Comments on HKMA info sharing meeting on bank accounts

I was at an HKMA info sharing meeting on the problem with opening bank accounts.

Also by way of background, here is a paper on Hong Kong banking regulation

Click to access sem_paper_0_173_goodstadt-paper060112.pdf

There were about 80 people there, and there was literally an inner circle of people sitting at the conference table and an outer circle of participants.  The format was quite interesting and gives in an insight as to how Hong Kong government works (or doesn’t work).

The Hong Kong has a philosophy of being passively non-interventionist, so instead of giving directives to the bank, the HKMA tries to moderate discussion between different groups.  In this case, it’s the tech companies versus the banks.  So the representatives from HKMA started by giving a few introductory notes on what they were doing to resolve the problem.  There was also a speaker from the HK government that mentioned that the issue of bank accounts was a major issue that was hurting HK’s competitiveness as a innovation hub.  Then you had people from tech associations talk, followed by individual tech companies, then you had a speaker from the banking association, and then individual banks.  In particular the big three banks, HSBC, Standard Charter, and BOC(HK).  The people that were representing the banks were all operational people in charge of setting up bank accounts.

The most surprising thing that I heard was something that illustrates the changing nature of HK politics, and it was that when the Hong Kong government speaker mentioned that the issue of bank accounts was a major problem because President Xi Jinping has made it a major national priority to have Hong Kong become an international innovation center, and the bank accounts issue was a major barrier.  Personally, I think this is significant because, I really don’t think that HKMA would have giving this issue as much priority as they did if it wasn’t for Beijing’s interest in the issue of HK’s as a innovation center.  So I think this is an example of how Beijing is playing a soft, mostly positive, but definite interest in events in Hong Kong.

On another note, I was present and so was another member of the bitcoin community at the invitation of Charles Mok, the IT representative, who happens to be a member of the pan-democrat political opposition.  If the people were simply chosen by the government, I don’t think that the bitcoin community would have been there.  One reason I mention this and I’m posting this in my blog, is that there is another conversation between Beijing and the moderate political opposition in Hong Kong, and one thing that I wanted to do was to show that having a “loyal opposition” is in fact a good thing for Hong Kong governance.  I also hate closed door meetings so that’s why I’m talking about this.

As far as the tech companies, you had the typical horror stories.  The interesting thing was that that you need an bank account to get an SFC license, but the SFC won’t issue you a license without a bank account.  One thing that I found interesting was that most of the people that were complaining were people new to Hong Kong, and so they were unfamiliar with the “local workarounds.”  They weren’t aware that there is a market in Hong Kong for dead companies with bank accounts or that most people just buy a securities license rather than apply for one.  One other thing that people mentioned (which is the one thing for which there may be action) is that banks were getting people to buy terrible wealth management products as a condition of getting a bank account.

I spoke up and I mentioned that I thought that the focus of the meeting was misplaced.  I think it’s hopeless to fix this problem, and that the objective should be to come up with services that allow businesses to bypass the banks, and also services that allow people to use bank accounts in other jurisdictions while still maintaining a presence in Hong Kong.

The response from the banks made me more confident that nothing will get done.  The focus was on streamlining the process with the hope (which I think is useless) of making it quicker for the banks to make a decision.  What I found frustrating but unsurprising is that no one addressed the fundamental issues that cause banks to behave in the way that they do.

The meeting ended with a summary of what the HKMA was doing.  People decided to form a working group, and it is my firm opinion that the working group will get nothing done.  It’s possible that the issue of banks forcing SME’s to by wealth management products to get accounts will be addressed.  The only situation in which something were to happen is that if somehow this issue gets a lot more political attention than I see being likely.

As far as the meeting.  I felt good.  Dealing with the Hong Kong government can be extraordinarily frustrating if you don’t have the right mindset.  But the way I do it is that I imagine that I’m in a Doctor Who episode, in which I’m a time lord stuck on a planet run by robots.  The regulators and the operational people at banks are robots.  They are literally programmed to do certain things and respond in certain ways.  I was trying to tell people about the cool technology and amazing things that you can do with time machines and spaceships, and you just get totally blank looks.  The robots are nice.  They are friendly.  But when you talk to them about spaceships and flying saucers (and bitcoin) it’s something that they just don’t comprehend, and its something that they simply can’t process.

