A Greater Gateway, Issue 3. This paper looks at the rapid development of fintech solutions for fund management and distribution in mainland China; and contrasts this with the traditional approach of many fund managers in Hong Kong.
The rapid development of fintech solutions for fund management and distribution in mainland China contrasts with the traditional approach maintained by many fund managers in Hong Kong. While the city is bidding to become a fintech hub, asset managers wanting to use it as a base to access the mainland market may need to rapidly consider updating their systems and practices.
In a remarkable example of the speed and scale of the disruption of asset management by fintech platforms in mainland China, Alibaba’s money market fund has in only four years become the world’s largest. The Yu'e Bao fund, sold principally through Alibaba's digital wallet, Alipay, had US$165.6bn under management by April this year, larger than JPMorgan's US$150bn US Government Money Market Fund.1
The explosive growth of Yu’E Bao should serve as a wakeup call for Hong Kong. The territory’s preeminence in financial services is due in part to its position as a gateway to China, but fund management in the city has not kept pace with the speed of technological development seen on the mainland. With many fund managers looking to use Hong Kong as a base from which to access China’s rapidly expanding market, the contrast is increasingly apparent.
Competition to become the leading hotspot for fintech is heated. A recent Deloitte review of fintech hubs around the world ranked Hong Kong fifth in terms of its conduciveness to the growth of the sector, behind the UK, Singapore, New York and Silicon Valley. “Hong Kong will focus on its core competitive advantage as a B2B platform for regional expansion,” the authors wrote.2
The review noted the region’s high cost of living, aversion to risk and relatively small market. But the local fund management industry has other challenges that could hit its competitiveness. Compared to the mainland, the industry has seen less competition and innovation and in some respects remains reliant on long-established setup, settlement and distribution systems.
While investing by smartphone through platforms like Alibaba’s Ant Fortune, WeChat’s Caifutong and Eastmoney Information’s Tiantian is transforming asset management in China, banks remain the primary intermediaries for fund distribution in Hong Kong. For fund administration, asset managers in Hong Kong often send and receive instructions by fax and calculate fund metrics in Excel, while investors often still prefer making payments by check.
As well as being driven by the sheer size of its consumer population, the faster pace of development of the fund management industry in China reflects a much less stringent regulatory regime. This has allowed Alibaba and others to roll out innovations at speed and on a massive scale, focused on the domestic market.
By contrast, as an open market that is subject to strict regulation, and which has grown by servicing international investors, Hong Kong cannot revolutionize its processes and platforms overnight. And while this means legacy systems remain common in Hong Kong, mainland China has benefited from the ability of new entrants to “leapfrog” established players by offering services on the latest technology.
“The Hong Kong fund market has been around much longer than the Chinese fund market, but new forms of technology are more readily adopted in China, especially with the tech giants pushing their fund platforms,” says Alan Fong, APAC Product Segment Manager at BNY Mellon. “On the tech front, Hong Kong can lean on China a lot more, but in terms of regulation and fund management expertise, it is the other way around.”
The Hong Kong government is trying to shake things up. The territory drew US$370 million in venture capital investment for fintech firms between January 2014 and September 2016, Secretary for Financial Services and the Treasury KC Chan told legislators earlier this year, adding that the number of fintech startups grew from 86 in the middle of 2015 to 138 by November 2016. 3
The increase may partly be due to a more favorable regulatory environment. The Securities and Futures Commission (SFC) last year set up a Fintech Contact Point through which market participants can engage with the regulator.4 The Hong Kong Monetary Authority’s Fintech Facilitation Office, meanwhile, has also established a Fintech Supervisory Sandbox, in which approved institutions can conduct technology trials that are exempt from some of the usual regulations.5 Most recently, the SFC signed a co-operation agreement with the UK’s Financial Conduct Authority to share information and collaborate on fintech innovation.6
Hong Kong is seeking to maintain pace with other regions vying to establish themselves as fintech hubs, such as Singapore, which also signed a bridge agreement with UK regulators last year and has been aggressively pursuing fintech investment.
“In Singapore, you’re getting a confluence of the government setting up structures and funding to support innovation, investor money coming in, a young and dynamic workforce which all ends up creating a self-sustaining ecosystem - but that’s not to say Hong Kong can’t do the same thing,” says Hans Brown, Head of Client Technology Solutions, Asia-Pacific, at BNY Mellon. “It’s all about getting the rails in, once you get the rails in, the rest of it comes along.”
The adoption of cutting-edge fintech should be a strategic imperative for fund managers in Hong Kong who want to access mainland investors through the Mutual Recognition of Funds (MRF) program. To be successful in China, where platforms that offer thousands of funds have attracted billions of dollars in investments, Hong Kong funds need to focus on digital distribution, Alan Fong notes.
Distribution is only one aspect where change is needed. Increasingly, fund managers can benefit from the adoption of open-source, cloud-based ecosystems that offer a range of fund management support services through application program interfaces (APIs). These can allow fund managers that still rely on outdated technology like faxes to leapfrog to the latest in cutting-edge fintech, while also bringing a whole new level of transparency by letting fund managers see realtime fund processes on a variety of dashboards.
Mathew Kathayanat, APAC Asset Servicing Product Head at BNY Mellon, refers to these API solutions as an example of how the asset management industry has the potential to be transformed in much the way new ride-hailing services bundle together APIs for separate functions such as maps, customer relationship management and payments.
“The asset management industry is going the same way,” says Mathew Kathayanat. “[Fund managers] can use a trading API, an investment research API, a distribution API, and a fund accounting API to call on services they need.”
“It’s the breakdown of the outcome into its various constituent services and the digitization of each of those services,” says Hans Brown. “This then allows you to generate customization at scale, without losing any associated economies of scale.”
Asset managers in Hong Kong will increasingly have to look to such services as they seek to maximize opportunities from the city’s longstanding position as a gateway to China - and its new one as a fintech hub.
1 Source: Financial Times, "Chinese money market fund becomes world’s biggest" by Louise Lucas, April 27, 2017. https://www.ft.com/content/28d4e100-2a6d-11e7-bc4b-5528796fe35c?mhq5j=e1
2 Source: Deloitte, “Connecting Global FinTech: Hub Review 2016”, September 2016. http://thegfhf.org/wp-content/uploads/2016/10/Connecting-Global-FinTech-Hub-Review-2016-.pdf
3 Source: Hong Kong government, “Gov’t dedicated to fintech promotion”, February 8, 2017. http://www.news.gov.hk/en/categories/finance/html/2017/02/20170208_144858.shtml
4 Source: SFC. http://www.sfc.hk/web/EN/sfc-fintech-contact-point/
5 Source: HKMA, September 2016. http://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2016/20160906e1.pdf
6 Source: SFC, "SFC and FCA sign Fintech cooperation agreement", May 12, 2017. https://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=17PR69
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