So far, regulators have been more concerned about the risks of financial innovation than the rewards.
Financial industry observers see big potential for Taiwan in the nascent fintech sector, citing the ways in which emerging technologies could help the banking and insurance components of the nation’s financial conglomerates share information safely and efficiently.
A special characteristic of the Taiwan market is that many of its largest banks, insurance companies, and securities firms operate under the umbrella of a financial holding company, observes Carl Wegner, director of Greater China business development for R3, a New York-based financial technology consortium created by more than 70 leading global financial-services companies. For Taiwan’s financial institutions, he says, new distributed ledger technologies such as blockchain “represent an outstanding opportunity for cost savings” in that they allow the sharing of client information while still maintaining the security controls needed to comply with data privacy laws.
Acknowledging the disruptive nature of some of the new financial technology, Wegner urges regulators to “actively learn” about fintech, a fast-growing industry that saw almost US$25 billion in global investment last year (including US$7.1 billion in Asia), according to a February report by KPMG. “To make judicious decisions, you need to first understand how this technology works, how it’s going to change the playing field, and why it can be good for both businesses and consumers,” he says.
Yet to date, Taiwan’s regulators have focused on managing the risks they see fintech posing to the economy rather than on maximizing the benefits it could bring. Noting concerns about money-laundering and the financing of terrorist activities, the Financial Supervisory Commission (FSC) said in an October statement: “Financial service providers should take risk management as the priority task and promote fintech development in compliance with international regulations.”
The FSC added in January that it is prioritizing the implementation of a “regulatory sandbox” (meaning a safe space for innovation) that would enable both financial institutions and fintech developers to test new products and services for a trial period of up to nine months. Participating developers would be relatively unconstrained by regulations that ordinarily apply to the financial sector.
It remains unclear when Taiwan’s regulatory sandbox will come into effect. The island is well behind its neighbors; Singapore, Hong Kong, Malaysia, Thailand, and Indonesia all set up fintech regulatory sandboxes last year. But the FSC said in an e-mailed response to questions from Taiwan Business TOPICS that it hopes Taiwan’s fintech regulatory sandbox could be implemented this year. Authorizing legislation has gone to the Legislative Yuan and passed its first reading on March 17.
“Fintech is developing slowly in Taiwan,” says Lee Cheng-hwa, an industry analyst at the state-backed Market Intelligence & Consulting Institute. “The government aims to protect the finance industry and consumers and prevent online finance risks like China’s peer-to-peer (P2P) loans from happening.” Those loans have been riddled with scams.
Jamie Lin, co-founder of the Taipei-based accelerator AppWorks and an expert on internet technology, says that the FSC worries that deregulation of the financial sector – coupled with the introduction of disruptive technologies – would facilitate a rise in financial crime at a time when the regulator is striving to keep Taiwan from being named a money-laundering country by a major regional watchdog. Taiwan has been on the watchlist of the organization – the Asia/Pacific Group on Money Laundering – since 2007.
“The FSC can’t see a reward that’s big enough for them to justify the risk,” Lin says. “If Taiwan is labeled a money-laundering country, it’s going to hurt the economy.”
In the view of the FSC, Taiwan would be less attractive as a destination for foreign investment if it is named as a high-risk money-laundering country, and Taiwanese banks would have more difficulty working with foreign counterparts.
Money laundering came to the public’s attention last year when New York State’s Department of Financial Services fined Mega International Commercial Bank’s New York branch US$180 million for violating money-laundering laws, among other offenses. In December, Taiwan’s prosecutors indicted former Mega Financial Holding Co. chairman Mckinney Tsai on charges of forgery, insider trading, and money laundering. If convicted, Tsai could be sentenced to 12 years in prison. [On March 15, the Executive Yuan established a specialized anti-money-laundering office].
The problem stems from weak money-laundering legislation. In a December opinion piece published in the English-language Taipei Times, Carol Lin, an associate professor at National Chiao Tung University’s Graduate Institute of Technology Law, notes that penalties for violations are mild under the Money Laundering Control Act. The law does not punish failed money-laundering attempts, and it does not enable authorities to fully seize illegal profits.
Given Taiwan’s money-laundering travails, “The FSC is in no mood for deregulation of financial services,” says Jamie Lin. “But fintech can’t flourish without a key change in existing regulations: Firms which are not financial institutions must be allowed to engage in banking activities.”
Exceptions to the rules
In a November report, consultancy McKinsey & Company highlighted the fast-growing range of fintech products and services, which has expanded to cover retail banking, wealth management, small-and-medium-sized enterprises, corporate and investment banking, and insurance. Among emerging areas of fintech, blockchain technology has especially strong potential, said Don Tapscott, CEO of the Tapscott Group and co-author of Blockchain Revolution, in an interview with McKinsey last May. Tapscott describes the blockchain as “an immutable, unhackable distributed database of digital assets…The implications are staggering, not just for the financial-services industry but also right across virtually every aspect of society.”
