2021 FINA5260 - Lesson 2

FINA 5260
The Future of Financial Industry
Prof. Hilton Chan, PhD

Adjunct Professor, Finance Dept.
School of Business and Management
Hong Kong University of Science & Technology
“BITD” analysis in FinTech
Business
Innovative Integration
Technology
Data
Copyright 2021 © Dr. Hilton Chan 2

“BITD” analysis
Business ideas and models, Innovative Integration with
Technology in computing and communication, and Data
analytics and management are the fundamental building blocks.
Market
Business Assessment
(ideas & models)
(Consumers)
Innovative New FinTech

Integration Applications
Technology Data
(computing & (analytics and
communication) management)

“BITD” model and the FinTech value chain
Disruptive Innovation or
Enabler to traditional innovation
and continuous improvement
to the financial Value Chain
Market
Business Assessment
(ideas & models)
(Consumers)

Technology Data

Class 2
Virtual banking vs. Online banking,
Digital payment/Faster payment

Agenda
1. Online Banking vs. Virtual Banking
2. Case analysis – Canadian Banks 2016 Embracing the
FinTech Movement
3. Different ePayment models and Key Business-IT
components
4. FinTech ePayment systems
a) Face-to-face ePayment
b) Digital-ID to Digital-ID in an “untrusted” environment
c) Digital-ID to Digital-ID in a “trusted” environment
d) Digital-ID to Digital-ID (non-traceable) in an “untrusted”
environment
5. Future banking - RCEP, China-EU agreement and DCEP
Online Banking vs. Virtual Banking
Any difference?
If there is no difference, why issue “Virtual Banking”

licence in Hong Kong?
(Class Discussion)

No physical office for virtual banks.
How to open a bank account online?

• Establish your true identity, i.e. associating the
“real you” with your personal data (including
biometric data)
• Authenticate you are “the real you” and have the
access right, i.e. create, amend, delete, etc.
(Class Discussion) Copyright 2021 © Dr. Hilton Chan 8

• Establish your true identity

• Authenticate you are “the real you” and have the access right
• Two-factor authentication

For a virtual bank in Hong Kong, who can enjoy its

services?
• Hong Kong residents

• Macau, Shenzhen, Guangzhou, …….
• the Greater Bay area?
• Asia? ….. Any place in the world?
Any hindering factors for accepting global clients?
(Class Discussion)
eID – European Commission
How it works?
1. A citizen requests an on-line service (e.g. banking, health) in a
Member State.
2. The citizen is requested to authenticate themselves by the on-
line service (e.g. banking, health).
3. At the authentication stage, it becomes apparent that the
citizen has an eID from another Member State.
4. Authentication request is sent to the citizen’s country for
authentication, through the eIDAS solution, to the citizen’s
Identity Provider (IdP) where authentication takes place.
5. Authentication result is returned to the service provider.
6. Authentication is complete and the citizen can proceed with
accessing the service (e.g. banking, health).
https://ec.europa.eu/cefdigital/wiki/display/CEFDIGITAL/How+does+it+work+-+eIDAS+solution
eID – European Commission
How it works?
https://ec.europa.eu/cefdigital/wiki/display/CEFDIGITAL/How+does+it+work+-+eIDAS+solution

eIDAS solution (Opportunities for FinTech firms)
https://www.ncipher.com/solutions/compliance/emea/eidas

Challenging Issue
Interoperability
People and businesses can use their national eID schemes to access services
in other EU countries.
• Legal interoperability: The legal validity of the authentication process
when information is exchanged across borders (while respecting data
protection requirements).
• Organisational interoperability: The organisational relationship between
the different Member States and the necessary operational
management related processes is clear.
• Semantic interoperability: Semantic elements of cross-border eID
authentication are compatible, allowing the different national IT systems
across Europe to exchange data with unambiguous, shared meaning.
• Technical interoperability: The technical elements of cross-border eID
authentication are compatible.

eID → i AM Smart
https://www.iamsmart.gov.hk/en/

HK eID - OGCIO
• eID will be provided for all Hong Kong residents free of
charge, enabling them to use a single digital identity and
authentication to conduct government and commercial
transactions online.
• Upon successful registration, eID will be bound to the
personal mobile device of the applicant.
• Users can make use of the biometric functions (including
facial recognition, fingerprint identification, etc.) provided
by their personal mobile devices to authenticate their
identities and log in online services.
• eID will also support digital signing with legal backing
under the Electronic Transactions Ordinance (Cap. 553) for
handling statutory documents and procedures.
HK eID - OGCIO
• OGCIO will provide three sets of Application
Programming Interfaces (APIs):
• Authentication
• Form Filling
• Digital Signing
• OAuth 2.0 will be adopted for authentication

and authorisation amongst eID user, online
service and eID system.
https://www.ogcio.gov.hk/en/our_work/business/tech_promotion/eid/

