Taiwan’s Conservative Fintech Revolution  

Banks remain cautious about embracing full-throated digitization.

Customers of Taiwan’s domestic banks sometimes feel like they’re in a time warp.

Basic savings accounts often are not automatically equipped with online banking – customers have to request that service. And in many cases, the standard means of tracking account activity is a passbook that must be updated with a temperamental stamping machine. When the machine doesn’t work, customers have to ask a bank teller to update the passbook for them – not exactly an optimal use of resources.

Global banks largely phased out passbooks around the beginning of this century. In a January interview with Bankrate.com, Sam Kilner, a director at banking consultancy Cornerstone Advisors, said: “Passbooks date back to a time when that was the accounting – there was a physical book at the bank, and there was a physical book with the customer.”

But the Taiwan financial industry changes slowly. That conservative mentality helps explain why the island has failed to embrace fintech – cutting-edge financial technology – with alacrity. Research by the Taipei-based China Credit Information Service shows that Taiwan’s financial holding companies spent just NT$1.25 billion (around US$42 million) on fintech development in 2016, a paltry 0.37% of the US$11.2 billion spent in Asia that year.

It’s not simply a regulatory issue, although regulatory reform to spur fintech could surely move faster. The banks themselves have been ambivalent about how digital technology can boost their bottom lines. “A lot of local banks don’t understand fintech yet,” says Hank Huang, a financial policy expert and president of the Taiwan Academy of Banking and Finance (TABF), a training and research organization. “Management tends to be conservative, so it’s hard to push them.”

For that reason, the Financial Supervisory Commission (FSC) launched its Bank 3.0 initiative last year in a bid to accelerate digitization of the local banking sector. It approved the digitization of 12 financial services, including online applications for low-risk retail banking products, loans, and wealth-management services. The financial regulator is encouraging banks to adopt mobile payments services as well.

Recent legislation may help boost fintech’s development in Taiwan. In December, the Legislative Yuan passed the Financial Technology Innovation Experimentation Act, creating a regulatory sandbox designed to allow fintech startups room for experimentation without falling afoul of existing regulations.

According to the statute, companies that pass an assessment conducted by a review committee under the FSC’s auspices will be allowed to use the sandbox. The committee must decide within 60 days if a company’s project qualifies for the sandbox. If the project is approved, the firm will have 18 months to conduct trial runs. With the FSC’s approval, the trial can be extended to a maximum of 36 months. The Commission will begin accepting applications for sandbox projects at the end of this month.

Lawmakers say that the bill augurs good prospects for fintech development here. Democratic Progressive Party legislator Karen Yu, who sponsored the bill, has described it as the world’s first law formally establishing a fintech regulatory sandbox. (In some other countries such as Singapore, a sandbox has been introduced through guidelines without being codified into law.)

As Yu wrote in a December post on her personal website, the top beneficiaries of the law are expected to be non-financial players who wish to become involved in the financial industry. Unencumbered by typical licensing requirements, non-financial tech firms will be able to use the sandbox to prove the viability of their business models and obtain government support, she says.

Chinese Nationalist Party (Kuomintang) legislator Jason Hsu, a key backer of the bill, has urged the FSC to provide abundant space for fintech to grow in Taiwan. He says he is working with the FSC and the Taipei City government to make the city a fintech hub.

Playing catch up

Passage of the sandbox law signals strong government support for a promising nascent industry in Taiwan. Yet the law alone will not be enough for Taiwan to develop into a fintech hub.

Banks need more education about the potential benefits they can derive from fintech, and how to cope with the challenges it poses. Conventional wisdom holds that fintech will take over certain banking services, such as payments, deposits, and lending. In Asia, that could hit banks in Hong Kong, South Korea, and Singapore hardest, according to a December report by the Monetary Authority of Singapore (MAS).

The reasons is that banks in those markets rely largely on payment income fees to support their operating costs, according to a December report by e27.co, a technology news site. If fintech firms continue to lower transaction and payment fees, an important current income stream for banks may dry up over the next five years, the report says.

MAS sees opportunity for banks in fintech as well. “Those that adopt a digital model successfully could perform better than those that do not,” the Singapore financial regulator said.

Indeed, if banks merely view fintech startups as rivals, opportunities for cooperation will be squandered. “Taiwan should encourage banks to learn more about how fintech and leveraging the latest technologies, including blockchain, can help them grow,” says Carl Wegner, head of Asia business development for blockchain firm R3. The New York-based company leads a consortium of the world’s top financial institutions in research and development of distributed ledger usage in the financial system.

The better that Taiwanese understand fintech and distributed ledger technology, the more they can leverage it to their advantage, for example in aiding their expansion into Southeast Asia, Wegner says. Digital banking, especially mobile payments, is ascendant in Southeast Asia. Smartphone penetration in Thailand, the Philippines, Malaysia, Singapore, Vietnam, and Indonesia is forecast to exceed 70% by 2021, according to research firm Euromonitor.

The Singapore government has been able to directly facilitate cooperation between banks and fintech firms. In a December report KPMG noted that fintech firms in Singapore are focusing on building partnerships with existing market players instead of “disrupting” the market.

Singapore has become a fintech hub in Asia, attracting US$229 million in funding last year. Prominent venture-capital funds, large global corporations, and established fintech firms have all invested in Singapore or set up a physical presence there to springboard into Southeast Asia, the KPMG report said.

TABF’s Huang expresses confidence that adoption will grow quickly if Taiwanese banks embrace the goal of developing fintech. He notes that Taiwanese consumers, especially the young, are extremely open to new technology. “We can see from the fast growth of e-commerce, smartphones, and messaging apps that Taiwanese are very willing to adopt new internet technology,” he says. “In Taiwan, the consumer is often more forward-thinking than the service provider.”

Huang urges banks not to overlook the opportunities fintech offers. As a case in point, he notes that a Taiwanese software developer created an early version of what became Chinese internet giant Tencent’s QQ messaging app. Today QQ has 861 million active users and is part of a company with a market valuation of half a trillion U.S. dollars.

The software developer first tried to sell the messenger service to one of Taiwan’s largest telecom firms, Huang says. “The telecom company wasn’t interested. They thought that if they offered the messenger service to customers, nobody would pay for text messages. The developer ended up selling it to Tencent instead.”