “broken” regulations in Hong Kong that suffocate innovation in financial technology? I received a detailed and non-anonymous answer from a local and active fintech folk. His answer revolved mostly around the SFC. He started with a common claim regarding unclear regulations:

“The funny thing is that a lot of Hong Kong is run by “non-regulation.”  I’d *love* it if the SFC issued a regulation that formally said “don’t do X” but that’s not how the SFC works.  What happens is that the SFC mumbles that you can’t do X, and then threatens to shut down anyone that does X.”

And continued with the specific example of how they treat crowdfunding in HK:

“… the SFC has killed crowdfunding in Hong Kong.  They issued a press release saying “we don’t like it if you crowdfund” and started calling up crowdfunders threatening them.  So no crowdfunding.  You can’t challenge this because there is no regulation to challenge.”

Actually, it’s not only crowdfunding- P2P lending is technically not allowed in HK which forces the platforms to retreat to unusual modus operandi. Here’s a quote from a press article about WeLend:

“Under Hong Kong’s current regulatory structure, P2P lenders are required to hold a moneylender’s license, which is far from accessible to individual investors”

HK’s current situation with regulations is not just sub-phenomenal. It’s embarrassing. But it’s not the biggest problem. Entrepreneurs are not turned off by unfriendly regulations because they believe in their ability to shape things and they think long term (entrepreneurs, remember?). Entrepreneurs are turned off by unfriendly regulators. Starting a fintech business in HK is a major life decision. Without regulators fully onboard (like in the UK), how can people trust that HK is laser focused on becoming a supportive fintech superpower?

Perhaps the most disturbing thing the guy said is that the SFC doesn’t show up to any startup event (it’s true- I checked this in all startup events I attended). Speaks loud enough?

Outsiders might think that like many countries in the world, HK is just being arrogant / old-fashioned / doesn’t get the size of the opportunity in open and friendly regulations. But the situation is much more complex. Some government bodies in HK, and even some people inside the SFC, are super smart and willing. They know that fintech can make a difference in the future of HK. They work closely with entrepreneurs, understand their problems and try to raise awareness among regulatory bodies. Yet for some odd reasons things aren’t moving much, and it’s unclear to entrepreneurs if and how they can change it.

Solutions?

Lack of relevant founders and lack of friendly regulations are the 2 main problems of the HK fintech scene today. There are many cultural and political currents behind them. This post is heavy enough so I’m not going to try and offer any solutions here 🙂 but there are no trivial solutions.

HK has long been in the position to think ahead, make fast moves and stay relevant. After many lost opportunities, 2 opportunities still remain on the table, screaming: fintech and IoT. The window of opportunity in both fields won’t last forever. But at least for fintech it doesn’t look like the main problems can go away fast enough.

What do you think?

Can Hong Kong really become a fintech hub?

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