1. User to access online
service website and to
start the login by using
eID process
2. Online service to
redirect user to a
webpage that is
hosted in eID System
3. User to use eID Mobile
App to scan the QR
code on the webpage
4. eID System to redirect
user to online service
with “Authorisation
Code” included
5. Online service to pass
the “Authorisation
Code” to eID System
6. . eID System to return
the “Access token”
* Tokenised eID is a unique identifier of eID user assigned by
which includes user’s
eID System for a particular online service. Different online
tokenised eID* and
service will be assigned with different values of tokenised eID
online service to use
for the same eID user.
tokenised eID to
https://www.ogcio.gov.hk/en/our_work/business/tech_promotion/eid/ perform user matching
at local user database
1. User to start the digital
signing by eID process
(if user is not
authenticated, perform
step 2-6 of
“Authentication”
process to obtain
tokenised eID*)
2. Online service to pass
the hash value
generated from the
web form to be signed
along with the user’s
tokenised eID to eID
System
3. Online service to show
• Tokenised eID is a unique identifier of eID user assigned by eID an identification code
System for a particular online service. Different online service
and invite the user to
will be assigned with different values of tokenised eID for the
same eID user. authorise digital
• # Digital certificate issued by Recognized Certification Authority signing in the eID
for eID user. Mobile App

4. After ensuring the
identification code
shown on the eID
Mobile App and
the online service
webpage are the
same, user to
authorise the
digital signing
action
5. eID System to
perform digital
signing and return
the signed hash
and user’s digital
certificate# with
• Tokenised eID is a unique identifier of eID user assigned by eID
public key to
System for a particular online service. Different online service online service
will be assigned with different values of tokenised eID for the 6. Online service to
same eID user. confirm the digital
• # Digital certificate issued by Recognized Certification Authority
for eID user.

signing and display
https://www.ogcio.gov.hk/en/our_work/business/tech_promotion/eid/ result to user
1. User to start the digital
signing by eID process (if
user is not authenticated,
perform step 2-6 of
“Authentication” process to
obtain tokenised eID*)
2. Online service to pass the
hash value generated from
the web form to be signed
along with the user’s
tokenised eID to eID System
3. Online service to show an
identification code and
invite the user to authorise
digital signing in the eID
Mobile App
4. After ensuring the
identification code shown
on the eID Mobile App and
the online service webpage
are the same, user to
authorise the digital signing
action
5. eID System to perform
• Tokenised eID is a unique identifier of eID user assigned by eID digital signing and return
System for a particular online service. Different online service the signed hash and user’s
will be assigned with different values of tokenised eID for the digital certificate# with
same eID user. public key to online service
• # Digital certificate issued by Recognized Certification Authority 6. Online service to confirm
the digital signing and
for eID user. display result to user

AI in Banking

Deployment of AI in banking
Any AI application in banking?
What are the challenges when deploying AI?
(Class Discussion)

AI: rule-based vs. non rule-based
Hong Kong Monetary Authority, “Reshaping Banking with Artificial Intelligence”, 2019.
25
(https://www.hkma.gov.hk/media/eng/doc/key-functions/finanical-infrastructure/Whitepaper_on_AI.pdf)
Challenges when deploying AI in banking
Managing AI project risks:
1. Interpretability and Explainability

2. Robustness and Security
3. Fairness
……. Any more?

Case analysis – Canadian Banks
2016
Embracing the FinTech Movement

Canadian Banks – Embracing the FinTech Movement

Examples of the banking initiatives in FinTech

a) Interac system for email money transfer
b) CIBC backed PC Financial providing grocery giant Loblaw “white-
label” bank; partnership with MaRS to create an innovation
hub/FinTech cluster
c) BMO launched Mbanx in 1996 which initially planned to be a virtual
bank but subsequently absorbed as BMO online banking;
SmartFolio in robo-advisor services
d) Scotia bank invested in Kabbage, online small business lender, and
set up Digital Factory to focus on technology and mobile banking
e) TD established an innovation lab at Communitech, and partnership
with Moven, a mobile personal financial management platform
f) RBC testing payments with Nymi Wristband technology, and Uber
for royalty rewards
Examples of the banking initiatives in FinTech

