Valley of the East - Singapore or HK?

The financial services industry and the wealth management space within it are at an inflection point. But are we living through the tipping point now, or are we still just on the cusp of it? The Asian "fintech" - or financial technology - ecosystem has never been so vibrant, and this may be only the tip of the iceberg. Although Asia is bursting with innovation as a whole, two places of particular interest are Singapore and Hong Kong. But which of these is emerging as the true "Valley of the East" in the fintech race? Let's look at what's happening in each a little closely.

We are well aware of the impetus created by the Monetary Authority of Singapore (MAS) to bring to fruition its vision of fostering innovation in fintech to develop Singapore as a "Smart Financial Centre". Blythe Masters, a high-profile banker-turned-fintech-entrepreneur, is the latest entrant to the 15-member International Technology Advisory Panel - the star-studded group organised by MAS that includes, among others, Vikram Pandit, the former head of Citigroup. MAS is leaving no stone unturned to ensure that the upcoming Singapore FinTech Festival in November will be a platform that not only galvanises the entire fintech ecosystem but also ensures that Singapore will establish itself as the preferred haven for the best incumbents and startups.

Total technology procurement budgets of the 200 banks in Singapore had swelled to US$485 billion in 2014, according to Gartner. Recognising that only a small part of this may be directed at innovation, banks such as DBS, UBS, Citi and, more recently, OCBC have not only set up their innovation centres to enable disruption from within but have also launched various startup incubators and accelerator programmes. As an example, Pact, a leading incubator under the aegis of the Hub, Singapore's innovation lab, is a partnership between DBS and the National Youth Council.

Meanwhile, institutions in Hong Kong are catching up fast in the fintech race. Not-for-profits such as the Hong Kong Internet Finance Council, in conjunction with the banking regulator and the technology industry, are actively working with stakeholders to build a sustainable case for fintech development in Hong Kong. Proximity to China enables Hong Kong to be used as a test bed for innovation by the growing brigade of Chinese fintech companies as well.

Fintech and wealth management

In the context of wealth management, what is the impact of the fintech triage of peer-to-peer lending, robo-advisory and cryptocurrency applications in trading? Although we are narrowing our discussion only to these areas, we realise that factors such as robust and clear regulation, cost of capital and the availability of talent affect the triage more so than other potential fintech applications, such as data analytics, cyber security and payments.

The "regulatory sandbox" announced by MAS in Singapore got fintech entrepreneurs very excited, as this approach allows for innovative ideas and products to be beta-tested in a controlled environment without having to secure a series of regulatory approvals. On the other hand, the laissez-faire approach in Hong Kong has meant relatively more ambiguity with regard to which regulation applies to each fintech business model and, accordingly, which licensing requirements apply.

In terms of the cost of capital or, for startups, the availability of incubators and seed capital, Singapore is more conducive than Hong Kong despite recent attempts, such as the Innovation & Technology Venture fund launched earlier this year under the InvestHK drive.

The availability of private money for fintech ventures is driven largely by the perceived growth potential they may offer. Although neither Singapore nor Hong Kong has any dearth of high-net-worth investors, the predisposition to fintech growth in Singapore has led to more wealth flowing into fintech there. This trend could evolve rapidly, however, as more Chinese fintech companies make a foray into Hong Kong.

Finally, the availability of talent and the strength of educational institutions are comparable in both Singapore and Hong Kong. To match the SkillsFuture vision of developing curricula and a tertiary education ecosystem around innovation and deep science in Singapore, the Hong Kong Computer Society has teamed up with the Hong Kong Institute of Bankers to collaborate on talent development focused on fintech.

A strong indicator for the strength of both countries as fintech destinations is the number of regional fintech related conferences underway and packed calendars in both places. Bringing together communities and stakeholders to engage in discussions around fintech will be crucial for developing a sustainable enabling environment. And long-term success will be built on rapid adaptability more than rapid deployment.

As private banks steer technology investments away from enterprise software, security and compliance and move towards incubating fintech products from within, and as software firms lure independent financial advisers with attractive access to robo and data-aggregation technology, fintech players will have strong opportunities to cross-pollinate across both of these financial hubs.

One argument for Hong Kong to emerge as the winner in the longer run may actually be a reason it is perceived as a bit of a laggard at present - that is, regulatory ambiguity and relatively difficult access to capital may imply that only the best and brightest ideas see the light of the day. And the ability to stress test those ideas in the mainland quickly could indicate better chances of commercialisation and scalability than those in Singapore.

This is likely why we see the likes of Accenture betting big on Hong Kong, as we saw three new Accelerators appear on the scene in Hong Kong - namely, the DBS and Nest Accelerator, Accenture Fintech Innovation lab and Baidu Supercharger. Similarly, we see more investment and activity around the use of cryptocurrency in Hong Kong.

Blockchain technology

In the broader use of blockchain technology, however, Singapore takes the lead. The new IBM Innovation Hub in the "Lion City" will deploy the prowess of Watson supercomputer to explore applications of blockchain and cognitive computing in areas such as real-time settlements, among others.

All things considered, it is a bit premature to declare either country as a preferred hub or the "Valley of the East" just yet.

As is expected, more ideas will fail than they will scale, and in this world of increasing trust deficit, only compelling value propositions that enhance user experience, access to real-time information and the ability to transact anytime in a secure environment will make the cut.

If a large private bank were to enhance client experience through a new feature-rich intuitive app, the switch for a high-net-worth investor to a robo or even a bionic adviser will become that much more difficult. And the values of trust, ingenuity and innovation as prerequisites to fintech success cut across boundaries - even geographical ones. Banks need fintech as much as fintech startups need banks to be able to scale. Most will fail, some will be bought, and only a handful will sustain - only time will tell where those will germinate.

As Clayton Christensen, the Harvard guru on innovation, once said: "Disruption is, at its core, a really powerful idea, but everyone hijacks the idea to whatever they want now." Healthy competition is ultimately good for the entire region, as it will spur a pervasive culture of innovation. And that ultimately will serve the greater good of empowering the communities.

The writers are from Mercer. Steven Seow is head of wealth management Asia, and Rahul Mudgal, the firm's ASEAN marketing leader. The views expressed here are the writers' personal opinions and do not represent the views of Mercer.

This article was first published on Aug 27, 2016.
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