Line Bank, Next Bank, and Rakuten International Commercial Bank face determined incumbent competitors and a saturated retail banking market.

With 39 commercial lenders and nearly 3,400 branches for a population of 23.5 million – many of whom have multiple retail bank accounts – Taiwan is often described as “overbanked.” Because many banks are family businesses that are satisfied with their market share, consolidation has proven elusive despite years of regulatory prodding.

When Taiwan’s three pure-play digital banks – Line Bank, Next Bank, and Rakuten International Commercial Bank (RICB) – entered the market several years ago, they knew they would face an uphill battle. Nonetheless, they expressed optimism that they could differentiate themselves through their respective ecosystems: Line Bank’s ubiquitous app, Next Bank’s connection to telecoms giant Chunghwa Telecom, and RICB’s links to Japan’s largest e-commerce platform Rakuten.

Thus far, the three digital banks have yet to break even. However, Taiwan’s Financial Supervisory Commission (FSC) estimates that at least one of them – it has not specified which bank – can hit that milestone by 2025.

“From the perspective of the total number of digital deposit accounts, Line Bank – leveraging its vast user base built upon the familiarity of Taiwanese users with its communication and social networking features – stands out,” says Li Pei-hsuan, an industry analyst at the semi-governmental Market Intelligence & Consulting Institute (MIC).

Line’s messaging app is widespread in Taiwan, with 21 million active users – a higher percentage of the population than in any other market. “Users are accustomed to utilizing the platform for functions such as splitting expenses, fund transfers, and point rewards,” says Li.

In December 2023, U.S. credit rating agency Fitch Ratings noted that Line Bank was still in its start-up phase, attributing its unprofitability to insufficient operating income growth failing to offset the high operating costs.

“Still, we expect its net loss to narrow as the bank ramps up operations, increases its loan-deposit ratios through expanding its loan portfolio, and grows fee revenues by adding non-loan products,” the agency added.

For its part, RICB is leaning into Taipei and Tokyo’s close economic, cultural, and political ties. “We expect synergies between RICB and the Rakuten group to gradually increase, as Taiwan is a strategically important market for the group,” said Fitch Ratings in an October statement. Noting Rakuten’s successful e-commerce business in Taiwan, Fitch added that “RICB takes advantage of the group’s local ecosystem and has established cross-sector alliances with companies in Taiwan to expand its customer base and service offering.”

Next Bank, backed by Chunghwa Telecom and supermarket chain PX Mart, has sought to grow its customer base by frequently launching collaborative promotional activities, says MIC’s Li. Additionally, the digital bank has launched features such as automatic deductions for daily expenses, including telecommunications bills, focusing on “the development of localized applications and ecosystems.”

Data compiled by the FSC shows that as of the fourth quarter of 2023, Line Bank had achieved the highest market penetration of the three pure-play digital banks by a long shot, with 1.7 million digital deposit accounts. Next Bank was second with around 346,000 and RICB third with nearly 204,500.

Intensifying competition

 Taiwan’s traditional banks often lag behind when it comes to digital interfaces. In some cases, they still use cumbersome technology infrastructure associated with the earliest iterations of the internet. However, some traditional banks have in recent years created or expanded digital subsidiaries or sub-brands that have made significant inroads with consumers.

The three pure-play online lenders face a market landscape that favors its incumbents. Conventional banks benefit from regulatory trust and strong brand recognition in Taiwan. In most cases, they also already possess the necessary licenses to offer banking services online, facing minimal obstacles in their digitization efforts.

One such bank is Richart, founded by Taishin International Bank in 2016. The bank claims to be the “most used digital bank in Taiwan,” with over 3.6 million accounts. Taishin launched the Richart Life App in 2020 to attract more customers. The app is a financial lifestyle ecosystem integrating deposit accounts, investments, credit card points, and other rewards previously managed by different units. Richart, boasting the highest market share among digital account services in Taiwan, has seen its new accounts grow at a rate of 53% over the past three years, according to MIC’s Li.

Cathay United’s digital bank is growing at an even faster pace, although from a lower baseline. Operating through the Cube app, Cathay’s digital banking division has experienced significant growth in new accounts, increasing at an annual rate of over 132% in the past three years and reaching nearly 2.3 million accounts, according to data from MIC.

Li describes Cathay’s business model as a “one card, one account, one app” strategy that offers a bevy of financial services through a single application. “Users can switch between suitable solutions based on different needs, with a clean interface and intuitive operation,” she says.

CTBC Bank, the largest privately held bank in Taiwan by assets, deposits, and loans, has experienced the fastest digital banking growth of any major Taiwanese lender over the past three years. According to MIC data, accounts have expanded roughly 303% since 2020 to more than 1.1 million.

Operating under the My Way digital account, CTBC’s online banking unit “collaborates with leading payment industry brands” like Line Pay, says Li. It features functions such as automated bookkeeping, bill payments through automatic deductions, and value-added services, she adds.

“The trend of incumbent lenders in Taiwan creating new subsidiaries or rebranding existing ones as digital banks reflects a semi-strategic adaptation to the evolving consumer preferences and tech progress in the banking sector,” says Zennon Kapron, founder and director of Singapore-based financial services consultancy Kapronasia.

Kapron says this rebranding allows traditional banks to leverage their existing balance sheet, infrastructure, and customer base while innovating and offering digital-first services without needing an additional license.

The success of platforms like Richart Life underscores the potential for digital banking services to meet the needs of a tech-savvy population seeking convenience, efficiency, and better rates, Kapron says. Yet, “the real challenge will be if Taiwan’s digital banks, either pure-play or offshoots of traditional banks similar to Richart Life, can make the economics work. We’ve seen across the region that that is easier said than done.”

Accelerating differentiation

 Given the maturity of retail banking in Taiwan and the plethora of consumer choices, it is unlikely that any digital banks operating here will dramatically alter the market landscape. That said, the pure-play online lenders in Taiwan benefit from their key backers being financially healthy, well-established companies willing to invest in them for the long run rather than quick turnaround-seeking venture capitalists. They have the luxury of taking some time to develop their respective business models.

MIC’s Li recommends that digital banks boost their respective competitive strengths by increasing product diversity. “In the past, regulatory constraints limited the development of pure-play online banking services,” she says. However, she notes that the FSC in recent years “has been progressively loosening regulations” based on industry suggestions. For example, restrictions on financial institutions selling funds were relaxed in 2023. In November of the same year, Next Bank became Taiwan’s first pure-play digital bank to be granted permission to sell funds.

 “It is expected that the FSC will continue to respond to industry suggestions regarding deposits, credit, online insurance, and other businesses in the future,” says Li.

For his part, Kapron notes that the high customer acquisition cost associated with the online retail banking segment – usually in the form of high deposit interest rates and other customer subsidies – poses a significant challenge to achieving profitability. In the four Asian tiger economies that include Singapore, Hong Kong, South Korea, and Taiwan, Korea’s Kakao Bank is the only pure-play digital bank to be consistently profitable in the past three years.

With that in mind, Taiwan’s digital banks “may need to refine their strategies to ensure long-term sustainability,” Kapron says. Efforts could involve focusing on niche markets or underserved segments, innovating in product offerings, and leveraging data analytics to enhance customer experience and operational efficiency. He also recommends they consider forming strategic partnerships with fintech firms or other non-banking corporations – which “could offer avenues for growth.”

Taiwan’s pure-play digital banks “should focus on building a unique value proposition that differentiates them from both traditional banks and other digital competitors,” Kapron says.