a) Interac system for email money transfer
b) CIBC backed PC Financial providing grocery giant Loblaw “white-
label” bank; partnership with MaRS to create an innovation
hub/FinTech cluster
c) BMO launched Mbanx in 1996 which initially planned to be a virtual
bank but subsequently absorbed as BMO online banking;
SmartFolio in robo-advisor services
d) Scotia bank invested in Kabbage, online small business lender, and
set up Digital Factory to focus on technology and mobile banking
e) TD established an innovation lab at Communitech, and partnership
with Moven, a mobile personal financial management platform
f) RBC testing payments with Nymi Wristband technology, and Uber
for royalty rewards

Technology revolution that transformed the banking value
chain
a) Digital authentication, biometric, e-signature, paperless, VoIP, data
streaming
- Bank account open and banking transactions
b) Mobile computing (memory & processing power), telecommunication
network and bandwidth (borderless, AV streaming)
- Live chat, 24x7 services, real-time transactions
c) Cloud computing & storage (lower cost)
- Pay-as-you-use for SaaS & PaaS
d) Analytic, AI, Machine Learning
- Customer-centric, personal services (mass customization)
e) APIs, connectivity directly between machines to machines
- Enhanced UX and customer experience
What are the challenges new FinTech
companies face in the Canadian market?
1. Winning the consumer trust is not easy

2. Pitching to investors without proof of concept is no
easy task with current economic outlook
3. Regulator may bring in new rules and regulations to
the FinTech community
4. Market is already very competitive

Things don’t change over night
But watch out for the “hockey stick effect”

Things don’t change over night
But watch out for the “hockey stick effect”
https://www.forbes.com/sites/sageworks/2016/10/23/navigating-the-make-or-break-years-as-you-create-
hockey-stick-growth/?sh=377902975ed7
Embracing the enemy
Refer to the article, “Embracing the enemy: Canadian
banks partnering with fintech firms after once seeing
them as rivals”
https://ncfacanada.org/embracing-the-enemy-canadian-banks-partnering-with-fintech-
firms-after-once-seeing-them-as-rivals/
FinTech innovation in three ways ……..?

What is the ultimate purpose/intent of the banks?
Group discussion

Banks vs FinTechs or Banks vs Telco’s
who controls the money? the data? the infrastructure

Different ePayment models

History of ePayment
1870 – Western Union introduced the Electronic Fund Transfer (EFT)
1918 – Federal Reserve of America transferred money via telegraph
1950 – Diner’s Club International became a credit card company
followed by American Express in 1958
1972 – the Automated Clearing House (ACH) was developed to process
transactions in batches
1977 – SWIFT as a global financial messaging service replacing the telex
1979 – Michael Aldrich introduced technology for telephone purchases
1996 – Google introduced online purchase with credit or debit cards
1999 – Paypal
1997 – Octopus (micro-payment contactless card)
2009 – Bitcoin (1 Bitcoin = 0.076 cent)
2013-2014 – Apple Pay, Alipay
2015 onward – email fund transfer, photo cheque deposit, e-cheque
Different payment methods
1. Global fund transfer to third party, e.g. EFT, SWIFT
2. From cash to digital storage (card), e.g. credit/debit
card such as Visa and Master, and micropayment
cards such as Octopus and Mondex
3. From paper to digital payment/fund transfer, e.g.
ATM cheque deposit, photo cheque deposit
anywhere
4. From online to online payment/fund transfer, e.g.
Interac, eCheque, Visa, Master
5. From online shopping to online payment, e.g. PayPal,
Apple Pay, Alipay
6. Digital wallet and crypto-currency
Transforming the Financial ePayment
landscape?
Instead of “payment through” the existing banking
authorities
Back to the old days direct person-to-person barter system

with a “globally trusted” system.
Can we replace the existing bank payment system

with a more efficient, lower cost (direct person-to-person)
and intelligent, personalized “IT payment
network”?
Various ePayment methods
1. Face-to-face (f2f) ePayment
• transactions between trusted IT systems;
Conversion of physical currency to digital unit
2. Digital ID to Digital ID ePayment in an

“untrusted” environment
• transactions between anonymous (identifiable)
individuals
• TTP

