Taiwan’s first two virtual banks have quickly accumulated customers, and the market is expanding with a third such bank on the way. But Taiwan’s oversaturated banking market will likely require that the digital lenders adopt new tactics and technologies to become truly competitive.
Taiwan’s financial industry is known for its conservatism. Firms and regulators alike are inherently cautious, and to the extent that innovation occurs in the Taiwanese financial sector, it is incremental and measured.
The emerging model for digital banking in Taiwan reflects this ethos. There are no virtual banking start-ups on the island in the traditional sense of the word. Rather, two of Asia’s largest platform companies and Taiwan’s preeminent telecoms provider have teamed up with some of the island’s most established incumbent financial institutions in three consortia that are licensed to provide banking services. There are, however, a few caveats: the digital banks cannot offer these services from physical branches, nor yet conduct business on the same scale as traditional banks.
Of the three licensed virtual banks, LINE Bank (in which Fubon Bank holds a 25.1% stake) and Rakuten International Bank (49.1% owned by IBF International Holdings) have been operating since early 2021 and have achieved good results. The third, Chunghwa Telecom-backed Next Bank, is expected to go live before the end of the second quarter.
At first blush, the digital lenders face an uphill battle in contending with one of the most oversaturated retail banking markets in Asia. Taiwan has 36 incumbent commercial lenders to serve a population of 23.5 million, and nearly 95% of the population has a bank account. Many people have multiple accounts because employers usually prefer to pay staff their salaries through the same bank the organization uses, which means that getting a new job often includes opening a new bank account as well. As a result, new market entrants must persuade their target customers to open what might be their fourth or fifth banking account, rather than a primary one.
But where digital banks have a clear advantage is in the functionality of their apps, says Zennon Kapron, director of Singapore-based financial services consultancy Kapronasia. “Taiwan may be overbanked, but the financial sector is under-digitized,” he observes, in reference to the aging legacy information technology (IT) systems of traditional lenders. “For people who spend a lot of time online, especially younger people, there is strong demand for banking services tailored to their lifestyles.”
Kapron says that in order to compete, Taiwan’s digital banks will likely try to provide services that are both cheaper and better than existing providers. “Cheaper services are relatively easy to fight, as most banks have a healthy margin that they can cut into to remain competitive,” he says. “Better services are a bit more challenging, as banks will need to have better technology platforms to provide a more compelling and engaging service. That technical agility is much more difficult to come by.”
Taiwan’s banks can sometimes seem to be operating in an earlier era. Last year, I visited the Taipei branch of a mid-sized local lender to reset my online banking password, a process that could only be done on a computer running the Internet Explorer 5.5 browser, which was released in July 2000. Meanwhile, bank branches close at 3:30 p.m. and do not operate on weekends, requiring customers to take time off from work or use their lunch hour whenever a visit to the bank is necessary.
Aware of these issues, regulators hope digital lenders can shake things up. “The opening of internet-only banks in Taiwan aims to bring a catfish effect [the impact of a strong competitor in inducing weaker rivals to improve] to the overbanked Taiwan market, with internet-based service and product innovation driving digital transformation,” says Lee Cheng-hwa, a senior industry analyst at the semi-governmental Market Intelligence & Consulting Institute (MIC).
While digital banks compete with incumbents, their business model is different thanks to the troves of user data at their disposal, notes Jessica Liu, a partner at the Taipei-based venture-capital firm AppWorks. “The most important thing about virtual banks is that they can design new products for customers based on their internet behavior,” she says.
Of Taiwan’s three digital lenders, LINE Bank is best poised to make waves in the banking market. Following a strategy pioneered by China’s WeChat and later refined by South Korea’s Kakao, LINE has built a formidable digital services ecosystem based on its popular messaging app. With more than 20 million users, LINE messenger is ubiquitous in Taiwan. Additionally, the e-wallet LINE Pay has about 10 million users, making it one of Taiwan’s largest third-party payment services. In the first nine months of 2021, LINE Pay recorded 146 million transactions valued at NT$68.2 billion (US$2.45 billion), up 90% year-on-year. LINE also offers e-commerce through collaborations with Momo and Shopee, as well as entertainment and food delivery through its app.