R3 has emphasized blockchain’s cost-saving potential. By 2022, reckons law firm White & Case, the technology could trim banks’ infrastructure costs globally by US$15-$20 billion a year.
MIC’s Lee notes that blockchain technology has gained widespread credibility within the global financial services sector. As a result, “Taiwan has no reason not to tap blockchain’s opportunities,” he says, adding that the government is in the process of developing relevant policy.
Tracy Li, a partner in KPMG’s Taiwan office who leads its fintech services here, sees strong prospects for Taiwan in blockchain. “Our resources can support the blockchain model,” she says, noting Taiwan’s strong talent pool of engineers. “The government should push for Taiwan to become a regional blockchain hub.”
In December, Microsoft announced that it was partnering with local blockchain solutions startup Amis and the Industrial Technology Research Institute (ITRI) on a pilot blockchain consortium project based on its Azure cloud platform. Consortium members include Fubon Financial Holding, Cathay Financial Holding, MegaBank, KGI, Taishin Bank, and CTBC Bank.
“At the moment, companies incur high costs when they perform any cross-organization transactions and this can be solved using blockchain technology,” explained Danny Ting, Microsoft Taiwan’s National Tech Officer, in a statement.
The FSC may be even more interested in blockchain’s anti-money laundering applications. Since the technology stores all transaction records across a network, duplication – and the consequent risk of fraud – is reduced. In a November post on the Global Anti-Corruption Blog, Christoph Nedopil, a consultant at Hong Kong’s International Finance Corp., wrote that “transferring money with blockchain technology…is like being able to look at the serial number on every dollar bill and identify every person who has ever held that dollar, as well as when, where, and why it changed hands.”
Bitmark Inc., a Taiwan-based blockchain startup for digital property, raised US$1.7 million in November in a seed funding round led by Cherubic Ventures. Bitmark bills itself as a pioneer in establishing ownership of digital assets. By issuing property titles (“bitmarks”) for user-generated content and data, the company’s users establish ownership claims. When a user issues a bitmark for a digital asset, that user “asserts an exclusive ownership claim,” the company said in a November press release.
Cherubic Ventures’ Matt Cheng said in the press release: “If you could put your stamp of ownership on everything you created and suddenly there was no disputing that it was yours, wouldn’t you?”
P2P is another area of fintech with strong potential for Taiwan. Because private lending is governed by the nation’s Civil Code, it does not require regulatory approval. Informal lending services like biaohui (rotating mutual credit) and pawnshops have long existed here.
“As long as peer-to-peer lending does not cross the red line” of either encroaching on traditional financial institutions or coming under existing regulations, “regulators will allow it to develop here,” says MIC’s Lee.
Taiwan’s first peer-to-peer lending service – lend.com.tw – launched in March 2016. At a press conference held to coincide with the launch, Lend’s chief executive officer Tony Huang said the company was pushing to “democratize finance” by offering more favorable returns for lenders and better terms for borrowers. Huang pointed out that savers earn interest of just 1.2% on their deposits in local banks. Banks, meanwhile, charge 15% for credit-card financing.
Taiwanese startups are moving into mobile payments as well. In December, Taipei-based Installment, Inc. announced that it would launch a mobile P2P lending app called INSTO in 2017. The company says that INSTO’s ability to offer automated recurring payments and installment payment plans makes it unique in the mobile P2P lending segment. Installment, Inc. aims to allow consumers to make installment payments for big-ticket items not covered by banks and credit cards.
Atypically for a Taiwan startup, Installment, Inc. has global ambitions. It is working with CTBC Bank to bring INSTO to Southeast Asia, and plans to launch it in both the United States and France as well. Investors have taken note. Installment, Inc. raised US$1.9 million from Silicon Valley investors last year and US$600,000 in pre-series A funding from local software maker Systex Corp.
Meanwhile, Pchome, Taiwan’s online marketplace, hopes to develop a dedicated P2P lending platform to add to its offerings. For individuals without physical assets such as a house or office, lending conditions from local banks are unfavorable, says Jamie Lu, PCHome’s marketing manager. “Taiwanese banks still think about this in a very traditional way,” she says. “They ask e-commerce sellers to show them a physical store. If you can’t do that, they may still offer you the loan – but with very high interest.”
PChome could help meet the lending needs of the underserved small-business and individual e-commerce markets, she says. The company has requested permission from the regulators to operate a P2P lending service, but approval has yet to be granted, Lu says. When asked how PChome would evaluate the creditworthiness of borrowers, she points to the company’s detailed user data, which enables it to view all transactions conducted on its online marketplace.
