Updating Taiwan’s Banking System with Fintech

The Financial Supervisory Commission’s new action plan includes goals related to data liberalization, encouraging disruption and innovation, and talent development.

Speaking at the Taiwan Capital Market Forum last August, President Tsai Ing-wen disclosed some startlingly ambitious plans to transform Taiwan into an Asian financial hub.

“We are going to make Taiwan the number one center in Asia for capital movement and establish ourselves as a wealth management center,” said Tsai. “This means loosening rules and providing more diversified financial products and services.”

Tsai’s rousing words seem to be at odds with Taiwan’s currently overcrowded and old-fashioned banking environment. Bank passbooks updated by dot-matrix printers are still the norm, and foreigners often complain of having to jump through arcane hoops just to get fairly standard service.

“I’ve had an account at Mega Bank since 1996,” says Anthony van Dyck, a Canadian entrepreneur and resident of Taiwan since 1989. “I had to wait half a year before I could have online banking services for my company, whereas an 18-year-old Taiwanese would have gotten it the same day.”

Alex Liu, CEO of cryptocurrency trading platform MaiCoin, on the other hand, is optimistic about Taiwan’s fintech potential in comparison with regional rivals.

“Taiwan has technological strength that Singapore or Hong Kong does not have,” says Liu. “We have a real economy that is three to four times larger. We can ground fintech across several technologies in a way Hong Kong and Singapore cannot.” To foster more innovation and liberalization, Liu has called on the government to step up the pace of fintech development.

Shortly after Tsai’s speech, the Financial Supervisory Commission (FSC) rolled out its three-year Fintech Development roadmap, which seeks to elevate Taiwan’s fintech environment by making financial services in Taiwan “more convenient, cost-saving, accessible and high-quality.”

Yet the roadmap, with its four objectives, three principles, and “sixty items in eight implementation dimensions” can appear a daunting document.

In an interview with Taiwan Business TOPICS, Brenda Hu, deputy executive secretary of the FSC’s Fintech Center, discussed what the roadmap boils down to for existing financial institutions, fintech startups, and the average Taiwanese consumer.

At the heart of the roadmap are provisions for data sharing. Without open data, the most exciting fintech innovations such as open banking and third-party service providers (TSPs) would not be possible. The roadmap will liberalize data sharing, but with a “tiered and gradual approach,” says Hu.

Right now, a holding company with a bank, a securities subsidiary, and an insurance arm cannot share data on the same customer from one unit to another. This creates “silos of information” that Hu says will be broken down under the roadmap.

Brenda Hu says that the FSC’s fintech roadmap will target data and innovation in the fintech space. Photo: Angelica Oung

“In the future, with the consent of the consumers, data can be almost freely shared,” Hu says. “This way, security measures such as KYC (Know Your Customer) will only need to be done once.”

While data liberalization is key to successfully transforming Taiwan’s financial industry for the digital age, Thomas McGowan, a foreign legal consultant with four decades of experience in Taiwan, says the kind of shift that is necessary to truly unleash the potential of fintech is also ultimately its biggest potential downfall.

“If you want to see fintech fail, have a massive data breach that can’t be fixed,” says McGowan. “All the folks that touch the data have an obligation to protect the data.”

To maximize both convenience and security, the roadmap calls for a standardized biometric verification mechanism called F-FIDO, which Hu says would solve the problem of repetitive data entry by financial consumers.

“We will use biometric technology such as facial recognition,” Hu notes. “Once the consumer enters the system, they will not be hassled again just because they are working with another institution.”

Although the roadmap is gradual, Hu admits that the end-point is ambitious. “After allowing sharing between subsidiaries within the same holding company, we will implement sharing between different financial institutions, and finally cross-market sharing,” she says. “For instance, an insurance company might want to share data with a medical company.”

In addition to the liberalization of data, there are many provisions in the roadmap to encourage innovation in the fintech space for Taiwanese startups.

“We are pro-innovation – in fact, we are pro-disruption,” Hu says. “It would be really fantastic to see a Taiwanese fintech startup do something truly eye-catching.” However, she notes that there are two prerequisites: The rights of the consumers must be protected, and the start-ups must not introduce systemic risk to the economy.

“Startups do tend to have a ‘move fast and break things’ attitude, but what we want to see when it comes to any kind of fintech startup is a ‘responsibilities first’ attitude,” Hu says.

To foster fintech startups while keeping them within the confines of the law, the roadmap called for the creation in Taipei of what is being called FinTechSpace. Hu describes it as “an incubator, an accelerator, and more.” She mentions that 55 FinTech partners are operating out of the space, which also provides one-on-one regulatory clinics, assists in fundraising and matchmaking, and houses the Digital Sandbox.

The FinTechSpace was created by the FSC to incubate and provide guidance to Taiwan’s fintech startups. It also houses the Digital Sandbox for innovative fintech solutions. Photo: FinTechSpace

The sandbox, which was launched in 2018, offers a platform through which fintech startups can experiment freely without threatening the wider financial system. The sandbox allows startups to operate without the usual licenses necessary to work within the realms of banking, securities, or insurance.

“They can hold up to NT$200 million if they convince us it’s legitimately necessary,” said Hu.

While the number of fintech startups that have taken advantage of the sandbox remains low, with only 15 applications as of the end of 2020, Hu says the success of the program doesn’t rest purely on how many companies enter the sandbox.

“Through the process of getting to know companies wanting to enter the sandbox, we’ve frequently been able to take care of the regulatory hurdles that stood in the way,” she says, pointing to the case of a company seeking to make fixed-term, fixed amount purchases of foreign mutual funds. “They don’t need to enter the sandbox because we are ready to amend related regulations to help them start their operations.”

There are other reasons, beyond tight regulations, why the Taiwanese fintech startup scene can appear relatively stunted, with more companies working on incremental rather than radical solutions, says Hu.

“The Taiwanese scene doesn’t have much in the way of angel investors interested purely in making great ideas happen,” she says. “Instead, most of the money going to fintech startups is from existing financial institutions.” Acknowledging the difficulty of getting funded, she says there may be room in the future for the creation of a fintech fund.

Hu adds that startups concerned about whether their product meets the criteria outlined in the roadmap should reach out to the FSC. “Laws and regulations can always be adjusted as long as you convince us you’ve got adequate provisions to meet our principles of security and stability,” she says.

The road ahead

Attorney McGowan says some parts of the roadmap are more likely to come to fruition than others.

“The good thing is that the drafters of the roadmap were very cognizant of the problems that are out there,” says McGowan, “Taiwan won’t meet all the challenges, but the glass is half or maybe even three-quarters full.”

He is particularly upbeat about the sections that address fintech talent and Taiwanese startups, calling the efforts “achievable.” One of these sections calls for a new fintech certificate in order to “cultivate professionals” with the skills to navigate the technical and security challenges of working in fintech.

“You’re taking engineers and teaching them how banking works,” he says.

The regulatory adjustment necessary to go from laws written for brick-and-mortar banks to a fintech world where “everything is done on an app” will be more of a challenge.

“All the rules were written for a brick-and-mortar world,” says McGowan. “The roadmap recognizes that it might be easier to build a new house than to fix the old one. But it will take time.” He says that top-down pressure helps, and that President Tsai’s emphasis on strengthening Taiwan’s financial services industry is a good sign.

As for Tsai’s ambitions of making Taiwan an alternative to Hong Kong as a regional financial hub? McGowan said it’s a goal that might become less relevant as fintech gains prominence.

“Fintech is by its very nature decentralized,” he says. “I could be in Afghanistan doing business with South Africa through Taiwan.”