Norman Chan, Chief Executive of the Hong Kong Monetary Authority (HKMA) shares his insights on how financial technology (fintech) is going to revolutionise the business world.
After starting his career in the Hong Kong government as an Administrative Officer, Chan has had a decorated career in both the public and private sectors. In 2009, he replaced Joseph Yam as Chief Executive of the Hong Kong Monetary Authority.
During his term, Chan has witnessed how technology has revolutionised businesses and people’s daily lives. He is a firm believer that businesses need to embrace technology or they will be left behind.
In September 2017, the HKMA announced seven initiatives including the newly launched Faster Payment System (FPS), to prepare Hong Kong to move into a new era of Smart Banking. Chan feels strongly that one should embrace technology to thrive in the fintech era.
TAKING THE INITIATIVE
This is an exciting time for financial innovation. Technology is a game changer when it comes to banking, payment and other financial services. It will differentiate winners from losers.
While the conventional financial industry is currently facing unprecedented challenges, Chan doesn’t believe it will be turned upside down or become obsolete because of fintech.
“Conventional banks are dedicated to developing fintech. The most notable example is their active participation in the research and application of the latest biometric identification technology, such as fingerprints, facial and voice recognition, as well as distributed ledger technology (DLT),” he says.
Having said that, Chan cannot rule out the fact that a small number of banks will be unable to keep up with technological advancements, and will therefore risk losing customers.
Chan adds that he doesn’t worry about whether technology firms will disrupt the banks, or whether the banks will be able to resist the intrusion of technology firms. The more relevant question is how to get the best out of banking and technology by marrying the two.
“We must move into the new era of Smart Banking by embracing technology and safe banking. Indeed, it is most encouraging to see many banks in Hong Kong are already taking the initiative to ride on the wave and making impressive progress in this direction,” Chan says.
DEFINING A SMART CITY
When it comes to talking about the fintech landscape in Hong Kong, two statements are commonly made. One is that the city is very backward in fintech, with the development of mobile payment methods in Mainland China, for example, being far more advanced. The second is that fintech will disrupt or displace traditional banking.
Chan said he does not agree with these two comments and he has good reasons to support his case.
“First, Hong Kong has not been slow in developing and adopting fintech. It is not entirely appropriate to use mobile payment as the only benchmark for measuring the state of development in fintech. There are many other important aspects of developments that define the maturity of fintech developments, such as the use of digital or internet banking and the robustness of cybersecurity,” he says.
He points out the city already has a well-developed electronic payments ecosystem. In 2015, each Hong Kong cit en had on average 2.6 credit cards, compared to 0.3 credit cards per person in Mainland China. And there are now some 1.7 million credit card transactions involving HK$1.7 billion every day.
It is also noteworthy that for a small city of just over seven million people, Hong Kong has around 34 million Octopus cards in circulation, with an average of 14 million transactions per day. This means on average each person in Hong Kong makes two transactions by Octopus cards daily.
“Second, I believe it is unlikely that fintech firms will displace or replace traditional banks because, in addition to speed and convenience, customers also need protection of their life savings or investment,” Chan says.
THE FUTURE OF BANKING
Banks in Hong Kong are offering safe and efficient banking services to customers, both through the conventional branches and through digital or internet banking. However, in view of the explosive advance of technology in the last few years, Chan believes that conditions now exist for banking in Hong Kong to rise to the next higher level.
There are an increasing number of technology companies venturing into finance by riding on the highly successful and popular e-commerce, payment or social media platforms that they have developed.
The paradigm of these newly emerged platforms is that it is highly “customer-centric”, meaning they design everything to provide what the customers want, taking care of many practical and lifestyle needs of customers.
“For example, fintech companies are obsessed with continuously enhancing user experience of their technology. If the current interface requires users’ seven clicks to complete a transaction, they will get software engineers to keep improving the system, to reduce the number of clicks to five and then three,” Chan says.
