Success as a virtual bank in Taiwan would bring the Japanese messaging app closer to super app status

In Taiwan, Japanese messaging app LINE is best known for its cartoonish stickers of furry creatures. LINE’s emojis telegraph the kawaii (literally “cute” in Japanese) culture of Japan many Taiwanese adore. Once hooked on the free stickers, users start paying to build a bigger collection. They might also use the LINE app to shop or watch television.

LINE is not stopping there, though. It wants to bring digital banking to its 187 million users, 21 million of whom are in Taiwan. “Fintech is among the best means of monetization for platform companies,” says Zennon Kapron, director of Singapore-based Kapronasia, a research firm. “Going beyond payments into wider retail banking would allow LINE to generate much more value from its user base.”

Taiwan is integral to LINE’s fintech aspirations. The island country is wealthy, has high internet connectivity and smartphone penetration, and its consumers are eager to try more LINE services. About 91% of the population uses LINE, and its digital wallet LINE Pay is the market leader in mobile payments with a 27.3% market share, according to the semi-governmental Market Intelligence & Consulting Institute (MIC).

Having been approved for one of three digital-banking licenses from the Financial Supervisory Commission (FSC) last year, LINE is planning to launch LINE Bank in the second quarter, with its fintech arm, LINE Financial, holding a 49.9% stake. LINE Bank will compete against Chunghwa Telecom-backed Next Bank and Rakuten Bank, backed by the Japanese e-commerce giant.

If LINE Bank is successful, it will be a watershed moment for Taiwan’s financial sector. The industry has been online for decades, and almost all retail banks offer mobile apps to their customers. Yet no technology company has gained a substantial footprint in the Taiwanese financial sector.

There is a catch: the FSC requires virtual banks to work with existing financial services providers. “It’s a joint-venture model,” says Ryan Terribilini, founder of Taipei-based Formosa Financial, a digital asset management company. “The regulators want to give incumbents a chance to experiment with a more innovative banking model.”

The FSC’s approach to virtual banking is “somewhat open-minded” in that the structure of the three virtual banks’ shareholding is “pretty diverse,” says Jessica Liu, a partner at Taipei-based AppWorks, one of Asia’s largest accelerators.

LINE Bank’s main partners include four financial institutions and two telecoms. Taipei Fubon Bank holds a 25.1% stake, while CTBC Bank, Union Bank of Taiwan, Standard Chartered Bank, Taiwan Mobile, and Far EasTone each have 5%.

“Leveraging services provided by these six partners, LINE Bank aims to develop a common portal while the company can leverage its partners’ expertise in risk control, financial product designs, legal compliance, and money-laundering control,” says Alex Chu, an MIC industry analyst.

LINE Bank will start from a strong position thanks to the prevalence of LINE Pay with its 6 million users and 120,000 merchant partners, including leading Taiwanese e-commerce platforms like PChome, Shopee, and Yahoo. LINE Pay has been successful with Taiwanese consumers in large part because of its credit cards, co-branded with local banks, that offer generous cash-back incentives. Credit cards are by far the most popular cashless payment option in Taiwan.

LINE will target Taiwan’s retail banking market. The idea is to provide consumers in the LINE ecosystem with a wide array of conventional financial services such as deposits, loans, payments, and insurance, as well as some innovative services such as bill-splitting and tourism advice.

This strategy mirrors that of the Chinese super app WeChat (owned by Shenzhen-based Tencent Holdings), but without lending services for small- and-medium-sized enterprises. WeChat launched its fintech business in 2013 with a basic digital wallet before rolling out a much larger suite of services.

WeChat’s digital bank, WeBank, founded in late 2014, offers wealth management and financing services through different digital platforms. It currently has a valuation of US$21 billion, making it one of the world’s most valuable fintech unicorns.

Once WeChat became a digital bank, its users had much more reason to spend time in the app. The timing was right, too. As WeChat became the dominant messaging app in China, building a user base of more than a billion, China moved swiftly to embrace cashless payments.

Taiwan has been late to the cashless game but picked up the pace in the past few years on the back of growing consumer acceptance of mobile payments, plus government efforts to encourage reduced reliance on cash. Mobile-payment penetration reached 62.2% in 2019, up more than 10% year-on-year, according to government data.

