FinTech: Reshaping Consumer Lending in Hong Kong

After the financial crisis in 2008, global banking regulations have been ramping up continuously and universal banks have been more focused on dealing with regulatory issues rather than identifying new market opportunities. In 2016, financial institutions had estimated that majority of large banks have been spending close to USD0.7 to the dollar on new regulatory and compliance issues.  While large banks have been preoccupied, opportunities arose for FinTech companies, enabling them to win market share from banks as well as capitalise on the underserved and unbanked consumer groups, representing 17% and 23% of the world’s population respectively according to Euromonitor International.

Hong Kong’s Policies Geared to Support the FinTech Sector

Hong Kong is well-known for its reputation as one of the global financial centres, however, it is also a city where the digital economy has fallen behind, particularly the FinTech sector.  To ensure that Hong Kong remains competitive as a smart city, new policies are being implemented to support the growth of the new economy.  With the smart banking initiatives announced by the Hong Kong Monetary Authority in late 2017, Hong Kong is in a strong position to build upon its existing digital infrastructure and bolster the development of the FinTech sector.

Online peer-to-peer (P2P) lending platforms are one of the FinTech categories that are benefiting from the FinTech initiatives and are starting to focus more on the local market. For example, WeLab, a leading P2P lending player, is aiming to be listed in the Hong Kong Stock Exchange (HKEX) while taking advantage of the new virtual banking initiative by being one of the first FinTechs to apply for the virtual banking license.

FinTech Shifting the Growth in Consumer Lending

Despite Hong Kong being a leading financial hub, consumer lending has not always been as popular as it is today.  Due to the conservative nature of the local consumers, consumer lending instruments were often circumvented.  However, over the past decade, there has been a dramatic change in consumer behaviour, especially with millennials (born between 1980-1994) and Gen Z (born between 1995-2009) becoming increasingly technologically savvy and more willing to spend as identified by Euromonitor’s “Premiumisation” megatrend.  As living expenses continuously rise in one of the most expensive cities in the world, the option of consumer lending has become increasingly attractive or, some may even argue, essential for these young consumers.  Personal loans for services and investments, such as weddings, education, tax payments, and equities trading, have been an increasingly prominent growth driver.

By the end of 2018, Euromonitor expects the consumer lending outstanding balance would reach HKD1,974 billion (USD253 billion), almost doubling its value in 2008.  The explosive growth in consumer lending has been also largely attributed to the accessibility of loans to consumers created by the FinTech community.  In 2018, 87% of the local population has access to the Internet, making online consumer lending immensely accessible.  By simplifying processes and offering affordable loan options, the FinTech sector was able to address consumer concerns and meet the growing demand for consumer lending services.

Cautiously Optimistic Outlook for P2P Lending Platforms in Hong Kong

Given the budding popularity of consumer lending services and the ease of access, the prospects for the P2P lending and crowdfunding platforms look positive.  Over the next five years, Euromonitor forecasts that the consumer lending outstanding balance will reach HKD2,729 billion (USD352 billion) in 2023 and according to trade sources, non-bank lenders (including online lending platforms) will contribute up to 25% of Hong Kong’s consumer lending outstanding balance, up from 18% in 2018.  However, this growth could be potentially undermined by the recent events in the world’s largest P2P lending industry, China.

In mid-2018, the number of lending platforms defaulting in China surged dramatically reaching 163 in July 2018, according to the Home of Online Lending, a data compilation platform.  Due to this, many investors suffered heavy loss in their investments and the Chinese government are in process of implementing stringent regulations within the online lending industry. This incident caused global investors to be more cautious with their investments, especially in P2P lending platforms. Despite this, the untapped potential of the industry remains large, especially in Hong Kong.  While there are still uncertainties around online lending platforms in Hong Kong, with the growing consumer demand for loan services, local government incentives and Hong Kong being one of the financial centres of the Belt and Road initiative, Hong Kong’s P2P lending platforms and other FinTechs are on the right track to reap the benefits of the digital economy.

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