January 17, 2017
European FinTech hubs have traditionally been taking leading places among the hottest FinTech communities globally. Nonetheless, in recent years, European FinTech startups faced certain hardships due to political, economic and regulatory changes, affecting the startup community directly or indirectly.
Brexit, for one, created a situation of uncertainty whether London will remain a strategically beneficial location for startups to reside. The expected outflow of the talented workforce, for one, will certainly affect the expansion potential and create difficulties for companies yet to launch. International businesses could shift as many as 100,000 jobs away from London within two years of the UK officially starting a process to leave the EU because they risk losing their passporting rights. As for the financial services jobs, some estimations suggest that Brexit could cost between 70,000–100,000 jobs by 2020.
For financial technology companies operating a remittance business in the UK, the political uncertainty has also been associated with currency volatility. Tomas Likar, VP of Strategy at Hyperwallet, noted that Brexit means more currency volatility, different regulations and a totally different banking system for the UK. For companies doing business in the UK, this creates a lot of friction, on top of the other sovereign currencies that were already causing headaches (AUD, CAD, CNY, JPY) prior to the UK’s divorce from the EU.
Businesses now face an unpredictable payments ecosystem – the days of the GBP moving almost 1:1 with the EUR and having all payments, licensing and regulatory questions aligned between the UK and Eurozone are over. Leaving businesses with an unpredictable payments ecosystem to manage and yet another currency to hedge.
Among the opinions expressed by industry experts, Richard Lumb, Head of financial services at Accenture, emphasized that half of all European FinTech investment had been made in the UK. But, he added, these FinTech companies are footloose with a global mindset and fortress UK is not going to be so attractive now.
While a positive hallmark for the region overall, high connectivity, mobile technology penetration, competitive challenger bank segment, and relatively high level of formally banked population in Europe due to developed business infrastructure creates an ‘another fish in a barrel’-type of environment in the region for new entrants and existing players – all in conditions of high cost of living and business maintenance.
Another problem ailing European startups is the lack of a single large unified market. The EU was established to make legislations simpler among the member countries. In order to bring them together, there should be a constant level of legal harmonization across the states. This brings in roadblocks of setting up bases of operations in other EU countries.
Meanwhile, on the other side of the continent, a market of unparalleled opportunities is blossoming into the biggest FinTech scene globally.
With a population of over 1.35 billion and the second largest economy in the world, China plays an important and influential role in the global ecosystem across industries. Summarizing the hallmarks of China’s FinTech market, the International Trade Administration (ITA) puts China among the top financial technology markets along with the UK, Singapore, Brazil and Australia.
Unmet financial needs, ubiquitous connectivity, the world's largest and most developed e-commerce market, forward-thinking technology companies driving innovation adoption and FinTech-ready generation are among the main factors that are expected to drive an explosive growth of China’s startup community focusing on financial technology. China has leapfrogged ahead to become the undoubted center of global FinTech innovation. One of the most prominent megalopolises in China – Hong Kong– has been recently recognized in the ranking of the world’s top FinTech hubs globally.
Hong Kong is one of the world’s major financial centers with a wide range of international financial industry giants having their Asian hubs in the city. Barclays, HSBC, Lloyds Bank, RBS, BBVA, UBS, Citi and Wells Fargo represent almost an endless list of international banks that have chosen Hong Kong as an Asian satellite location. Hong Kong has an active European presence. The population of the European community, including British, French, German and Italian is over 60,000 in Hong Kong. It explains why various Chamber of Commerce and associations are active here to strengthen HK-relationships through network building and high-level dialogue on economic cooperation between the two economies. Due to its strong European heritage in its past and now presently, Hong Kong has an exceptional knowledge of both international and Chinese markets. Europeans staying in Hong Kong experience a vibrant culture mix of Asian and Western Culture and enjoy a very high standard of living.
Hong Kong’s supportive legal system and tech leaders created one of the most business-friendly regulatory environments not only to start a business but to gain a competitive position in China, the APAC region and the international scene. Being an international financial center, Hong Kong’s domestic regulatory environment is one of the most welcoming for entrepreneurs globally, creating an extremely competitive business environment with equal opportunities for international businesses.
The former British colony has significant advantages to offer to European and Western entrepreneurs bringing technological innovation into the financial sector – Hong Kong has a legal system trusted by international business, free flow of information, ease of access to major markets, political stability and a pool of managerial talent as well as highly skilled young professionals from leading educational facilities with special programs (undergraduate financial technology programs from HKCU and HK PolyU). According to Forbes, as of January 2016, Hong Kong counted 10 accelerators and incubators, 34 co-working spaces and a 46% increase in startups then topping 1,500 startups.
Moreover, Hong Kong’s legal framework provides the much-needed certainty for business setups and forms a strong foundation for free trade and competitive economy. Hong Kong, above all other Asian hubs, has an advantage of being the gateway into the largest consumer market in the region that is eager to adopt the latest tech (Hong Kong is leading the FinTech adoption market – 29% of the digitally active people in Hong Kong reported that they have used at least two FinTech services in the last month (followed by the US and Singapore)). For example, the Securities and Futures Commission’s (SFC) Code of Conduct recent Ccircular currently allows certification services that are recognized by the Electronic Transactions Ordinance (ETO) to be employed for client identity verification.
This creates a framework for non-face-to-face online account opening in Hong Kong for both Hong Kong citizens and Guangdong, China citizens. Given that the populations of Hong Kong and Guangdong are 7 million and 104 million respectively, the current rules significantly expand the potential market. Therefore, for European startups that are functioning in a saturated and substantially smaller market, expansion of the business in Hong Kong translates into the opportunity to reach the largest consumer market through a single gateway.