Standing out in the crowd

Despite its strong positioning, LINE Bank may find Taiwan a challenging market to break into. Put simply, Taiwan is overbanked. Its retail banking market is among the most saturated in the world. Roughly US$1.6 trillion in assets – about the same as what Citigroup alone holds – is spread out among 37 different banks. The banks all have their niches, but the market is not large enough for them to grow meaningfully.

The FSC urges consolidation but does not go further than that. Twelve mergers or acquisitions have occurred since 2004, but most have been too small to make a big impact on the industry landscape. The M&A cases have brought Taiwan from 49 banks to 37 – still far too many for its market size. Market insiders say that labor-union resistance has prevented the large-scale consolidation that Taiwan’s banking industry needs to boost competitiveness.

At the same time, the FSC is wary about disrupting the banking sector with digital upstarts. They will be permitted in Taiwan, but with some caveats. For one thing, neobanks are forbidden from acquiring a traditional bank, which will frustrate efforts to fast-track growth. Nor are they permitted to open retail outlets. At first blush, that seems reasonable for a business that is “digital” or “virtual.” The problem is that some customers may want the option of opening an account or speaking to a customer service representative in person.

If virtual banks want to eventually compete in wealth management services, which often involve large transactions, being branchless could be a big disadvantage. “There’s a fairly restrictive environment for banking in Taiwan which limits how far it is possible to go with innovative banking services,” says Formosa Financial’s Terribilini.

LINE Bank is betting on technology to give it an edge over the competition, particularly in consumer lending. With its large user base, LINE Bank will have troves of user data at its disposal – data that can be analyzed by artificial intelligence applications to make product recommendations to customers, observes Jon Jones, co-founder of Taipei-based blockchain firm Unitychain.

More data should allow the AI tools to better target users’ preferences, resulting in their spending more time in the LINE app. In that way, “the platform will become much stickier,” Jones says.

Recognizing that young Taiwanese – who have not had time to build credit – struggle to get conventional bank loans, LINE Bank is also developing its own model for assessing borrowers’ credit.

“It is a sore point for young consumers, so we will take the initiative by inviting them to use our model,” Morris Huang, chief executive of LINE Bank’s preparation office in Taiwan, said at a press conference last year.

LINE Bank’s model will not be used by any other institutions and is not intended to replace Taiwan’s standard means of credit scoring used by the Joint Credit Information Center, the company says. The JCIC model provides card issuers with detailed information on an applicant’s credit history and ability to repay loans.

Besides Taiwan’s traditional banks, LINE Bank must contend with the two other recipients of virtual bank licenses. Next Bank can tap principal shareholder Chunghwa Telecom’s 10 million subscribers, and its consortium also includes three financial institutions and the grocery retailer PX Mart, which has 9 million members.

Then there is Rakuten Bank, which is Japanese like LINE but targets a different demographic. With its 21 million users in Taiwan, LINE is casting a wide net. Rakuten, in contrast, is targeting existing users of its e-commerce platform in Taiwan, many of whom are working professionals aged 25 to 50 who spend a lot of time on their smartphones and have an affinity for Japanese products, says MIC’s Chu.

Rakuten is the only one of the three virtual banks with significant financial industry experience. It set up in Rakuten Bank in Japan in January 2000 and has about 7.2 million users.

Compared to Next Bank and Rakuten Bank, the stakes for LINE are higher. The non-banks holding majority shares in Next and Rakuten are established profitable companies. But LINE went public only four years ago and is under pressure to show investors it has a sustainable business model. In the fourth quarter of 2019, LINE posted an operating loss of 11.5 billion yen even as revenue increased 8.6% year-on-year to 60.8 billion yen.

Without establishing a bigger fintech business, LINE’s growth prospects are limited. Stickers, advertising, and media only go so far, especially when user growth is stagnant. LINE’s quirky messaging app has a loyal following in Japan, Taiwan, Thailand, and Indonesia – but that’s it. China has WeChat, South Korea has Kakao, and the rest of the world uses WhatsApp and Facebook Messenger.

Taiwan is the only one of LINE’s markets where it has secured a digital banking license. If the company could become a preferred bank for a significant portion of its Taiwan user base – people who already use the app to chat with friends, conduct business, shop, and watch television – it would have a shot at becoming Taiwan’s first super app. That would be an impressive feat, and just might help Taiwan mint its first billion-dollar startup.