Further consolidation could be on the cards for the fintech industry in Hong Kong and the mainland in the next 12 months amid greater scrutiny by regulators, and digital currency could be a bright spot, some players say.
Mr David Rosa, co-founder and chief executive of digital payment services fintech firm Neat, expects mergers to grow "by quite a bit" as regulators move to plug loopholes and maintain financial sustainability even as firms are more focused on user experience.
"What I think is going to be really tough for a lot of the players is the realisation that if they want to continue to touch customers' money, they have to be able to demonstrate a robust compliance department and they have to have corporate governance.
"You're going to have to play on the same level playing field (as banks) if you want to continue to touch the customers' money and that is something that's going to hit the industry in quite some fashion in the next 12 months," Mr Rosa said in an interview with The Straits Times on Thursday.
The issue of balancing financial risks and freedom of innovation in the fintech space - not peculiar to China where rules are not as prescriptive as those in Hong Kong - came under the spotlight in recent days, following Ant Group's suspended dual listing that led to a US$290 billion (S$392 billion) wipeout in stocks from Chinese giants Alibaba Group and Tencent Holdings earlier in the week.
Mr Benjamin Quinlan, chairman of the FinTech Association of Hong Kong, said: "If you look at any market with fintech that's proliferating, that's completely unregulated, it's extremely dangerous and I've seen many experiences where people have lost a lot of money, they're getting burnt."
So companies that want to play in the financial services space need to abide by what is best practice, he said, and as that happens, "the quantity of innovation might decrease as will the number of companies, but the quality of innovation will be better".
Professor Wong Kam Fai, who is director at the Centre for Innovation and Technology of the Chinese University of Hong Kong, agreed, pointing to the many examples of success on the mainland such as in the electronic payment area with the rise of QR codes and digital wallets, even as rules were tightened.
And although the recent Ant Group saga may have erased some of the optimism in the sector, with China moving to focus on digital currency or electronic renminbi (e-RMB), observers see lots of opportunities for Hong Kong players.
Digital currencies are a bright spot and public-private partnerships with central banks in this area are "super exciting", said Mr Rosa, while Prof Wong pointed out that e-RMB will have to go international subsequently, setting the stage for Hong Kong to play a key role and "be an international e-RMB centre for the mainland".
Mr Zennon Kapron, founder of fintech consultancy Kapronasia, thinks digital currency is "certainly an opportunity for the government, but not necessarily specifically for fintechs".
Instead, he is more hopeful about financial inclusion where there is a huge gap on the mainland.
"There's still a number of people who are financially excluded in China and don't have access to financial products and services, and so, for me, China has done a tremendous amount over the past couple of decades of bringing people into the financial ecosystem, but there's still more that can be done... How do we democratise finance for the underserved?"
He said the pandemic has shown the importance of digital finance for consumers and businesses across the Asia-Pacific region, so the importance of platforms including Tencent, Grab and Gojek will only rise in future.
Still, there are challenges for the industry in Hong Kong and the mainland.
"Hong Kong is still arguably the most open market around and so you have complete freedom of capital in and out of the territory whereas you don't have that in China. So that actually changes the dynamics of the end-product in the market and the format for these digital currencies," said Mr Rosa.
He also said the biggest challenge in China now is its ability to export its products or solutions to the world, whereas the obstacle for Hong Kong is how the city can make itself "relevant in the global market rather than domestic market".
China's digital economy grew 15.6 per cent last year to 35.8 trillion yuan (S$7.3 trillion).
It made up 36.2 per cent of the country's gross domestic product, according to the China Academy of Information and Communications Technology.
Meanwhile, Hong Kong is home to more than 600 fintech companies and start-ups, including eight unicorns.
Financial Secretary Paul Chan said at a virtual wealth management event earlier this week that in the first seven months of the year, more than 20 Hong Kong-based start-ups raised nearly US$500 million in venture funding.
As of August, eight virtual banks and four virtual insurers have been authorised, or granted in-principle agreement, to operate in Hong Kong, of which seven virtual banks have started to provide services to the public.