Various ePayment methods (con’t)
3. Digital ID to Digital ID ePayment in a “trusted”
environment
• transactions between anonymous (identifiable)
individuals
• TTP is the same ePayment provider
4. Digital ID to Digital ID (non-traceable)

ePayment in an “untrusted” environment
• transactions between anonymous (non-traceable)
individuals in a “untrusted” cyber environment
FinTech ePayment systems
1. face-to-face ePayment
Octopus Card (Hong Kong)

1. Face-to-face e-Payment - Octopus
What are the Business, IT, Data and Innovative
Integration components?
Business
(ideas & models)
Innovative
Integration
Technology Data

Business
- Transportation payment (stored value card)
- Contactless and low latency
- Anonymous payment card holders Business
(ideas & models)
- Limited stored value
- Physical authentication (open acct); HK$50 deposit
- Paper currency to exchange for stored value or pre-
arranged electronic fund transfer from bank Innovative
accounts Integration
IT
- Centralized system Technology Data
- No peer-to-peer transactions (no system to system, (computing & (analytics and
or card to card transactions)
- Card reader
- Real-time transactions; batched money transfer

Data
- System ID + HKID (physical authentication)
- Stored value $$$ balance
- Transactions (date, time, location, in and out, fee) Business
(ideas & models)
- Data recovery features with Centralized system
Innovative Integration Innovative

- From stored value card to micropayment card Integration
- Extend to all POS (point of sales) systems of retail
shops
- Provide backend accounting services to SME Technology Data

Data
- System ID + HKID (physical authentication)
- Transactions (date, time, location, in and out, fee) Business
(ideas & models)
- Data recovery features with Centralized system
Innovative Integration → Data analytics Innovative

- From stored value card to micropayment card Integration
- Extend to all POS (point of sales) systems of retail
shops
- Provide backend accounting services to SME Technology Data
What happen to your digital asset (data)?

What happen to your digital asset (data)?
Data (stored value card) Business

- System ID + HKID (physical authentication) (ideas & models)
- Transactions (date, time, location, in and out, fee)
- Data recovery features with Centralized system Innovative
Data (micropayment) Integration
- Data (stored value card)
- Store ID, amount spent, date, time, location
Technology Data
Big data analysis → Innovative Integration (computing & (analytics and
- Estimate the total revenues of a store.
- Why 7-11 has higher revenues than Circle K at
similar location?
- …… (more examples)
What is the impact to the financial landscape (value chain in
banking and finance)?
Market
Business and continuous improvement
(ideas & models) Assessment to the financial Value Chain
(Consumers)

Technology Data

banking and finance)? → Reduced transaction costs
- Less coins to be counted and transport from branches to branches
- Less coins to be produced
Market
(Consumers)

Technology Data

Was Octopus an IT solution or a FinTech solution?
• In September 1997, the Octopus fare collection

system was officially launched
• Octopus Cards Limited was authorised as a deposit-
taking company by the Hong Kong Monetary
Authority (HKMA) in April 2000
• In January 2001, OCL underwent a change in
corporate structure.
• Early stage of a prepaid-FinTech merchant issued card
• In Nov 2015, the Payment Systems and Stored Value
Facilities (SVF) Ordinance was introduced.
FinTech → Regulations → RegTech

1. Face-to-face e-Payment – Credit Card
How is this compared with

Octopus card?

Fundamental IT Building Blocks in
eCommerce/mCommerce
ePayments

eCommerce and mCommerce
http://bd-ecommerce.blogspot.com/2015/09/how-online-credit-transaction-works.html 55
Doing business online, what are the new Business-IT
requirements / project challenges?

ePayment solutions face the following challenges:-
1. Data security/Data confidentiality (CIA model)

2. Data privacy
3. Authenticity (Digital ID)
4. Non-repudiation
5. Trust
• Inter-operability/Scalability
• Cost-effectiveness

How to achieve “Confidentiality”?
Cryptography
• DES, Blowfish/Twofish, AES, HLES, RSA, Open PGP
• Symmetric and Asymmetric
Cryptography concerns with protecting the message

contents.
How about if we want to conceal the fact that a

secret message is being sent?

