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A new report identifies the opportunities and challenges associated with collaborating with fintechs, in addition to how banks expect the Hong Kong fintech space to grow over the next decade, per Crowdfund Insider. The report was released by the Hong Kong Institute for Monetary and Financial Research (HKIMR), and the findings are based on a survey of Hong Kong’s traditional banks and the newly licensed virtual banks.
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Partnerships between banks and fintechs could lead to a more distributed model for Hong Kong’s banking industry, though regulatory and technical obstacles currently hinder this.
More than half of respondents believe the banking system could become more distributed over the next decade. The survey revealed that 51% of incumbents and 38% of virtual banks have formed partnerships with fintechs, such as through internal accelerators, innovation labs, or incubator programs. As the fintech ecosystem continues to grow, boosted by government initiatives, the provision of financial services may be increasingly shared between banks and fintechs.
According to the survey, 57% of incumbents consider an eventual distributed model where they operate as joint ventures or partners with fintechs to be “possible.” By contrast, half of virtual banks consider the distributed scenario, or that incumbents will be replaced by technologically driven banks, as “highly possible,” suggesting that they expect fintech to have a larger impact on the banking industry.
However, fundamental differences between banks’ and fintechs’ respective business models mitigate successful partnerships. A bank may be uncertain as to whether its fintech counterpart is fully compliant, for example, because although banks have specific license regimes, there’s no fintech-specific framework in Hong Kong.
The fact that the fintech regulatory landscape is also constantly evolving exacerbates this further, with 73% of incumbents and 88% of virtual banks citing this as a challenge to partnering. In addition, 78% of incumbents state cybersecurity risks as a hurdle, as they’re concerned that fintechs’ IT security is inadequate. Notably, only 38% of virtual banks agree, which could be because they’re less likely to rely on legacy IT systems and are thus more confident in their cyber resilience and interoperability with fintechs.
For fintechs to benefit from an increasingly distributed banking model, they’ll need to both overcome the current hurdles and prepare for increased regulatory oversight. For example, fintechs could develop initiatives with banks within the Fintech Regulatory Sandbox, which enables partners to launch pilot trials for limited customers without having to achieve full compliance.
This environment would alleviate banks’ concerns regarding regulatory uncertainty. To mitigate cybersecurity concerns, Hong Kong fintechs should look to harness the local open banking framework by working with banks to develop security standards for the sharing of customer data. They could also propose to help banks upgrade their IT systems to ensure full interoperability.
These initiatives would promote further partnerships with incumbents and virtual banks, with fintechs increasingly involved in the distribution of financial services, enabling them to scale and reach wider customer bases. However, fintechs should also prepare for more stringent requirements, as their growing role in the banking system will mean increased oversight from financial supervisors.
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