The one thing that was on my agenda, was that I’m worried that by pushing a lot of the crypto activity off of the banking system, that it opens Hong Kong to systemic risk.  I mentioned that to a regulator and asked if there was anyone at HKMA that was looking into this, and he gave me the expected response, which is that they are looking at what other regulators do and adopting best practices.  Basically, it was like going to the middle ages, and telling some random person that you are afraid that your flying saucer will cause a metastable collapse.  It just didn’t compute.

One of the things that I found funny was how ironic some of the people were without realizing it.  For example, the position of the banks was that they could do their jobs better if the business gave them complete records of the business, which neglects the fact that businesses that haven’t been in operation don’t have records.  Also there’s the usual Hong Kong silliness when in talking about innovation the main attitude was “let’s copy other people.”  The notion that Hong Kong might just do something new and creative or that Hong Kong may have some unique issues is completely alien to the regulators here.

But as far as the deep reasons why nothing will get done…..

The basic fact of the matter is that banks don’t want to open accounts because every business account costs them money.  If something goes wrong, then the banks get massively fined.  On the other hand, banks don’t make money from business accounts.  Interest rates are zero, and if it’s so impossible for the banks to hand you a bank account, heaven help you if you want a business loan.  The only think that banks in HK really make money on is property loans and terrible wealth management products for people that don’t know better.

Someone said that it’s not worth penalizing 99% to catch 1%.  It’s worse than that.  AML/KYC simply does not catch any bad actors.  So it’s penalizing everyone to catch no one.  From the banks point of view, the purpose of the exercise is not to screen out bad people, but to make sure that bank has an excuse if someone bad slips through.  If the bank rubber stamps a bad person, then they get fined tons of money.  If they make people give them 100’s of pages of documents, then if something bad happens, they can tell the regulators that they made the applicant go through hell so they shouldn’t be fined.  The fact that the process does not in fact catch bad guys is irrelevant.

The thing about the politics of banking is that too much documentation is never enough.  You can always request more documents, and the purpose of the documentation is not to do anything useful.  It’s just to protect the bank in case something goes bad.  It’s always going to take forever to make a decision, because you have an army of people whose job is to make sure that nothing gets done.

The other thing that people don’t understand is that it’s not bad businesses that banks are afraid of.  It turns out to be impossible to tell the difference between a business that is being used for illicit purposes, and the bad guys have an army of hackers that can hack accounts of perfectly legitimate companies to push money through their accounts.

So if banks had their way, they wouldn’t issue any accounts at all.

There as also systemic issues.  The big one is that no one that matters cares about the damage this is doing to Hong Kong.  The reason Singapore and Taiwan banks have a better balance is that their CEO’s live in Singapore and Taiwan.  The people that make the final decisions for the big global banks are outside of Hong Kong.  They are responding to mandates from the US and UK, and if this kills business in Hong Kong, then so be it.

Technology will not help and regtech is useless.  The issue is that banks have IT systems from the stone age.  One person mentioned this frustration at having to enter the same information online to a bank that he submitted on paper earlier, and that’s because different parts of the bank simply don’t share information.  To fix this would require tens if not hundreds of millions of dollars and some senior directives from C-level officers, and those people simply do not live in HK.

So what’s the solution?

• I’m working with people that are coming up with some really cool tech.  It’s still a bit immature, but it should get rolled out over the next year.
• More networking between startups and connection with local businesses.  It turns out that most banking issues have “local workarounds” and getting startups to talk to each other and local businesses will help them figure out these workarounds.
• Remove need for banks – It turns out that most banks are simply payment processors, and the HK government could to quite a bit to help remove the need for a bank account.  The big thing is to allow SVF’s and stored value cards to be used for disbursing and paying government grants.
• Integration with international systems.  We need to make it as smooth as possible to integrate with bank accounts in Singapore and Taiwan.  Also bitcoin can be used as a bridge technology

But this has a happy ending.  There is a parallel banking system forming not just in Hong Kong but worldwide, and one thing that is good is that people will be so busy in working groups that don’t solve anything to be able to block any of the cool stuff.

So back to the flying saucer……