The ugly truth about bank accounts in Hong Kong

In an earlier post, I talked about why I taught that nothing will get done with bank accounts for tech companies in Hong Kong.  It turns out that the HKMA had a sharing session in which nothing got done, and I predict that after many working groups and meetings that nothing else will get done.

One thing that I do is that I like talking to a broad spectrum of people.  I’ve talked to people in law enforcement on this issue, as well as with “professional money movers.”  If you are already annoyed at the situation of tech companies not being able to get bank accounts, you will likely be more annoyed to know that “professional money movers” don’t have particularly large difficulty to get bank accounts, and most of them find bank accounts to be an annoyance but they get one in the end.

Here is why….

Bank accounts are highly unprofitable for banks.  Compliance regulations make them even more unprofitable, and banks would frankly prefer not to open any accounts.

A lot of the discussions are made with the assumptions that banks want to open bank accounts, that they want customers, and that the problem is to get rid of the barriers that prevent a win-win solution.  The problem is that that assumes that banks want to open accounts which they don’t.  In fact running a day to day business account is highly unprofitable for the bank.  The only reason why banks have bank accounts is so that they can cross sell services.  The dream of a banker is that after losing money from your checking and savings account, one day you will come in and want a property loan or credit card at which point the fees start rolling in.

The trouble is that with tech businesses, there aren’t really any products and services that a commercial bank can offer.  Tech businesses get their funding from angels and VC’s, and so there are no loans that the banks can offer.  Worse yet, tech businesses have employees that are pinching pennies, which make them terrible customers for banks.

This puts the fact that banks have been trying link accounts with terrible wealth management products in a different light.  Without *something* to justify the cost of an account, it’s hard for a bank to justify the cost of opening one.  Now in an era where bank accounts were unprofitable but cheap, you could justify it as charity.  But now every bank account is a potential time bomb.  Which gets to the next annoying fact…

The purpose of examining documents is not to catch the bad guys, but to protect the bank and intentionally make it difficult for *anyone* to open a bank account.

So one misconception is that banks look at documents in order to screen out bad actors.  In fact this is not true.  The trouble is that a business that is laundering money for criminal activity *looks exactly the same* as a business that isn’t.  Someone that wants to run money through a business can just take an existing business and become a silent partner.  Worse yet, it’s quite common for the underworld to run money through legitimate businesses *without the business being aware of it*.  Criminals can and do hack into a corporate network to route payments in a way that the business just sees some odd charges in their bank statement.

So *every account* is a time bomb for a bank, and the bank has no way of knowing which accounts are good and which ones are bad.  So why do they insist on a ton of documents?  It’s to protect the bank.  They know that there is no way of preventing a bad company from slipping through, so they want to demonstrate that *when* a bad company gets caught that they submitted a massive amount of documentation so it wasn’t their fault.

In addition, there is some benefit in making things inefficient for the bad guys, so that they can’t easily open a million accounts at a million banks, but the *only* way of making things inefficient for the bad guys is to make things inefficient for everyone.

This is also why banks now have massive bureaucracy that do nothing but shuffle papers.  They want to show that *when* there is a bad company, that the bank hired a million risk managers and AML/KYC people.  The fact that these people do nothing except to make work for each other still looks good when something goes bad.

This has a number of consequences.  The first is that corporate accounts particularly with tech companies are things that banks don’t like to do because in order to protect themselves, they have to examine the owners of the companies, and their owners, and their owners and so forth.

The second consequence is that banks won’t tell you want the criterion for getting your account approved quickly are, because once you know what the banks are looking for then it’s pretty easy to submit documentation that gets the account approved relatively quickly, and this makes it harder for the banks to reject accounts.  The trouble with all of this is that the “bad guys” already know what the rules are.

But wait, won’t regtech make this more efficient, well…

Banks have terrible technology infrastructure and “regtech” is useless….

One thing that you’ll find is that bitcoin exchanges do AML/KYC a lot better than banks, and that’s because bitcoin exchanges built the entire technology stack from scratch.  That means that a bitcoin exchange has an 360-view of the clients.  The management of a bitcoin exchange can pull up customer records with a button press, and can look at deposits, withdraws, and look at customer service information, and all of the documentation that has been submitted by the customer.

A bank can’t.  Banks don’t have integrated IT systems, and so if you send a bank a paper documents it gets buried in a filing cabinet and it’s not integrated with the banks other systems.  Because banks have such terrible IT, it turns out that regtech is useless since you can’t simply “bolt on” a new system into something that’s already totally broken.