Steganography (confidentiality of a confidential

message)
• Steganography concerns with concealing the fact that a
secret message is being sent
• Hiding a secret message in a normal message
• From confidentiality to “absolute” privacy
• e.g. an image file with every hundredth pixel adjusted
to correspond with an alphabet letter

Steganography
Demo
https://www.youtube.com/watch?v=6Y7c1Ky1V4w
https://www.flickr.com/photos/chrisleague/3192090017/in/album-72157612500197672/
Cryptography
• DES, Blowfish/Twofish, AES, HLES, RSA, Open PGP
• Symmetric and Asymmetric
Steganography (confidentiality of a confidential
message)
• Cryptography concerns with protecting the message
contents
• Steganography concerns with concealing the fact that a
secret message is being sent
• e.g. an image file with every hundredth pixel adjusted
to correspond with an alphabet letter
How to achieve “Integrity”?
Data integrity check
• MD5 checksum
• SHA (secure hash algorithm)
How?
• Apply a hash function (MD5, SHA) to the data message
and generate an unique identifier
• No two different data message will have the same
unique identifier

How to achieve “Availability”?
Redundancy
• Tightly coupled DBS architectures (multi-core thread
parallelism is used to concurrently communicate,
replicate, and apply master update transactions on all
replicas with extremely high throughput and low
latency)
• Distributed computing and storage
IT Applications
• Cloud computing technology
• IaaS, PaaS, SaaS

CIA Model

How to achieve “Authenticity”?
Authenticity of things
• Digital Watermarking
Data message with

Data Watermarking Attacks/
visible or invisible
message Algorithm Noise
digital watermark
Watermarking
Recovered
Detection
watermark
Algorithm

Authenticity of things
• Meta data is data that provides information about
other data
• Descriptive metadata, e.g. title, author, abstract, and
other keywords
• Structural metadata gives the structure of the data file,
e.g. version no., file type
• Administrative metadata, e.g. creation date, access
date, change data, who can access
Metadata Analyzer

Authenticity of person
• What you know, e.g. password
• What you possess, e.g. card, phone, token
• What is your unique characteristics, e.g. biometric
features, hand writing signature, facial recognition,
voice, ……
How?
• Two-factor authentication

How to achieve “Non-repudiation”?
Register a “trusted” user ID for electronic transactions in an
“untrusted” environment
1. Check the person against a piece of trusted unique ID (e.g. HKID,
passport)
2. Open an account and generate a system unique ID
3. Link the account, system ID, trusted ID and the person
4. Link the person’s hand written signature or 2-factor digital
authentication with the person and the trusted ID
5. [hand written signature] or [2 factor digital authentication] = the
person with the trusted ID
6. Therefore, [hand written signature] or [2 factor digital
authentication] access the account with the unique system ID
7. With that, the digital identity of the person is established for his
online transactions.
PKI infrastructure

How to achieve “Non-repudiation”?

Can I trust your public key?
You need a TTP to authenticate the public key!

2. Digital-ID to Digital-ID in an “untrusted”
environment
Paypal (US)

Can I trust you who have the money to pay?
Can I trust you who will deliver the goods?
Model 1 – ePayment in a “untrusted” environment
1. Like many cash transactions in market place where the payer and
payee are anonymous and the environment may not be secure.
2. We have to establish a TTP (Trusted Third Party).
Why TTP?
1. Will you pay? Will you deliver?
2. Double spending issue
3. Privacy issue

Online purchase – why Paypal, not just credit
cards?

Online purchase – why Paypal, not just credit
cards?
Trusted Third Party
(TTP)

How can we achieve “inter-operability”?
EDI (Electronic Data Interchange) is data download/upload in
batch mode.
API (Application Programming Interface) is a communication
protocol, including data exchange, between computer
software to computer software at real-time

How can we achieve “cost-effectiveness”?
Cloud computing (VM, IaaS, PaaS, SaaS)
Software Development Kit (SDK)
Open-source technology
Shareware

How can we achieve “trust”?
Government
Banks
Insurance carriers
Alibaba
Amazon
eBay
……

How can we achieve “trust”?
Government
Banks
Insurance carriers
Alibaba
Amazon
eBay
…….
Which system (corporate governance) upholds …….?

3. Digital-ID to Digital-ID ePayment in a “trusted”
environment
eCheque (Hong Kong)
Interac (Canada)
WeChat pay, Alipay (China)
FPS (UK)
FPS (Hong Kong)

environment
eCheque (Hong Kong)

Business flow of an eCheque (Hong Kong)

eCheque (Hong Kong)
1. Sender has to registered with the bank for the eCheque services
2. Sender has to login to his bank account with the security token
3. Sender has to use security token to generate the eCheque
4. Sender has to download the eCheque as PDF
5. Sender has to login to his email system and attached the
eCheque/PDF
6. Sender send the email to recipient
7. Recipient has to login to his email system and download the
eCheque
8. Recipient has to login to his bank account
9. Recipient has to deposit/download the eCheque to his account
10. The eCheque will take 2 days to clear as normal cheque