Since its launch in April 2021, LINE Bank has accumulated about 600,000 customers, a strong performance for such a short period of time. Crucially, it is zeroing in on the right demographic. About 75% of LINE Bank’s users are aged 20 to 40, the most digitally savvy among Taiwan’s population.
LINE’s large, highly engaged user base gives it a significant advantage, says AppWorks’ Liu. “If you are already using LINE’s app all the time, people feel it is intuitive to open a bank account within that ecosystem.”
The same holds true for Rakuten International Bank, which focuses on Taiwanese who use its popular e-commerce platform known for its extensive variety of products from Japan. In that sense, Rakuten International Bank is cultivating more of a niche market than LINE Bank.
LINE Bank will likely accept thinner margins from a larger customer base, while Rakuten Bank will have far fewer – at present just 63,000 accounts – but more profitable customers. Data cited by Taiwan’s Central News Agency (CNA) show that the average Rakuten Bank account balance is NT$84,000 (US$3,020) compared to NT$31,000 for LINE Bank. Although the latter has nearly 10 times as many customers as Rakuten, its total deposits are less than four times as large: NT$20 billion compared to NT$5.4 billion. Further, about a quarter of Rakuten’s customers have annual income above NT$1 million, the company’s general manager, Kazuhiko Saeki, told CNA.
Meanwhile, Taiwan’s third virtual bank will likely launch by the summer. Compared to Taiwan’s other digital lenders, Chunghwa Telecom-backed Next Bank has faced more obstacles in the approval process. The Financial Supervisory Commission (FSC) declined to issue Next Bank a license until it improved its cybersecurity and completed a management reshuffle. As a result, Next Bank received the license in late 2021, more than a year after the other virtual banks.
“The number of Next Bank’s founding companies is higher than the other two online banks, thus complicating the cooperation process,” says MIC’s Lee. “On top of that, Next Bank lacks a dominant player like LINE or Rakuten to steer cooperation.”
Nevertheless, once it does go live, Next Bank will have some unique strengths, says AppWorks’ Liu. One of these is Chunghwa Telecom’s involvement in the enterprise. “A telecom company owns a lot of your data and knows how long you spend on different apps,” she notes. “They have all the information.”
While the FSC has not signaled an intention to issue additional virtual bank licenses, competition in the sector is still likely to increase following a revision of third-party payment legislation last year. The Act Governing Electronic Payment Institutions enacted in July 2021 has integrated the regulations governing electronic payment and electronically stored value cards, notes MIC’s Lee.
“This act allows service providers covered in its scope to offer most of the same services as virtual banks,” though not lending, he says. With that in mind, Lee reckons that prominent e-wallets like JkoPay, PX Pay, FamilyPay, and PChome’s Pi Mobile, which have large existing digital ecosystems, will become the digital banks’ primary competitors.
One issue facing Taiwan’s digital banks is regulatory skepticism about internet companies competing with incumbent lenders. Given the gimmicky tactics digital banks have used to proliferate in other markets, the FSC has warned the island’s virtual banks to tread carefully.
In December 2020, after Rakuten International Bank received its operating license, FSC Chairman Thomas Huang told reporters, “It is tolerable for the virtual banks to offer better rewards or prices shortly after they begin operating, but we would not allow them to make it a long-term strategy. It would be meaningless if they expand their business by initiating a price war.”
Kapronasia’s Kapron notes that Hong Kong’s digital banks have relied on heavy subsidies, such as unusually high interest rates on deposits, to attract and retain customers. That strategy, however, can be costly. “If LINE and Rakuten can take a page out of the WeChat and Kakao playbook and leverage their ecosystems rather than continually subsidize customers, they should be fairly successful,” Kapron says. In terms of regulatory oversight, “regulators need to walk a fine line when they allow digital banks to launch,” he cautions. “They need to encourage competition and innovation, but they also need to make sure that the competition doesn’t get out of hand. The FSC will have its work cut out for it to ensure this balance.”