While most people are in favor of greater efficiency and ease when it comes to shopping or investing, few want to put their hard-earned wealth at risk. In the age of FinTech, deciding how to strike a balance between convenience and security is one of the trickiest challenges facing the Deputy Chief Executive of the Hong Kong Monetary Authority, Arthur YUEN.
Along with ensuring the stability of Hong Kong‘s currency and supervising its banks, the HKMA is also tasked with supporting the integrity and development of the city’s broader financial system.
Technology may currently be proving something of a double-edged sword for the HKMA, but Yuen sees it increasingly enabling the authority to discharge its responsibilities with greater efficiency and thoroughness.
Role of RegTech
While FinTech makes possible all manner of new digital products and services, RegTech, its counterpart, uses some of the same technology to help regulators and supervisors monitor compliance.
“In general terms, FinTech refers to how financial institutions interface with customers,” explains Yuen. “It’s the use of technology to enhance that interface, enhance the customer experience and speed up processes. RegTech refers to the use of technology to enhance the interface between financial institutions and the regulators or supervisors.”
Yuen says RegTech solutions promise to make the system more efficient and forward-looking for both the supervisors and the banks. A central requirement placed on banks is to measure and monitor their risks properly. “The traditional way of doing this was through an iterative process between us and the banks. But technological solutions can speed up that process.”
Banks are now using quantitative models in their risk management, to analyse transaction data to ascertain whether limits need to be revised, he notes.
In order to comply with anti-money laundering rules, banks have to sift through vast volumes of transactions every day, looking for those that could be problematic. “The first part of this process is already quite technology-driven,” Yuen points out. “You define the parameters and the computer will pull out all the potentially problematic transactions for you. Then, to see if they are genuinely problematic, you need either a human expert or a more advanced engine.”
Developments in data analytics, artificial intelligence and also in machine learning – where the results of previous checks are fed back into the model used by the system – means the digital process has the potential to become more accurate, as well as faster, than human validation.
Virtual banking and Open API
Yuen says there are three reasons why the HKMA is now willing to grant a licence to virtual banks. “First, we want to push the technology envelope, so we have more advanced financial technology coming to Hong Kong,” Yuen says. “Second, we want customers to experience new ways of accessing financial services; and, third, from what we’ve seen elsewhere, virtual banking is very helpful in addressing a financial inclusion agenda.”
In the summer of 2018, the HKMA published guidelines for the Open Application Programming Interface (API) Framework for the banking sector. Open API is intended to give consumers greater choice and convenience in the financial services market. If fully implemented, it will mean that banks, with the customer’s consent, will share customer’s data with outside service providers.
Yuen says the HKMA wants to take a gradual approach to Open API because it is based around new types of relationship. It is therefore being implemented in four stages, with the initial step already underway. “The first two stages are mainly concerned with information gathering,” he explains, adding that the risks to customers are much lower in these phases. “The third stage will be applications and the fourth stage will really be the opening up of account information.”
With an easier flow of information, the risks that customers and banks would be taking on in these latter phases would be higher. “For the third and fourth stage, we will monitor the situation and take a decision in 2019,” Yuen says.
The HKMA runs ongoing campaigns to raise public awareness around phishing emails, fake bank websites and the potential dangers of public Wi-fi. “The more convenient a system becomes, the more important it is for people to safeguard their personal information,” Yuen says.
When it comes to assessing the balance between value and risk in new FinTech applications, Yuen notes it’s not just the HKMA that has to strike a balance, the public does also. “A supervisory framework is there to serve a public good, as we can’t just leave it to the banks – they are in an inherently stronger position than individual customers.”
When it comes to the steps that business school graduates can take to prepare themselves for the financial world of the future, Yuen, who is also a member of the HKUST Business School Advisory Council, suggests that it’s not only digital and business skills that are going to be required, but also an understanding of behavioral science.
“The future success of financial firms will depend very much on how accurate they are in predicting or driving behavioral change. For that to happen, you have to understand human behavior.”