3. Digital-ID to Digital-ID e-Payment - eCheque

Business
(ideas & models)
Innovative
Integration
Technology Data

3. Digital-ID to Digital-ID e-Payment - eCheque
Business
- Replacing the paper cheque with eCheque
IT
Business
- Digital signature (ideas & models)
- PKI technology to encrypt eCheque file
- Blockchain technology
Data Innovative
- (same as before) Integration
- Eliminate physical cheque exchange & deposit Technology Data
(source:http://i.cs.hku.hk/~msd15102/index.php/2016/07/31/simulated-testing-
platform-for-echeque-processing/)

Business-IT Architectural Design
eCheque (Hong Kong)
86
environment
Interac (Canada)

Sending money with Interac e-Transfer
1. Sender will login and send money to the recipient's email or
mobile no. and create a <password>
2. Sender will send the <password> to the recipient.
3. The recipient will receive an email and login to his bank account to
deposit the money after entering the <password>
4. Money is now transferred from sender to recipient, and ready for
use in the recipient’s account

environment
WeChat pay (China)

3. Digital-ID to Digital-ID e-Payment – WeChat pay (China)
User
1. Open a telecommunication account (telecom ID) after authenticated with a government ID
2. Open a WeChat account (after authenticated with telecom ID and govt ID)
3. Online add bank account(s) (previously authenticated with govt ID)
4. Convert RMB to WeChat account
5. Peer to peer e-transfer/payment with digital authentication (access control) between
Wechat accounts, bank accounts, etc. for any online purchases


Business
(ideas & models)
Innovative
Integration
Technology Data

BITD anlaysis
Business Business
- ??? (ideas & models)
Innovative
Integration
Technology Data

Business
Business
(ideas & models)
Innovative
Integration
Technology Data

Business
Business
(ideas & models)
Innovative
Integration
IT
- Group exercise/Final paper on “IT architecture
design” Technology Data
Data communication) management)
- Group exercise/Final paper on “Big Data analysis”
- Group exercise/Final paper on “Innovative
Integration”
banking and finance)?
- Migrate nearly all banking and finance transactions to a Telecom
network (another trusted system)
Market
(Consumers)

Technology Data

environment
Faster Payment System (UK)

3. Digital-ID to Digital-ID e-Payment – FPS (UK)
1. UK bank initiative launched in 2008.
2. The founding UK banks became the initial shareholder of
the Faster Payments Scheme Limited in 2011.
3. It enables mobile, Internet, telephone and standing order
payments to move quickly and securely.
4. Virtually, all Internet and telephone banking payments in
the UK are now proceed via Faster Payments.
5. Seventeen banks and building societies are Participants of
the scheme, and over 400 other financial institutions are
able to offer the service, making Faster Payments available
to more than 52 million current account holders in the UK.
6. Transfer limit up to £250,000. Why set a limit by UK govt?
1. Simon wants to pay his friend, Mike, who has an account with different
Faster Payment System (FPS)
bank.
2. Simon instructs his bank through his mobile phone, online or telephone
banking service to pay £50 to Mike now. Simon’s bank carries out its
normal checks to verify that he is the genuine customer. For example, they
may ask Simon to provide a password or other security information.
3. In addition to Simon stating the amount he wants to pay, he also provides

Mike’s sort code and account number – this is the information used to
address the payment. Simon also enters the name of the account he wants
to send the payment to, which will appear on his statement along with any
reference details so that Mike knows what the payment is for.
http://www.fasterpayments.org.uk/about-us/how-faster-payments-works
4. Before Simon’s bank allows the payment to be made, it will check that
Simon’s account has sufficient funds and that the request to make a
payment is genuine. In certain cases, the bank may need to hold the
payment to undertake further checks to protect Simon.
5. Simon’s bank sends the transaction through the Faster Payments Service.
From this stage onwards, Simon is committed to making the payment.
6. The Faster Payments Service sends the payment instruction to Mike’s bank
(the ‘receiving bank’) after checking that all the relevant details are included
and properly formatted.
7. Once Mike’s bank has received the instruction, it checks that the account
number is valid (note, it does not verify that the account name and number
match), and then sends a message back to the Faster Payments Service
that it has accepted (or rejected) the payment.
8. The Faster Payments Service credits the receiving bank with the funds and
sends a message to the sending bank to let them know that the transaction
has been made successfully.
9. Simon’s bank marks the transaction as complete. Each sending bank will
decide how this confirmation will be made available to its own customer. In
all cases, once the payment has been made, a confirmation message will
always be sent between banks.
10. Simon’s bank confirms the fate of the payment to Simon.
11. The receiving bank will credit Mike’s account with the £50 sent by Simon
Where Mike’s account is with a Faster Payment Participant Bank, he should

