Traditional banks, insurers, and financial service providers in Hong Kong are jumping on board with fintech adoption, with a Hong Kong Monetary Authority (HKMA) study showing 86 per cent of incumbents are currently adopting fintech technologies. These financial institutions have succeeded to varying degrees in digitalising their businesses. Yet, many of their customer on-boarding and Know Your Customer (KYC) procedures remain archaically manual, lengthy and costly.

KYC is increasingly critical as the rush to go digital means customers demand faster access to services, while anti-money laundering requirements globally are evolving and becoming more demanding. COVID has accelerated efforts to move to remote and online procedures, but the results are piecemeal and lacking in standards. This cannot continue.

Firstly, customers will not stand for slow, in-person onboarding processes in today’s digital era, especially considering the pandemic experience. KYC should take minutes, not weeks.

Secondly the banks cannot sustain this drain on resources. A report on the cost of KYC by Refinitiv found that 52% of KYC costs are attributed to operational staff who primarily manage manual verification processes. Evolving AML and compliance regulations globally will continue to exert pressure on KYC complexity and costs.

Third, transitioning KYC to a digital – and ideally a utility model – is simply a huge opportunity. In recent times, financial services providers in Bahrain, the Nordics, the Netherlands, and Abu Dhabi have made progress in creating e-KYC utilities. A utility model would provide a single standard platform or framework that all providers could simply plug into and quickly enable eKYC at different levels of requirement, depending on the service provided.

Digital ID and digital onboarding would provide instant access to financial services for the World Bank’s estimated 1.7 billion unbanked consumers, while full digital ID enablement will potentially add 3-13% of a country’s GDP by 2030, according to a 2019 McKinsey report on digital ID innovation.

At its core, KYC is straightforward. To know your customer, be it an individual or a business entity level, there needs to be three levels of information to be verified. First, confirming the people or companies are who they say they are. Second, any transaction needs authentication through a signature or increasingly biometric and video authentication. Finally, there are additional anti-money laundering and regulatory requirements that may not apply to all financial services but are now a standard in cross-border transactions.

Individual service providers with the means to do so can make eKYC a reality, but as an industry and for the benefit of customers across the board, a utility model would massively accelerate the shift to a truly digital era of finance. Customers would immediately trust an industry-wide and regulatory-compliant utility framework for KYC, while saving providers millions of dollars in time and money in making eKYC a reality.

In Hong Kong, eKYC could unlock value in the financial space as consumers could interact seamlessly across the full gamut of financial and government services. However, whilst a utility model is an ideal solution to the heavy investment required for eKYC, the challenges are significant.

There needs to be broad buy-in and collaboration across key stakeholders, including regulators and the government. Without adequate incentives and a clear understanding of the risks, liabilities, and who will ultimately bear these responsibilities, a unified commitment to a utility model cannot emerge.

Other issues such as who owns the customer in a utility model is a major obstacle, especially with providers in Hong Kong, who are among the most competitive in the world. What does best-in-class eKYC look like? What technology platforms and data standards should be adopted? How should one equate the level of benefit for each provider with a respective cost and investment? How should the model be future proofed to adapt to the fast-moving world of fintech and rapidly changing regulatory landscape?

These are all major questions that will require significant collaboration – and ultimately compromise – among industry players to find answers to.

This necessitates coordinated, managed, and constant engagement across all key stakeholders. It also requires the CEOs of respective providers to step up and show genuine industry leadership. But equally, the government and regulators must accept their role and responsibility in driving this forward.

eKYC is certainly the right direction for Hong Kong’s financial sector to be heading. This provides a path to stand on the world stage and set new levels of AML excellence, reinforcing Hong Kong’s credentials with industry-leading KYC protocols that are built on a proven track record of financial services leadership.

Expert observers note Hong Kong already has a progressive framework in place for eKYC to happen. According to Claus Christensen, CEO of Hong Kong technology provider Know Your Customer, there are distinct models for eKYC emerging around the world. He noted Hong Kong and Singapore as the models with the greatest potential. “By embracing cutting-edge RegTech solutions, the Hong Kong regulators demonstrated in practice their commitment to innovation without mandating overly restrictive limitations on what software to use or precise procedures to follow,” noted Christensen in his recent article on eKYC models.

Ivan Nabalon, CEO and founder of Electronic Identification, a world-recognised authority on eKYC, has also observed that Hong Kong made great progress early on in leading initial eKYC developments in Asia, but further developments since 2018 have slowed down.

This is not to say eKYC is not happening in Hong Kong. All eight of Hong Kong’s virtual banks have launched their services successfully, enabling rapid customer onboarding via web and mobile with not much more than a residential address and HKID number. Ping An-owned OneConnect has provided eKYC technology to banks and securities firms during 2020, enabling thousands of mainland Chinese nationals to open stock trading accounts here in Hong Kong. Many of these digitalisation initiatives were created during the disruption of COVID-19, and all regulator-approved which paved the way for full digital-based onboarding.

Examples like the virtual banks and OneConnect show what can be done if the private sector take the lead in close collaboration with the regulators. But imagine the wider impact and possibilities if a utility model could be achieved.

COVID’s acceleration of digital adoption across Hong Kong has opened up bold new possibilities for the city’s financial sector. Now is the time for Hong Kong to ride on the great momentum and take the lead as a global Fintech scale-up hub.  

The article was co-authored by: Benjamin Quinlan, CEO and Managing Partner at Quinlan& Associates, Chairman, Fintech Association HK