Chinese FinTech – Hong Kong Fund Management’s Goliath at the Gates7 March 2017
Hong Kong’s US$2.3 trillion fund management industry has fallen behind in terms of Financial Technology (“FinTech”) driven automation and online offerings. This restricts market growth and results in higher investor costs. For Hong Kong funds, the fax machine is still King and a significant FinTech gap now exists between Hong Kong and Mainland China. The Mainland is leading the way in mass application of FinTech within the fund management business. More recently though, Hong Kong is emerging as a leader in the region for FinTech start-ups which are receiving significant Chinese investment. There is also continual integration between the two markets as China open’s up its capital account. This is leading to opportunity for HK to change with China’s tech giants demonstrating a ‘FinTech’ first approach. This article reflects on the opportunities and challenges for HK fund managers.
Hong Kong’s Lack of Automation
The humble fax machine, introduced in 1964 by US company Xerox was ground breaking. 53 years later, it still reigns supreme with most HK distributors. HK’s bank dominated fund distribution market is fragmented and complex. Due to lack of competition there’s little incentive to modernise. Fund manufacturers have created a distribution network through banks and other financial institutions with transfer agents providing fund servicing. They are completely reliant on HK’s distributors for order flow. Many of HK’s financial servicing firms also continue to struggle with the limitations posed by their outdated systems. Key operational areas such as order flow, clearing & settlement, client interaction, etc. are low tech and non-standardised. HK has fallen behind other geographies where distributors use modern systems for electronic order flow called STP (Straight Through Processing). Specialised STP messaging engines keep STP rates high creating huge cost and time savings. China have also implemented automated order flow for their funds business using a centralised system from China Clear. Other unnecessarily complex paper based processes are KYC & AML.
Mainland Market Integration & HK’s Rise in FinTech
Continued HK/China market integration is driving growth and modernisation. The 2015 launched Mutual Recognition of Funds (MRF) Scheme is an example. Others are:
- 2016 CIPS (RMB – Cross Border Interbank Payment System)
- 2015 ATIS (Agreement on Trade In Services)
- 2014 Stock Connect
- 2011 RQFII (RMB Qualified Foreign Institutional Investor)
- 2006 QDII (Qualified Domestic Institutional Investor)
- 2003 QFII (Qualified Foreign Institutional Investor)
- 2003 CEPA (Closer Economic Partnership Arrangement)
Mainland China’s internet tech giants are rewriting the rulebook for traditional funds management. Alibaba’s Alipay offers it’s 300m account holders automatic investment into Tianhong AM’s Zenglibao money market fund via its Yu’e Bao service raising US$116 billion in 3 years from mostly retail investors via their smartphones. They have also developed Ant Fortune, a wealth management platform for online fund sales. In early 2016, Tencent’s WeChat digital platform and underlying digital bank collected US$16 billion using their Caifutong money market fund platform. Eastmoney Information’s ‘TianTian Fund Sales’ internet platform gathered US$20 billion in Q1’ of 2015 alone. Over 2000 funds are offered on this platform. Others of note are Noah Upright Fund Investing’ (Used by JP Morgan for Mainland Mutual Recognition of funds Sales), ‘HowbyFund’ and ‘Taobao Fund Online Store’.
Alibaba and WeChat have over 450 and 850 million users respectively. As close quarter spectators HK can simply observe in awe.
However, HK is gaining notoriety for its growth in domestic FinTech start-ups. HKSAR Government & regulatory policies are supporting this. The Innovation & Technology Fund (ITF) has invested US$1.4 billion across 5000 projects. HKEX’s US$42billion GEM (Growth Enterprise Market) also provides early stage funding. Blockchain, robo-advice, e-payments and peer-to-peer online money lending are gaining traction. Regulators are playing catch up. The HKMA’s (Hong Kong Monetary Authority) FinTech Facilitation Office supporting FinTech application and development is encouraging. They have launched a sandbox for banks & FinTechs offering light touch regulation.
Collaboration & Smart Regulation is Key
To achieve automation, standardisation is required. China standardised and automated order flows using the CSDC (China Securities & Depository Clearing Corporation) Funds Central Data Exchange Platform Service. Their CIPS (Cross Border Interbank Payment System) also centralises RMB cross-border payments.
The HKMA’s CMU (Central Moneymarkets Unit) Fund Order Routing & Settlement Service provides a centralised link between distributors and fund houses and is also used for the Mutual Recognition of Funds(MRF) market. It’s not mandatory so uptake is mixed.
Industry collaboration is gaining momentum. AFAC (Asia Funds Automation Consortium), AFSF (Asia Fund Standardisation Forum) and TFOG (Taiwan Fund Operation Group) are good examples.
Other regional regulatory FinTech initiatives of note are:
- Taiwan: The TDCC (Taiwan Depository Trust & Clearing Corporation) have a standardised & automated messaging platform using 3 leading information transmission service providers for cross border funds.
- India: SEBI (Securities & Exchange Board of India) KYC Registration Agency’s centralised market investor KYC records system. Also, the AMFI (Association of Mutual Funds of India) MF (Mutual Fund) Utility for common investor account number generation and single payments for purchasing units in multiple investment funds.
- Korea: Mandatory KSD (Korean Securities Depository) FundNet System for centralised onshore fund order processing.
- Australia: mFund Settlement Service allows unlisted funds to be purchased online via the Australian Securities Exchange (ASX).
The ASEAN framework for cross-border offering of funds and the ARFP (Asia Region Fund Passport) will also bring standardisation.
There are many headwinds preventing widespread FinTech adoption by HK fund managers & servicing agents. Complex KYC requirements, lack of independent fund platforms and continued reliance on the fax machine are key barriers. HKSAR’s Government and the HKMA FinTech initiatives are helping as are collaborative industry groups. A centralised KYC system would help. Also, provision of an exchange based distribution platform allowing unlisted funds to be purchased online via the HKEX’s technology could be a silver bullet. The Australian Securities Exchange (ASX) and the Shenzhen Stock Exchange being examples of success here. However, the Goliath at the gates really is the continued integration with China. Ant Financial, Tencent’s WeChat and Eastmoney’s Tiantian among others will soon dominate here. HK market, please brace for disruptive change.
This article originally appeared in Ignites Asia on 22nd February 2017. You can view the article here. (Please note that you must be a subscriber to Ignites Asia to view their content).