generally be able to see the credit on his account within seconds and also be
able to access the funds. If Mike’s account is with a non-participant of the
Scheme, then it may take longer for funds to be shown on his account.
3. FPS (UK)
UK Financial Market Infrastructure (‘FMI’):-
1. An FMI should allow for fair and open access to its
services, including by direct and indirect participants and
other FMIs.
2. An FMI’s participation requirements should be justified in
terms of the safety and efficiency of the FMI and
commensurate with the FMI’s specific risk. Subject to
maintaining acceptable risk control standards, an FMI
should endeavour to set requirements that have the least-
restrictive impact on access.
3. An FMI should monitor compliance with its participation
requirements.

3. FPS (UK)
Why?
In UK, Financial Market Infrastructure (‘FMI’), the Scheme

adheres to CPMI IOSCO Principles, with regard to Access
(Principle 18) → Opening the e-Payment
infrastructure to new players

Direct Participant Payment Flow Schematic
The payment routing of a typical Faster Payment that has been originated by Participant Bank A’s
customer to Participant Bank B’s beneficiary.
1. Customer of Direct Participant A initiates a Faster Payment Instruction to credit Customer of Direct Participant B
2. Direct Participant A sends Faster Payment Message to credit customer of Direct Participant B
3. Direct Participant B responds in Real-Time either acknowledging or rejecting payment request from Direct
Participant A
4. If acknowledged, Direct Participant B credits its customers account accordingly (normally real-time or up to 2
hours subjects to relevant fraud checks etc..)
5. Direct Participant A advises payment fate to its customer (whether its been acknowledged or rejected by Direct
Participant B)

Aggregator A represents a “banking
platform provider” adding Faster
Payment functionality to their existing
accounting platform technology, by
either building or licensing a solution
from another vendor.
Aggregator C is a multi-tenanted
solution, focused on delivery of Faster
Payments to multiple PSP participants.
Aggregator B is a single tenant
Aggregator D s a multi-tenanted solution, solution, where a vendor is providing a
supporting all payment types, for multiple managed solution for a single provider.
PSP participants The Scheme recognises that some
Copyright 2021 © Dr. Hilton Chan Participants may want their own105
instance of such a solution.
This schematic shows Aggregator D from the previous diagram in more detail. The methods of connectivity
(both into and out from the Aggregator) are in the competitive space; but must be able to conform with the
Scheme’s requirements regarding availability and speed of messaging.
Within the Aggregator, we would expect to see modular applications, allowing PSPs to pick and choose from
a menu of options that best meet their needs.
Direct Participant offering sponsorship services

Barclays as an example
Indirect Access
• We support payment service providers (PSPs) seeking to provide their
own customers with services to transfer funds within the UK. We do so
by providing PSPs with indirect access to the UK payment schemes.
Barclays subscribes to the voluntary Code of Conduct for Indirect
Access Providers from 30 September 2015.1
Indirect PSPs fall into two categories:

• Agency Bank: these PSPs are provided with their own sort code and
provide their customers with their own unique account number on that
sort code
• Non-Agency: these PSPs are provided an account in our books and
typically identify their underlying beneficiary customer for payments by
the reference in the payment instruction.
Copyright 2021 © Dr. Hilton Chan
108
Barclays as an example
Agency Banks benefits:
• Settlement Account with Barclays in the name of the institution
• Provides access to the UK clearing systems, Faster Payments, Bacs,
CHAPS and Cheque & Credit via a unique sort code in the name of the
Agency Bank
• Enables an organisation to project the image of being a UK clearing
bank in its own right and if transferring to Barclays to continue to use
their existing sort code(s) in most circumstances
• Provides the advantages of access to the UK clearings without the
higher costs and operational challenges of being a direct member.
Non-Agency benefits:
• Make and receive a variety of payments from their Settlement Account
with Barclays
https://www.barclayscorporate.com/products-and-solutions/cash-management/indirect-access.html
Barclays and HSBC sponsor for indirect access
Why?
What is your view of their offer – sponsorship for

indirect access?

environment
Faster Payment System (HK)

3. FPS (Hong Kong)
Addressing service allows users to link his/her email, mobile phone or FPS
identifier (ID) with his/her bank accounts.
https://www.hkma.gov.hk/media/eng/publication-and-research/quarterly-bulletin/qb201809/fa2.pdf

3. FPS (Hong Kong)
Real-time credit transfer such as P2P, B2B and person to merchant (P2M),
allowing banks and SVF operators to develop different front-end
applications to meet customers’ needs.

