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A Potential Megatrend Investment Opportunity: Hong Kong’s FinTech Revolution

Photo: Charles d’Haussy, Head of FinTech at InvestHK, kicked off “2018 Hong Kong FinTech Week” by giving an opening speech.

FinTech, short for “financial technology,” is used to describe new tech that seeks to improve and automate the delivery and use of financial services. I was invited by InvestHK(a Hong Kong government agency that attracts and retains foreign investment) to take part in the “2018 Hong Kong Fintech Week” event in early November, and I came away impressed by Hong Kong’s vast potential to become a premier FinTech hub – and possibly benefit investors along the way.

Why FinTech in Hong Kong?

Hong Kong is the world’s third financial centre after New York and London. There are several factors that attract FinTech companies to establish a foothold in Hong Kong.

  • Hong Kong has world-class financial infrastructure: Most banks have a branch or even a regional headquarters here. According to InvestHK’s research, 62% of current FinTech companies are enablers, working with financial institutions to reduce the friction of service delivery or enhance customers’ experience. Banks and financial institutions’ strong presence in Hong Kong allows FinTech firms to locate clients easily and serve them better.
  • An ample talent pool of financial and business professional provides enough manpower for FinTech firms to grow their business. Since most FinTech in Hong Kong is application-oriented, Hong Kong talents can pick up the technology rather easily. According to the InvestHK survey, 28% of FinTech companies in Hong Kong are targeting the Greater China market, while 61% are aiming at global expansion. With international vision and China experience, Hong Kong professionals are perfect staff for those FinTech companies.
  • Plenty of institutional investors fulfill the pre-listing funding needs of FinTech startups. A strong equity market serves FinTech IPOs and subsequent funding needs. Moreover, the Hong Kong Exchange has just allowed weighted voting rights to attract more new-economy companies to list here.
  • TheGovernment fully supports industry development, such as setting up a dedicated platform to enhance communication between regulators and the FinTech community, and providing government funding to motivate entrepreneurship. In 2016, The HongKong Monetary Authority launched The FinTech Supervisory Sandbox, allowing startups to partner with banks to conduct testing and trials of new technology and business models.

What one company can teach us about the FinTech industry

We believe the best way to learn investing is to study business models from a company’s presentations. During FinTech week, I got the chance to do just that with one exciting new company.

Disclaimer: This is not investment advice. The below startup company is still privately owned and not open to general retail investors.

TNG FinTech Group

TNG, a local Hong Kong FinTech company, facilitates peer-to-peer transactions, bill payments, and cash withdrawals through its mobile app. What makes TNG unique from popular e-wallets in Hong Kong like Octopus and Alipay is its blue-ocean strategy to target the underserved niche of our unbanked population.

There are 350,000 domestic helpers in Hong Kong. They are paying high remittance fees every month to transfer money to their family members in home countries like the Philippines, Indonesia, etc. Worse yet, any of their families living in rural areas may have no bank service or bank account. TNG’s app solves this problem by allowing family members to withdraw cash through rural post offices, pawn shops, or convenience stores by just clicking a button on their cellphone, with zero remittance fee.

Hong Kong employers also have good reason to pay domestics helpers through TNG’s app, instead of cash: The app’s clear payment records help them avoid future disputes.

According to the World Bank, 1.7 billion adults worldwide remain unbanked in 2017. The unbanked market opportunity provides TNG a huge source of potential growth. In fact, TNG has just secured a new round of funding from venture capitalists for its global expansion to frontier markets such as Vietnam, Sri Lanka, Pakistan, Bangladesh etc.

Why does the Hong Kong FinTech revolution matter to investors?

Two aspects of this emerging trend could help or harm Hong Kong investors:

  1. Game-changers may affect the financial stocks in your portfolio.

Though most FinTech firms are enablers, some could disrupt the financial services industry in dramatic ways. Traditional banks that fail to catch up with new technology – say, blockchain for digital transactions – may be squeezed out from competition and lose market share in the future. Moreover, regulators are now more open to disruptors than any time before, lowering potential barriers to entry.

Since financial stocks compose around 50% of the Hang Seng Index, most Hong Kong investors hold certain traditional banks and insurance companies in their portfolio. Watch out for financial stocks that lag behind the technology upgrade trend!

  1. Unicorn IPOs could offer investing opportunities.

There are huge number of FinTech unicorns preparing to go public. The biggest, most famous one is Ant Finance, well known for its Alipay payment app, and privately owned by Alibaba founder Jack Ma. Rather than just relying on reading IPO prospectus, you, being a user, can have a first-hand knowledge to know what you own.

The Hong Kong Exchange has just allowed weighted voting rights, reducing the listing threshold to compete with the Nasdaq exchange and attract more new-economy companies to list here.

 

Want to know more about the Hong Kong market?

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Disclosure: Hayes Chan, CFA, is The Motley Fool Hong Kong’s investment analyst. Motley Fool Hong Kong is not licensed by the Hong Kong Securities and Futures Commission to carry out any regulated activities under the Securities and Futures Ordinance.