“We can see how large a seller’s store is, what has been sold in the store, and at what price, and the feedback on the seller, such as whether items are shipped on time and are as described,” she says. “That data is more than enough for us to evaluate someone for a loan.”
Need for speed
Even in the area of P2P lending, which at present is beyond the control of regulators, the FSC has sounded warning bells. At the lend.com.tw press conference last March, Banking Bureau Deputy Director-General Lu Hui-jung reminded would-be P2P entrepreneurs that P2P services would be violating the Banking Act if they accept deposits or handle remittances. Managing trust funds or public property under mandate is also off limits.
In an e-mail to the FSC, Taiwan Business TOPICS raised the question of whether the fintech policy is overly focused on risk management and consumer protection to the detriment of fostering innovation. The Commission responded that it is “referencing other country’s [fintech] blueprints” as it develops policies related to promoting innovation. “Based on how many people will be impacted by the innovation, the FSC will evaluate how much restriction should be imposed case by case,” the reply said.
Jason Hsu, a Chinese Nationalist Party (Kuomintang) legislator, says bureaucratic inertia could harm Taiwan’s opportunities in the current wave of emerging technologies, including fintech. To begin with, “many of our government officials are unfamiliar with internet technology; their lives aren’t digitized to the same degree as the rest of us,” he says. As a result, they may not have a good understanding of the benefits the technology offers. At the same time, “bureaucrats lack motivation to change.”
Hsu is skeptical as to whether the FSC is the proper governmental organization to lead the development of Taiwan’s fintech sector. “The FSC is focused on controlling risks in the financial sector,” he says. “What we need is a Financial Technology Development Council whose mission is to build up the fintech industry.”
In developing fintech, Hsu says Taiwanese officials can learn from their Singaporean counterparts, who have helped Singapore quickly emerge as the leader in the race to become Asia’s fintech hub. “Singapore’s bureaucrats are like good salespeople,” he observes. “They go around the world promoting their country.”
The Monetary Authority of Singapore (MAS) believes banks can reduce costs and develop new revenue streams by integrating fintech products into their existing infrastructure. The idea is that instead of disrupting the banking system model, fintech should enhance it.
Anson Suen, founder and chief executive officer of the Hong Kong-based trade finance startup FundPark, lauds the Singaporean approach to developing fintech. “Singapore regulators first talked to banks and asked them in which areas of their business they needed help,” he says. “Then the regulators went to the startups and said, ‘if you can offer the banks what they need, we’ll link you up with them.’ Isn’t that smart?”
At the same time, Singapore has made an excellent case for itself as a fintech hub thanks to a focus on providing a regulatory environment friendly to innovation. In its Fintech Regulatory Sandbox Guidelines published in November, the MAS wrote: “In circumstances where it is less clear whether a new financial service complies with legal and regulatory requirements, some FIs or start-ups may err on the side of caution and choose not to implement it. This outcome is undesirable as promising innovations may be stifled and this may result in missed opportunities.”
With that in mind, Singapore’s regulatory sandbox allows both financial and non-financial firms to experiment with “innovative financial services.” While everything is subject to MAS approval, the guidelines do not explicitly prohibit any particular type of experimentation.
In contrast, the FSC said in January that certain regulatory lines could not be crossed – even in an experimental setting. For instance, both Taiwanese securities firms and fintech startups have expressed an interest in using artificial intelligence (AI) – robo advisory systems that with little human input provide automated recommendations at a lower cost than a human asset manager – for the purpose of wealth-management services. The FSC has said only that it would study the introduction of such services.
Some entrepreneurs aren’t waiting around for a green light from the FSC. Meet, an English-language startup news site published by Business Next, reported in October that local fintech entrepreneur Ku Chia-chi moved his AI advisory firm to Singapore to join the StartupBootcamp FinTech accelerator. The flagship product of Ku’s company is an AI-powered investment analysis system that follows stock markets and makes recommendations to investors.
Ku praised the business environment in Singapore. Firms in Singapore “aren’t afraid to do R&D on AI financial analysis,” he was quoted as saying. “We aren’t burdened or restricted.”
Legislator Hsu urges the Taiwanese government to move swiftly to capitalize on opportunities offered by fintech. When it comes to succeeding in the digital economy, “speed is everything,” he says. “If we don’t move quickly, we’re going to be left behind just like we were in the earlier waves of internet technology development.”
Says R3’s Wegner: “Taiwan needs to ask itself whether it wants to be an influencer in the fintech industry – whether it wants a seat at the table to decide industry standards. If that’s the case, then being a fast follower is not an option.”