To stay relevant in the market, banks must become more “customer-centric” by offering highly personalised services to meet what the customers want rather than pushing out products or services that the firms think the customers should have.
Banks need to appreciate and accept that they must revamp the way they offer financial services to their customers. It is true that, compared with unregulated entities, there is a high degree of public trust in banks, but customers now demand much faster and more convenient services, not just in payments but also over a wide range of financial services, many of which are now made possible by the advancement in technology.
“I believe that in a couple of years’ time, there will be a high degree of convergence in the way in which banks and tech firms conduct their businesses and compete in the arena of finance,” Chan says.
CRYPTO FRIENDS OR FOE?
In the past few years, different forms of “crypto-currencies”, notably Bitcoin, have been rapidly emerging. There are currently many trading platforms that allow these crypto-currencies to be traded.
Some people may wonder whether the emergence of crypto-currencies could challenge the traditional fiat money.
While it is true that crypto-currencies such as Bitcoin have attracted many investors and speculators around the world who own and trade them, Chan doesn’t foresee crypto-currencies being accepted as a medium of exchange any time soon.
Chan comments that currently crypto-currencies are not efficient means of payment. Take Bitcoin as an example. Each Bitcoin transaction needs to be validated by the so-called “miners”, who need to solve a complex mathematical problem using specialised computers. It takes a lot of time and consumes considerable electricity to complete a transaction.
Currently, the average transaction time is some 20 minutes per transaction. During periods of high network traffic, the average transaction time can take anywhere from 30 minutes to many hours. Transaction fee is also high and can spike up suddenly from time to time. The average fee per transaction in December 2017 was US$34.
“Unlike other forms of electronic money using central bank or commercial bank balances, crypto-currencies are not scalable, which undermines its prospect of gaining ‘moneyness’ over time. For this reason, I would like to call these ‘crypto-currencies’ as crypto-assets as they do not qualify to be called ‘currencies’,” Chan says.
Having said that, Chan believes that the DLT used in crypto-assets has shown great potential in many other applications.
The HKMA and the banks in Hong Kong have recently launched eTradeConnect, a digital trade finance platform using DLT. “We have been proactively looking for opportunities to connect Hong Kong’s trade finance platform with trade platforms in other regions. Operators of eTradeConnect and we.trade, the leading European digital trade finance platform, have signed a Memorandum of Understanding to conduct a proof-of-concept on connecting the two platforms,” he says.
CONVENIENCE vs. RISK
While there is no doubt technology is advancing in a speed that was unthinkable 10 years ago, Chan called for investors and the public to proceed with care.
“All of us, industry practitioners and regulators alike, must try our best to keep up with the pace or else we risk being left behind. However, in embracing new technology and innovation, we must also guard against the risk of overlooking the nature of the financial transactions and the risks that are inherent in these transactions under the pretext of technological advancement,” Chan says.
The HKMA’s supervisory principles are “risk-based” and “technology-neutral”. So, no matter how the new technologies are applied to financial activities or transactions, there should be appropriate supervision whenever there is a need to protect depositors and investors.
Under the risk-based principle, the HKMA supports and embraces technology and innovation as it brings greater convenience, efficiency and security for the public.
Using mobile phones to purchase investment products is becoming more and more popular. The question is how to make sure that the convenience offered by fintech will not lead customers into making hasty decisions that may result in a material loss when investment products are sold with the use of fintech.
Another question is how to ensure that investors understand the terms and conditions and the risks involved when financial products with a complex structure or high risk are sold online. These questions show that there is a need to strike a reasonable balance between convenience and investor protection.
JOURNEY TO THE TOP
Chan started his career in the government as an Administrative Officer Administration 1976 after graduating from university. When asked why he decided to join the government instead of the private sector back then, he said it was circumstance.
“After the energy crisis, there were not many career choices in the market in 1973. I applied for both government jobs and openings in the private sector. I sent more than 40 job applications to private companies but received no reply, but I received positive responses from all my applications for government vacancies. The job offer to be an Administration Officer was the best among the offers I received from the government, so I took it,” Chan recalls.