3. FPS (Hong Kong)
Real-time direct debit allows pre-authorized direct debit payment such as
e-wallet top up, bill payment and e-commerce payment.

3. FPS (Hong Kong)
Liquidity arrangement:
1. All licensed banks are required to maintain an RTGS (real-time gross
settlement model) ledger account and an FPS ledger account.
2. Banks are required to set parameters, i.e. minimum balance,
maximum balance and optimal balance for their respective FPS
accounts
3. During RTGS opening hours, an auto-sweeping mechanism (HKD and
RMB now; and other currencies in future) to support liquidity transfer
between RTGS and FPS accounts.
4. When the RTGS closes, all the remaining balances will be transferred
to FPS account to provide liquidity for the FPS at nights and during
weekends and holidays. When the RTGS opens, the excess balance
over the optimal balance will be automatically transferred back to the
RTGS account

3. FPS (Hong Kong)
Liquidity arrangement:

3. FPS (Hong Kong)
What are the benefits of FPS?
Comparing the design and implementation of FPS HK with

FPS UK and the WeChat pay, how are they different?
(Class Discussion)

4. Digital-ID to Digital-ID (non-traceable) ePayment
in an “untrusted” environment
Crypto-currencies, Crypto-tokens, etc.
Will be discussed in Class 6

Future Banking Services

Future Banking Services

Case Studies
– Facebook

Q&A

Food for Thought
(Final Paper Topics)

Case analysis of the FPS next journey
Final paper
Analysis the FPS infrastructure:-
BITD model
Business-IT architectural design
Impact to the Financial value chain

AI Banking: rule-based vs. non rule-based
Hong Kong Monetary Authority, “Reshaping Banking with Artificial Intelligence”, 2019.
(https://www.hkma.gov.hk/media/eng/doc/key-functions/finanical-infrastructure/Whitepaper_on_AI.pdf)
Unmanned bank, Smart banking, AI banking
From the lesson we learned from unmanned shop, what is
your view about “future banking”?

Digital Currency Electronic
Payment

DCEP in China
Background
• World’s first Central Bank Digital Currency (CBDC)
• Blockchain and cryptographic technology
• Stable crypto-token, NOT listed on cryptocurrency
exchanges
• With a view to increase RMB circulation and
international acceptance like USD, EUD, etc.
Why launching DCEP?

DCEP in China
https://boxmining.com/dcep/
DCEP in China
DCEP – two-tiered system
DCEP in China
Future of DCEP?

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FINA 5260

The Future of Financial Industry

Prof. Hilton Chan, PhD

Copyright 2021 © Dr. Hilton Chan 2

Innovative New FinTech

Copyright 2021 © Dr. Hilton Chan 3

Innovative New FinTech

Copyright 2021 © Dr. Hilton Chan 4

Copyright 2021 © Dr. Hilton Chan 5

If there is no difference, why issue “Virtual Banking”

Copyright 2021 © Dr. Hilton Chan 7

No physical office for virtual banks.

How to open a bank account online?

(Class Discussion) Copyright 2021 © Dr. Hilton Chan 8

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For a virtual bank in Hong Kong, who can enjoy its

• Hong Kong residents

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• OAuth 2.0 will be adopted for authentication

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for eID user.

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Any AI application in banking?

What are the challenges when deploying AI?

Copyright 2021 © Dr. Hilton Chan 24

Managing AI project risks:

1. Interpretability and Explainability

……. Any more?

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Examples of the banking initiatives in FinTech

Examples of the banking initiatives in FinTech

Copyright 2021 © Dr. Hilton Chan 31

1. Winning the consumer trust is not easy

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FinTech innovation in three ways ……..?

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Back to the old days direct person-to-person barter system

Can we replace the existing bank payment system

2. Digital ID to Digital ID ePayment in an

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4. Digital ID to Digital ID (non-traceable)

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Innovative Integration Innovative

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Innovative Integration → Data analytics Innovative

What happen to your digital asset (data)?