The coronavirus crisis has provided a catalyst for a digital transformation through financial technology — or fintech. As Hong Kong emerges from the Covid-19 pandemic, the city’s technology sector is powering confidence in the “new normal” economy, helping corporates and individuals tackle fresh ways of doing business.

“The pandemic has driven an accelerated demand for contactless payment worldwide. In Hong Kong, more merchants and consumers are adopting digital payment in their daily lives,” says Forest Lin, president of Tencent Financial Technology and corporate vice-president of Tencent, the Chinese internet giant.

Tencent has been operating WeChat Pay in Hong Kong since 2016. In 2018, WeChat Pay Hong Kong became the first Stored Value Facility licensee in the city that supports cross-boundary mobile payments. “Today, it has more than 3.8m registered users in Hong Kong, connects over 90,000 merchants in Hong Kong and around 1m bricks-and-mortar merchants in the Mainland, covering fashion, food and beverage, lifestyle and travel,” said Mr Lin.

Tencent is also a strategic investor in Fusion Bank, which was granted a virtual banking licence by the Hong Kong Monetary Authority in 2019 and launched in December 2020. WeChat Pay Hong Kong is collaborating with Fusion Bank to allow the virtual bank’s customers to use their bank accounts to transfer funds to their WeChat Pay Hong Kong accounts.

“I think the collaboration and partnership between digital wallets and virtual banks will continue to help develop an ecosystem of smart financial services in Hong Kong and beyond,” said Mr Lin.

Players such as Tencent show how Hong Kong is established as a major regional and fintech base with deep expertise and plentiful funding.

The Covid-19 pandemic not only galvanised fintech to find useful solutions, but also enabled it to meet new and existing consumer demands.

“During Covid-19, one of the biggest trends globally was the surge in consumer participation in financial markets, many for the first time,” said Kelvin Lei, cofounder and chief executive of AQUMON, one of the leading wealth management fintech companies in Hong Kong. “Locally in Hong Kong, we noticed an increase in users and new account registration during lockdown months, with 365 per cent year-on-year growth in new account openings last year.”

Mr Lei attributed the surge to three factors: (i) more time, so consumers thought more carefully about how to manage their finances while working from home; (ii) uncertain economic outlook, with customers looking to new channels to invest in the face of Covid-led market fluctuations; and (iii) technological progression, meaning all consumers could open an account and quickly start investing on their smartphones or online.

“When faced with uncertainty, psychologically many consumers react by thinking about how to protect their wealth and how to potentially grow it. With banks paying little to no interest on their savings, many consumers instead turned to investing,” said Mr Lei.

The rise of virtual banks has been a challenge to traditional lenders, but rather than freeze or hide behind protective legislation, bricks-and-mortar bankers are taking on the newcomers, which should result in a more competitive and efficient market for consumers.

“A pure fintech play is usually more nimble compared to traditional banks in terms of business and operational model,” said Mr Lin. “But I don’t think there will be much difference going forward as a lot of existing financial institutions are in the process of transforming themselves to becoming more like fintech companies, and fintech companies are striking a balance between innovation and risk management.”

The challenge for Hong Kong is to deepen and broaden the fintech market while protecting consumers. “We need to hold up the bar in terms of risk management,” said Joseph Luc Ngai, managing partner at McKinsey & Company Greater China. “If we look at requirements in a stringent or dogmatic way, that can prevent any innovation.”

Fintech regulation is evolving, said Mr Ngai, who is a board member of the Hong Kong Science and Technology Parks Corporation. “Many people have a feeling that we are being conservative and should be more open-minded, and rightfully so. Society is demanding that,” he said. “At the same time, you see some of the risks arising because of new ways of doing things.”

Given the need to foster growth while monitoring risk, the Hong Kong SAR Government is highly involved in the growth of the fintech industry.

“AQUMON itself benefited from this fintech support,” said Mr Lei, noting it was incubated by the Hong Kong University of Science and Technology (HKUST) in 2016 and is supported by key investors such as Alibaba Entrepreneurs Fund, as well as receiving all-round support from the local digital tech hub and incubator Cyberport. “Through this nurturing start-up spirit, AQUMON cofounder Dr Don Huang was able to establish an artificial intelligence lab in HKUST,” he said.

Such an environment is essential for fintech to thrive, according to Tencent. “Tencent values the fintech ecosystem and we will continue to nurture its growth,” said Mr Lin. “Looking into the future, I think more financial institutions will embrace fintech. An open and collaborative ecosystem will offer a win-win solution for all.”

One fintech area that Tencent foresees as of increasing importance for Hong Kong is wealth management. “Tencent operates a wealth management platform called Licaitong in Mainland China, which now has more than Rmb1tn [$153bn] in assets under management. We don’t currently have a wealth management business in Hong Kong, but we look forward to collaborating with local banks and asset managers in the future.”

McKinsey also forecasts a bright future, but with a lot of development happening behind the scenes. Mr Ngai said that while advances in e-commerce and digital payments have captured the headlines, “there will be much more going on around the non-consumer-facing side”.

He expects strong growth in regulatory technology, or regtech — the management of regulatory processes within the financial industry through technology — and internal functions using fintech. “There will be more trade finance, more B2B development, and another interesting trend you will see is fintech start-ups in the environmental, social and governance — or ESG — world.”