Hong Kong’s authorities have demonstrated great dedication to FinTech innovation with supportive initiatives. In September 2016, HKMA announced a collaboration with the Applied Science and Technology Research Institute (ASTRI) to set up the FinTech Innovation Hub, equipped with all necessary system and support resources to enable players of the banking and payment industry to conduct proof of concept trials of products and services through the use of new technologies and do it safely – as this controlled environment is separated from their internal systems. At the same time, HKMA kicked off the FinTech Supervisory Sandbox that allows banks to conduct testing and trial of newly developed technologies and applications on a pilot basis.
Later the same year, HKMA and ASTRI jointly launched the Fintech Career Accelerator Scheme ("FCAS") to nurture talents to meet the growing needs of FinTech in Hong Kong. FCAS is supported by 11 banks and nine universities. It aims to provide practical internship for undergraduate and postgraduate students interested in developing their careers in the FinTech industry.
Moreover, at the beginning of December 2016, HKMA and the UK Financial Conduct Authority (FCA) entered into a Co-operation Agreement (agreement) to foster collaboration between the two regulatory authorities in promoting financial innovation. According to the Agreement, the HKMA and the FCA will closely collaborate on a number of initiatives such as referrals of FinTech firms, joint innovation projects, information exchange and experience sharing, to facilitate financial innovation in Hong Kong and the United Kingdom.
InvestHK is one of the most prominent initiatives spearheading efforts to strengthen Hong Kong as Asia’s leading international business and financial center. Outlining the main reasons Hong Kong is a perfect place to start a business, InvestHK emphasizes the earlier-mentioned government support, strategic location as a gateway to the Asian market, low and simple tax regimes, world-class business infrastructure, business-friendly cities, availability of highly talented professionals and other important markers identifying a perfect hub to start and grow a business. The fact that Hong Kong is one of the least corrupt economies in the world indicates a high transparency of the rules for starting and conducting a business.
Not only does Hong Kong has a supportive legal system with dedicated stakeholders, the largest technology companies in the megapolis have also been collaborating to support relevant startups for their businesses. Alibaba even operates its own Hong Kong Entrepreneurs Fund, valued at close to $130 million. The fund is dedicated to Hong Kong startups working in industries relevant to Alibaba’s various businesses: e-commerce, logistics, mobile, cloud computing and finance. The Alibaba Entrepreneurs Fund is a not-for-profit initiative of Alibaba Group that provides entrepreneurs and young people with investment capital, strategic guidance and internship opportunities to help them achieve their goals better.
With strong support from the technology sector and the government, the FinTech ecosystem in China does not experience a shortage in financing. In fact, investments in the APAC region have eclipsed Europe, which attracted $1.85 billion in the same period in comparison to $9.62 billion invested in APAC as of the end of July 2016.
A range of FinTech investors in Hong Kong, such as 500 Startups, Wavemaker Partners, Warburg Pincus and many more, pour substantial funds to provide startups with guidance and capital to gain market traction and accelerate the learning curve. Dedicated accelerators are acting as platforms to expediting the FinTech growth. In fact, Hong Kong boasts HK$2 billion in innovation and technology venture funds from private venture capital organizations. The Hong Kong Science and Technology Park Corporation provides an expanding number of workspaces for startups. It has earmarked HK$200 million to support startups as of 2016 through its corporate venture fund and incubation programs.
Just at beginning of January, Hong Kong and Shenzhen signed Memorandum of Understanding on Jointly Developing the Lok Ma Chau Loop between the Hong Kong Special Administrative Region (HKSAR) Government and the Shenzhen Municipal People's Government. This will be a perfect marriage between the software (talent, services, management) of Hong Kong and the advanced hardware in Shenzhen.
The Chief Executive, Mr. C Y Leung commented in the official press release on this 87-hectare project at the border, With a site area four times that of the Hong Kong Science Park, the Hong Kong/Shenzhen Innovation and Technology Park will be the largest innovation and technology platform ever established in the history of Hong Kong.
The Park will establish itself as a key base for co-operation in innovation and technology research. Related higher education, cultural and creative, as well as other complementary facilities will also be provided at the site, creating unprecedented space and opportunities for the development of innovation and technology in Hong Kong and Shenzhen.
In early December, Cyberport celebrated the opening of Smart-Space FinTech, a 35,000 square foot all-encompassing co-working space tailor-made for FinTech startups and companies. Smart-Space FinTech features an Info Lab, FinTech service corners and training rooms for FinTech startups. The space encourages partners to develop solutions and enhance business development. Smart-Space FinTech will also facilitate networking events, accelerator programs and knowledge sharing sessions to foster better partnership and collaboration among the community. In addition, Cyberport has also fulfilled two further initiatives discussed in the earlier Policy Address: increasing the intake of Cyberport incubatees and establishing an HK$200 million Cyberport Macro Fund, a co-investment fund that co-invests with other private and public investors in digital entrepreneurs.
Private investments are not the only sources of financing FinTech growth in Hong Kong, unlike the vast majority of other hubs – authorities take steps to push the whole ecosystem to adopt innovative technologies. In particular, SMEs are given an opportunity to work with FinTech startups without the burden of substantial financial investments. The Innovation and Technology Commission, for example, has recently launched the Technology Voucher Programme (TVP) to subsidize local SMEs in using technological services (including FinTech) and solutions to improve productivity or upgrade or transform their business processes. The TVP is implemented for an initial period of three years with HK$500 million from the Innovation and Technology Fund. Approved funding can be used to cover technology consultancy services, equipment, hardware and software up to HK$200,000 per eligible SME.