Saturday, 25 May 2024

Hong Kong's digital leap: Charting a new era in financial innovation

5 min read

By Abe Smith

Hong Kong's emergence as a fintech hub is attributed to its tech-savvy populace, robust funding mechanisms, and sound business infrastructure

  • Maintaining a conducive fiscal environment
  • Strong business fundamentals fuel growth
  • Potential roadblocks to growth

Hong Kong stands at the cutting edge of the global digital and fintech revolution, reshaping the finance industry's future. Ranked as the sixth most promising tech hub in the region and ninth worldwide, according to KPMG, it prompts the question: What is behind Hong Kong's rapid ascent?

Several factors have been key to its digital leap, ushering in a new era of financial innovation.The typical Hong Kong consumer is no stranger to digital financial services. A report from Bain & Company in December 2022 showed an 80% mobile banking penetration in the region, rendering it an ideal launchpad for introducing new services with a unique value proposition. With 7.5 million residents, a remarkable 20% more than regional rival Singapore, Hong Kong is home to a large group of digital-first consumers.

This willingness to give new fintechs a chance is stimulating a new era of financial innovation in Hong Kong. The city is now home to over 800 fintech companies, and has put Hong Kong ahead on the path to digital transformation.

Over 85% of respondents in The Hong Kong Polytechnic University’s April study expressed their satisfaction with fintech solutions. However, there’s still work to be done. The same study reported that security is the consumer’s main concern when adopting fintech solutions, primarily due to real losses from fraud. In 2022, Hong Kong’s police reported that crimes relating to fraud (deception) had soared by over 45.1% in a year, pointing towards a concerning trend. 

Addressing this concern, Hong Kong’s strong tech hub is at the centre of the solution. Savvy fintechs have been implementing strong security protocols, including extensive two-factor authentication support. A case in point is Mox, a virtual bank launched in 2019 by Standard Chartered, which positioned security and fraud detection at the forefront of its offerings to Hong Kong residents.

Maintaining a conducive fiscalenvironment

The funding and investment landscape is a key determinant of an innovation hub’s success in luring global entrepreneurs. Hong Kong boasts a favourable fiscal environment for fintechs seeking investment that spares capital gains from taxation and leaves dividends largely untouched.

Hong Kong’s government has staunchly supported  its 3,900 start-ups and counting. The government is a key source of funding, ranging from microloans to subsidy schemes for financial innovators in the region. This support has paid off, with the city boasting over 10 unicorn companies. Moreover, the government directly supports fintech innovation by providing a fintech-specific subsidy of up to HKD 150,000 ($19,187) for proof-of-concept collaborations with institutions. Notably, Hong Kong's standout feature lies in ecosystem-building efforts, exemplified by InvestHK’s FintechHK, which provides extensive scale-up support for startups.

Strong business fundamentals fuel growth

Hong Kong has long been a leader in the traditional finance world and has successfully transitioned into a hotspot for local and international fintechs. This transformation is driven by a digital-first population, a favourable funding environment, and strong fundamentals to fuel business growth.

Hong Kong’s attractive fiscal policies, with corporation taxes set at an extremely appealing 16.5%, require only 8.25% payable on a company’s first $2 million. The government has furthered its commitment to specific industries by launching the Fintech 2025 strategy to promote fintech development in the city. Hong Kong’s Monetary Authority (HKMA) also introduced a regulatory sandbox that fosters innovation while ensuring consumer protection. 

Potential roadblocks to growth

The city’s finance industry is currently experiencing a squeeze on the supply of specialised talent, causing retention issues for the fintech and banking industries. The Hong Kong government is taking a supportive stance, promoting the upskilling of existing employees and increasing graduate programmes to bridge the talent gap. The finance secretary announced an 80% rebate on training costs for financial certifications, marking a strong initial step in solving the talent shortage.

Hong Kong faces barriers in attracting foreign talent, primarily due to systemic high costs that reduce the city’s attractiveness to expatriates. However, there is a silver lining on the horizon, with the house prices in Hong Kong experiencing an 8.95% drop in May from a year earlier, easing affordability concerns amid high inflation.

Hong Kong’s status as a leading global tech hub is no coincidence, resulting from a digital-first population, strong support for entrepreneurship and enduring business fundamentals. Therefore, it’s hardly surprising that the city is also making waves in fintech, providing extensive funding, sandboxes, and support for the ecosystem. Although there are roadblocks in the way, Hong Kong is taking the right steps to reach success.


Abe Smith is theco-CEO of Paymentology, a global processor with innovative features. 

Institution: KPMG, The Hong Kong Polytechnic University
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