HK banks on 'sandbox' to keep rivals at bay

Fintech iniative aims to spur innovations in the sector, amid regional competition

HONG KONG • Hong Kong yesterday said it has launched a regulatory regime known as a "sandbox" for financial technology innovation in the banking sector, amid fears that the city is losing ground to China, Australia and Singapore in the fintech race.

The initiative, effective immediately, would help maintain Hong Kong's competitiveness as a financial hub by supporting the development of fintech in the banking sector, Hong Kong Monetary Authority (HKMA) chief executive Norman Chan told a conference.

"The sandbox allows banks to conduct tastings and trials of newly developed technology on a pilot basis. Within the sandbox, banks can try out their new fintech products without the need to achieve full compliance with the HKMA's usual supervisory requirements," the city's top banking regulator said.


The sandbox allows banks to conduct tastings and trials of newly developed technology on a pilot basis.


Mr Chan said the financial centre "must remain diligent all the time if we wish to continue to maintain our competitive edge", although he did not believe Hong Kong was lagging rival fintech hubs.

The sandbox will apply only to banks looking to use fintech, such as distributed ledger technology or robo-advisory, as opposed to start-up fintech firms. In a circular yesterday, HKMA told banks that they can launch fintech pilots for banking services involving a "limited number of participating customers", provided the bank properly tests the technology, and sufficient risk management, customer protections and monitoring are in place.

Banks wishing to use the sandbox will need to directly apply to the HKMA for permission.

Many countries, including Singapore, Australia and Britain, have established more far-reaching regulatory incubators to allow fintech firms to experiment with new business models and products without falling foul of financial rules.

Although the approaches have differed in each country, they generally afford fintech firms temporary waivers or exemptions from rules such as capital requirements or management experience.

Officials from the Monetary Authority of Singapore have spoken before about the merits of a "sandbox" approach to regulating fintech, and some entrepreneurs and banks have engaged the regulator to discuss their ideas.

Despite a government push to promote Hong Kong as a fintech centre, critics say the semi-autonomous Chinese territory has been slow to accommodate fintech firms, whose capital-light, online-focused business models struggle to satisfy traditional licensing requirements.

In July, Reuters reported that Hong Kong had fallen behind Singapore, which has deployed a combination of state funding and light- touch regulation to become Asia's leading fintech hot spot.

There is "a quite commonly held perception that the development of fintech in the financial services sector in Hong Kong has been slow", said Mr Chan. "I do not subscribe to this view, at least insofar as the banking sector is concerned," he said. Mr Chan cited biometric authentication, such as voice and facial recognition, as an example of the technology the fintech hub could be involved in.

The urgency to prepare regulatory environments for fintech is growing as banks from HSBC Holdings to Standard Chartered begin offering digital services such as biometric authentication, and as mobile payment systems such as Apple Pay and AliPay are introduced around the region.

The sandbox concept allows regulators to become familiar with new business models, said Mr James Lloyd, Asia-Pacific fintech leader at financial consultancy EY. "As a top three financial hub, Hong Kong needs to plan for the new types of work that innovative technologies, processes and business models will bring."


A version of this article appeared in the print edition of The Straits Times on September 07, 2016, with the headline 'HK banks on 'sandbox' to keep rivals at bay'. Subscribe