Chan served in a number of policy bureaus, before becoming Deputy Director (Monetary Management) of the Office of the Exchange Fund in 1991 when he worked with Joseph Yam for the establishment of HKMA ahead of the reunification of Hong Kong in 1997.
In 1993, the HKMA was officially established. Chan was appointed an Executive Director before becoming the Deputy Chief Executive in 1996 and held the role until 2005.
When asked why he chose to leave the government at the peak of his career to become Vice Chairman, Asia, of Standard Chartered Bank, Chan says serving in the private sector was something he has always wanted to try.
In 2007, he returned to the government and was appointed Director of the Chief Executive’s Office of the Hong Kong Special Administrative Region Government. He was then appointed Chief Executive of HKMA in October 2009.
Shortly after taking office, Chan noticed the risks of the overheated property market. He took the lead in implementing counter-cycle macro-prudential regulatory measures to strengthen risk management of banks’ mortgage business, with a view to maintaining the stability of the banking system.
“I realised I had a heavy burden on my back. When I went out, people often said to me: ‘We rely on you’, ‘take care of our money’, ‘don’t let the banking system collapse’, and so on” Chan recalls.
REFLECTING ON THE 2008 FINANCIAL CRISIS
When asked about whether it is possible to predict a financial crisis, Chan’s reply is straightforward - it is not possible.
“Although financial crises are unpredictable, we have preventive measures in place to protect ourselves. In particular, Hong Kong’s financial system has a relatively solid and healthy foundation that will allow us to recover more quickly than other places. As long as everyone has higher awareness of the risks, damages brought about by the burst bubble can be minimised,” Chan says.
“A financial tsunami is actually the accumulation of a number of mistakes over a period that break out at the same time,” he adds.
Since the handover in 1997, Hong Kong’s total banking assets have doubled to HK$20 trillion.
The growth has been due to the city’s stable economic growth and the inflow of international investments, in addition, the internationalisation of the yuan since 2009 also led Hong Kong banks to expand rapidly into yuan financing and trading.
Chan believes the city’s banks are better prepared than 20 years ago for a crash in the property market, noting banks are now better capitalised and less exposed to real estate loans after the eight rounds of prudential measures for property mortgage loans put forward by HKMA.
“While nobody can predict when the next crisis will arrive, Hong Kong’s financial sector is now well prepared for that,” Chan says.
Noting that the rosy days will not go on forever, Chan had repeatedly told the public that the current low interest rate is not normal, and it would be unrealistic to expect property prices to only go up.
The impact of the China-U.S. trade conflict on the economy is another key issue, with Chan calling on the investors and the public to monitor it closely.
“It is difficult to predict the future development of the China-U.S. trade conflict. If the situation worsens, it may have an impact on the U.S. inflation and economic outlook, as well as global capital flows,” Chan says.
LOOKING BACK ON THE GOOD OLD DAYS
Chan studied at Queen’s College and says he always has a special feeling for the school.
“I simply cannot hide my sense of pride when it comes to my Alma Mater. Queen's is very, very special and different.” Chan said.
For Chan, Queen's is special not only because it was the first public school in Hong Kong, but because alumni of Queen's have played such an important part in the history of Hong Kong and China throughout the last 150 years. For example, Dr Sun Yat-sen, the founding father of Modern China was an alumnus of the school.
Chan takes exceptional pride in the vital role played by Queen's alumni in the development of Hong Kong. He says that 23 classmates in his class (1966-73) have become medical doctors. There are numerous QC Boys who have become government officials at the top level, Executive Council members and Legislative Councilors.
“There are many, many QC Boys who have excelled in other fields, such as commerce, finance, art, professional and community services. Together we help shape and move Hong Kong into a place as we know it today,” Chan says.
Until today, Chan keeps in touch with his classmates and participates in many activities with them despite his busy schedule. “On the first day of every year, we go back to the school to play basketball together. This arrangement has been going on for more than a decade,” Chan says.