For something to change, the bank has to spend tens and probably hundreds of millions of dollars to rearchitect their entire IT system.  They just don’t have the money to do this, and the authorization to do something this lies with the head office in Beijing, London, or New York, which gets to the final problem…

None of the decision makers are in Hong Kong or care about the Hong Kong tech industry…

The problem that Hong Kong with banking has has nothing to do with Hong Kong.  It all started when HSBC was fined a huge amount of money for helping very bad people in Mexico move drug money.  As a result the US and UK fined HSBC a ton of money and imposed conditions on the bank worldwide.

Hong Kong is particularly hard hit by these rules for two reasons, and we can compare these with Singapore.  In Singapore, the regulator has a great deal of power, and the CEO and senior management of the big banks live in Singapore, and so they can modify the policies to be friendly to Singapore business.  In Hong Kong, the regulator has very little power, and the people with real power don’t live in Hong Kong, and have no real interest in helping the tech industry here.  Hong Kong could die and it wouldn’t bother anyone at the international banks with any real power.

So let me predict what is likely to happen….

You’ll have a lot of conversations in banks with people that have no power, and they will be kind, friendly, and totally useless, because they don’t have the power to do anything.  What’s worse, because the people that you talk to at the banks are operational, they are so used that that they can’t even *think* about how to fix the problems.

As far as suggestions:

• pull law enforcement and “street finance” people into the conversation – The big thing that I’ve done is I’ve talked with people in law enforcement and also people that do “street finance.”  It’s really important to get those perspectives into the conversation because the people that really do catch bad guys think that all of these banking rules are stupid.  Also it’s important to get people involved with “street finance”.  You want to be a nice white collar, middle class professional solution.  The trouble is that the banks think that you are a shady character and the lump you in with the underground financial world.  Get into that world.  You’ll find that the world of “street finance” in Hong Kong is where the real deals get made, and you’ll find that the people involved are honest, moral, ethical people that happen to run businesses that the professionals don’t like.  If you are in tech in Hong Kong, you are now part of that world, and it turns out that the people with real money in Hong Kong (i.e. the superrich) have more interaction with street finance people than you’d think.
• Make it easy for businesses to function without local bank accounts
  • Set up government services so that you can go without a local HK bank account.  This involves setting up government services like grants and government payments so that they can be done with bank alternatives.  There are some bureaucratic details on how this can be done, and it’s tricky for political reasons, but the good thing is that everyone that can veto this project lives inside of Hong Kong, so deals can be made.
  • Make it easy for companies to function without a local HK bank account – This means setting up fast payments with Singapore and Taiwan, and also integration with banks in places like Gibraltar, Estonia, and Slovenia.
• See if Beijing is interested in helping to fix the issues through Mainland banks – It is totally hopeless to get HSBC or Standard Chartered to help support Hong Kong technology.  It *might* be possible to put this onto the agenda of the Central Government so that they put “helping the Hong Kong tech industry” on the agenda of Mainland banks.
• Provide information about street financial solutions – The thing about Hong Kong licenses is that all of them are for sale.  If you need a SFC license, a bank account or anything else, you can buy it in Hong Kong.  There is in fact a business for someone to recycle old companies in Cyberport and Science Park for bank accounts.
• Play hard ball. What is going to have happen is with all of these working groups is that the people from the banks will just pass messages to the people with real power.  I want them to pass this message.  We are going into the new world of finance with or without you.  We are going to circumvent your systems, and make mincemeat out of your processes, because that’s what we need to do to stay in business.  You can either come up with solutions, or not.  I don’t care, because if you don’t come up with solutions, you are going to be dead in the new world that is being created.

The people involved in this process are well meaning and nice, and maybe too nice.  They’ll have dozens of meetings and position papers but nothing real has happened for the last few years, and I suspect nothing real will happen in the next few years.  Personally, I’m actually quite happy for lots of people to waste their time attending useless committee meetings that do nothing since it means that they won’t get in my way.

One final thing.  A lot of my views have to do with me working on both Wall Street and the money changers.  I’m pretty convinced that in the world of Hong Kong street finance, there is less criminality and a stronger sense of business ethics than there is on Wall Street, and once reason I like paper money is that I’m convinced that paper money in Hong Kong is a lot cleaner than the stuff that goes through the banks.