Regtech Development in Hong Kong: Challenges and Recommendations

Understanding Industry Perspective 12 11 PART II: SPECIFIC PROBLEMS FACED BY REGTECH PRACTITIONERS The focus group participants have identified some specific problems that they believe are hindering the further development of regtech in Hong Kong. These problems are listed below in no particular order, as they are all existing issues that urgently need solutions. Instead of further prioritizing these problems, they should all be addressed as soon as possible. 1. Low Regtech Adoption Beyond Banks Two major driving forces in digital transformation by traditional banks are the COVID-19- related measures and the launch of eight virtual banks in Hong Kong between 2019 and 2020. Traditional banks are investing in digital banking services to catch up with virtual banks. The former are introducing mobile banking apps to allow for new customer account openings that don’t require customers to visit branches. Currently, the highest adoption rate of regtech is with banks, card payment processing networks (card schemes) 9 and PSP that are subject to strict compliance regulations. The benefits of regtech can be easily measured to justify the costs, comparing the high penalties in case of non- compliance and detriment in goodwill. These organizations commonly adopt regtech tools that focus on compliance such as TM, AML, KYC, Know Your Business (KYB), Know Your Transaction (KYT), and fraud detection. The following was shared by a focus group participant, a regtech service provider specialized in brokerages: • The participant has developed solutions in TM, AML and insider trading monitoring for a broker house to use in payment, auditing and compliance for the past 4 years. However, the adoption rate remains in a preliminary phase. Despite having over 30 years of experience in stockbroker trading systems, it is not an easy task to develop a regtech product that meets the regulations from HKMA and SFC. Selling the product is even more difficult than expected. This is mainly due to two reasons: a lack of platforms or opportunities for them to connect with potential users; and more importantly, potential users are unaware that these regtech solutions exist. Although a high proportion of traditional banks in Hong Kong have adopted regtech, those using KYC tools for account opening are still relatively low. Many potential regtech users in stockbroking are unaware that the SFC has approved regtech solutions in the market. Insurers are also unaware that applicable regtech tools are readily available and approved by the Insurance Authority. 9. Card Schemes are “payment networks linked to payment cards, such as debit or credit cards, of which a bank or any other eligible financial institution can become a customer. Examples of card schemes are Visa, Mastercard, American Express and UnionPay”. Wikipedia, https://en.wikipedia.org/wiki/Card_scheme Some of the participants representing regtech users in the focus groups commented that the decision makers at their companies do not rank regtech adoption as a high priority as compared to revenue-generating projects. The improved efficiency and cost savings may not be easily quantified or justified by the cost and resources needed to implement regtech technologies. From a service provider perspective, it is challenging to convince these decision makers, especially those of SME banks, to invest in a relatively small budget (e.g., around HK$500,000) for a regtech solution. Unless there are mandatory requirements, heavy penalties or loss from fraud, many regtech users are unwilling to spend large amounts. Even for larger banks with more resources, a regtech project is often considered as having the least investment value. Fintech products in banks that generate revenue (such as wealthtech that uses AI for wealth and asset management) are often prioritized over regtech. Participants at two different traditional banks mentioned their banks considered whether or not to invest in voice analytics technology: • Bank A adopted voice analytics technology to carry out compliance checks for bank relationship managers and staff during customer interactions and sales of financial products. However, the adoption was not only due to perceived improvements the technology could bring, but that there were also business initiatives for the bank. • Bank B was hesitant to adopt a regtech voice analytics surveillance tool to detect and flag key words in voice recordings between bank sales staff and customers. They were skeptical the technology could achieve the high standards necessary, mentioning the application would need to be taught to comprehend languages, meet compliance requirements, detect AML, and perform data analytics. As the solutions cost a few million Hong Kong dollars, the bank decided that the cost outweighed the benefits. While cost is a key concern, some service providers suspect that budget may not be the biggest obstacle in regtech adoption. A regtech solution provider had seen reluctance in financial institutions even when a service was provided without cost by a card scheme. In response to this, some regtech users commented that the major concerns for them to adopt regtech are the shortage of skilled in-house talent and the difficulty in finding the service provider that meets their requirements.