Hong Kong Monetary Authority chief executive Eddie Yue announced the establishment of an HKMA-led Commercial Data Interchange, or CDI, at the opening of the Hong Kong Fintech Week virtual conference.
“This new data strategy is a paradigm shift in the development of Hong Kong’s financial infrastructure,” Yue said.
The HKMA’s traditional role has been to secure the movement of funds through its clearing and settlement systems. Now it is securing the movement of data, to support new financial products, reduce risks, and improve capital deployment.
The state-led approach to open banking
Yue calls these timeless aspects of banking, but the HKMA’s decision to launch CDI represents the government deciding to build its own platform to facilitate open banking, rather than rely on the private sector.
It poses a challenge to private initiatives such as Jetco’s APIX (API Exchange), even (or especially) if they are made compatible. But it could also jumpstart open-banking initiatives that have been slow to take off, partly due to banks’ concerns around liability and data protection, as well as their reluctance to throw open customer data to third parties.
The HKMA’s approach stands in stark comparison to how the European Union has regulated open-banking standards, by making it mandatory and accrediting third-party service providers (fintechs and merchants).
The U.S. has no formal open-banking regulation but the market has been big enough to incentivize data-sharing deals that achieve a similar outcome.
In Hong Kong, there has been an HKMA-led requirement for a phased open-banking protocol, but lack of clarity around legal liability for data breaches and a decision to let banks set standards (which hasn’t gotten very far) have made many local fintech companies wonder if true open banking will arrive.
Bank-first open banking
The HKMA’s CDI seems to be the Authority’s solution to these problems of trust, data, and security, and framing a level playing field it can supervise.
Most of all, CDI turns the data question on its head. Whereas in Europe the regulators have focused on requiring banks to share consumer data upon customer request – that is, they have focused on consumer rights – the HKMA’s approach seems focused on building use cases for banks to access customer data.
This reflects the hugely banked nature of Hong Kong, with over 160 licensed banks (including eight virtual banks) and a recognition by HKMA of the need to enable data to flow more readily to enable better financial services and capital management.
“Data is banking’s secret sauce,” Yue said. “HKMA is adopting a data-centric strategy to support the future of Hong Kong.”
He says currently the bilateral nature of data-sharing arrangements among banks, fintechs and merchants means there is no compatible protocols or standards, which limits the scalability of solutions. It makes it difficult for banks to gather the alternative-style data based on customer behavior that can be used to assess a credit – which is why so many small businesses struggle to get access to affordable loans and trade financing.
“For banks to use big-data initiatives, a long-term framework is needed,” Yue said.
Data to build SME services
CDI will be a venue through which data owners (consumers, businesses) can share with banks via data providers (fintechs, utilities, payment gateways), with consent. Under CDI, each bank and provider has a single connection to make data-sharing efficient and scalable. CDI will allow service providers get relevant, authenticated data.
“With customer consent, banks will gain access to a substantial body of data,” Yue said, including merchant point-of-sale information so banks can forecast a businesses’ future cash flows, identify cashflow patterns, understand counterparty risks, and make loans without having to ask for collateral. Merchants that outperform projected sales can then begin to improve their credit standing.
“This will enable bank customers, especially SMEs, to use their own data to enhance their access to financial services,” Yue said.
The challenge now for HKMA is to ensure customer consent and data security are upheld, and that consumer protection measures are sound.
Yue hopes to use CDI as a stepping stone to international payments and transactions, noting HKMA has been working with the Bank of Thailand on transacting via blockchain-based central-bank digital currencies.
CDI could be used to allow mobile wallet operators offer services to travelers, or support remittances and cheaper cross-border payments.