Transforming the global financial services market through the Internet of Things

Published: 19 January 2015

Digital technologies are inexorably opening up the global financial services industry to more and more entrants from different and previously unrelated fields, and redefining the concept of money, banking and banks. According to Deloitte China, the Diamond Sponsor of the Asian Financial Forum for 2015, the unique dynamics of the China market are expected to put China at the forefront of this transformation, with far-reaching implications for the global financial services industry and the global economy. Hong Kong, with its well developed and proven pedigree in connecting China and the global markets – not just from a logistics perspective but also in the critical role that it plays in the capital markets - is well placed to play a leading role.

The growing pervasiveness of internet and smartphone is transforming everyday life and the way the world operates systemically and irreversibly. The latest Deloitte research predicts that during 2015 some one billion wireless Internet of Things (IoT) devices will be shipped across the globe up 60% from 2014 and leading to an installed base of 2.8 billion devices.  Whilst much of the past decade has been dominated by discussion on the consumerisation of the internet, Deloitte believes that much of the next year will be dominated by the re-emergence of the enterprise.   Technology enablement has meant that continuous machine to machine connectivity must now lead to enterprises fundamentally changing the way they interact with every part of the market – never more so than in financial services.  Consumers are looking for their financial institutions to provide them the same level of experience that they get from their everyday interaction with the IoT. 

The latest Deloitte research predicts that in 2015 one billion smartphones will be purchased as upgrades generating over USD300 million in sales – and this trend will continue.  The smartphone base is forecast to increase from 1.8 billion in 2014 to 2.2 billion in the coming year.  By the end of this year, five percent of the base of 600-650 million near field communication (NFC) equipped phones will be used at least once a month to make contactless in-store payment at retail outlets. This compares with monthly usage by less than 0.5 percent of 450-500 million NFC-phone owners as of mid-2014. Whilst contactless mobile payment will not be mainstream by the end of 2015, niche adoption will be a major progression from near nil in prior years. It looks like 2015 will be the first year in which the pre-requisites for mainstream adoption – satisfying financial institutions, merchants, consumers, technology vendors and carriers are sufficiently addressed.

With over 600 million internet users and 527 million mobile internet users, China is playing a leading role in demonstrating how connectivity can at the same time disrupt traditional financial services and create significant opportunities for both traditional and non-traditional providers to act in parallel to enhance the overall consumer experience.  Currently, mobile phone and tablet PC have a penetration rate of 92 percent and 54 percent respectively in China. Increasingly, financial services will be offered in a virtual environment, and sustainable success will require robust digital platforms and the ability to transform them to stay ahead of the curve on what the customer wants not just today but tomorrow.

Tim Pagett, Financial Services Industry Leader, Deloitte China said, "Given the technology available, the evolution of China's financial services market is expected to be less linear than that of more developed economies which have transitioned from transacting in physical currency, to debit cards, electronic payments, credit cards, stored value cards and now digital wallets. The potential of today's technology in the world's largest consumer market and second largest economy creates a unique situation and is a disruptive force, though by no means a negative one because innovation and competition motivate value creation for customers. All this is opening the domains of physical banks as well as debit and credit card service providers to new, non-traditional entrants – such as China's first private online bank by a digital platform provider. We expect China to be at the forefront of innovation in financial services given its unparalleled, rapid growth of e-commerce." 

Chris Harvey, Global Industry Leader of Financial Services at Deloitte, said “Digital technologies are challenging established financial services providers to innovate and prioritize the customer experience. All this is broadening the definition of "know your customer" in the banking taxonomy so that, as much as it refers to risk management, it also references winning, growing and retaining share of wallet of the financial services customer. The challenge and the opportunity for established financial services providers in elevating their online services, and for digital platform providers expanding into financial services will be to deliver the right combination of personal and online connectivity.”

“Along with the rapid development of innovative retail payment products and services, we have witnessed the emergence of a new mainstream payment method for a wide range of goods and services, such as mobile payments and digital wallets," said Peter Koo, National Leader of Security, Privacy and Resiliency, Deloitte China, "the HKSAR Government has proposed a new legislation – the Stored Value Facilities and Retail Payment Systems Ordinance, which will be officiated by mid-2015. There will be a structural change in the Hong Kong administrative jurisdictions and it will lay down the legal framework for stored value card in Hong Kong, specifically for NFC-enabled smartphone usage and m-commerce. This will be a major revamp for the e-commerce market in Hong Kong."

"Furthermore, heightened data privacy regulation was introduced in China and Hong Kong in 2014. In the same year, China also issued on-line payment rules, limiting the amount of money consumers can transfer to third party online payment platforms and requiring banks to establish a method to identify customers' identities. Financial institutions need to integrate these security and privacy regulations efficiently as well as effectively into their e-commerce strategy. This is by no means easy but non-compliance for any reason raises serious reputational risks," he said. 

With all of this taken together, what can Hong Kong do to benefit from its position? Clearly there is a need to continually evolve the regulatory framework to adapt to the on-going development of both traditional and non-traditional market participants.  But beyond that is the need for a policy framework that supports the development of Hong Kong as a technology innovation center.  Providing incentives for investors and innovators alike to "incubate" and "embrace" the adaption and deployment of global solutions for local application, to provide a base from which entrepreneurs in the IoT space can work together.  Our experience is that the race for position in this space is clearly on – moving Silicon Valley to the current crop of leading international financial centres (IFC).  To remain in the forefront of IFCs, Hong Kong must look to the rest of the world for what might be missing – and it may be as simple as having the right name!!