In June 2019, Taiwan’s Financial Supervisory Commission (FSC) approved three licenses for internet-only banks, the first time new banking licenses have been issued since the 1990s. The entry of new banks in an overcrowded market appears somewhat counterintuitive. Analysts have long viewed Taiwan’s banking sector as overly saturated. Throughout the past two decades, local authorities have pushed for a consolidation of the banking sector.
What are the considerations behind the decision to introduce new internet-only banks? Supporters say that these institutions are well positioned to bring two important potential benefits: expanded access to credit and banking sector innovation. Nonetheless, their entrance will likely add to banking sector competition and drive profit margins lower. This blog explores the potential ramifications associated with the introduction of internet-only banks in Taiwan.
Taiwan Introduces Internet-Only Banks
The FSC announced in July 2019 that it has approved three licenses for internet-only banks in Taiwan. The three applicants—Next Bank, Rakuten International Commercial Bank, and Line Bank—all have large telecommunication or e-commerce companies as key shareholders (Table 1). This decision came after regulators in Hong Kong and Singapore approved several digital banks licenses earlier this year, making Taiwan the latest Asian jurisdiction to allow technological companies to obtain a majority stake in banks.
Table 1: Taiwan’s Internet-Only Banks
Mega International Commercial Bank, KGI Bank, Shin Kong Financial Group
Chunghwa Telecom, PX Mart, TradeVan
Rakuten International Commercial Bank
Waterland Financial Holdings
Taipei Fubon Bank, CTBC, Union Bank, Standard Chartered Bank
Line Financial Taiwan Corp, Taiwan Mobile, FarEasTone
Table 1: Taiwan’s Internet-Only Banks
The FSC requires that an internet-only bank have at least one traditional bank or financial holding company as a key shareholder, but permits a non-financial corporation to take a majority stake of up to 60 percent. The largest telecommunications firm in Taiwan—Chunghwa Telecom—will have a 41.9% stake in Next Bank. The Japanese e-commerce giant, Rakuten, will own 51% of Rakuten International Commercial Bank. The popular Japan-based messaging app, Line, will control 49.9% of Line Bank via its Taiwan-based financial subsidiary, Line Financial.
The FSC guidelines for internet-only banks, which were published in 2018, appeared to focus on ensuring a level playing field. Like traditional banks, internet-only banks are subject to an initial capital requirement of NTD 10 billion (USD 320 million). Moreover, internet-only banks can conduct a similar range of banking businesses currently permitted for traditional banks, except that they cannot establish physical branches. Deposits with internet-only banks will be covered by the deposit insurance scheme.
Why Internet-Only Banks?
The new licenses have raised concerns about even more competition in Taiwan’s already saturated banking market. As discussed in previous blogs, Taiwan banking sector’s net interest margin—the spread between interest earned on assets and the cost of funds—is persistently low. The banking sector’s average pre-tax return on assets has remained under 1 percent for more than a decade.
Taiwanese authorities have rolled out multiple policy initiatives to address the overbanking problem over the years, including the most recent push for banking sector mergers and acquisitions. Another example is the “New Southbound Policy,” which encourages Taiwanese banks to expand their overseas presence in Southeast Asian markets. So far, these measures have yet to bring meaningful consolidation or to improve profitability in the banking sector, and the three new internet-only bank licenses have somewhat complicated the picture.
In spite of overcrowding concerns, internet-only banks present a substantial upside. Analysts anticipate that with technological know-how, these banks will offer competitively priced banking products to retail customers. Internet-only banks can also leverage their non-financial shareholders’ strength in telecommunication and mobile applications to further expand mobile banking penetration, by tapping into new customer bases and offering banking services across platforms and industries. Additionally, according to a feasibility study by the FSC, the issuance of internet-only bank licenses will send a signal that the financial regulators are committed to cultivating a technology-friendly environment in Taiwan. More concretely, internet-only banks’ perceived benefits include promoting technological competition among financial institutions, improving efficiency in the financial sector, and expanding credit access for individuals and small- and micro-sized businesses.
Will internet-only banks be a game changer? Only time will tell. To the extent that these firms will be able to combine the banking expertise of financial industry shareholders with modern technology, they certainly have the potential to contribute to a more diversified and more vitalized banking market in Taiwan. But there are important caveats. Some analysts have pointed out that local bank customers can already choose from a wide range of financial services offered digitally by traditional banks. Internet-only banks will also likely face competition from large Taiwanese banks that are expanding digital services in recent years, as well as small traditional banks with a heavy strategic focus on digital banking.
Internet-only banks have already laid out their strategy to use big data, artificial intelligence, and financial technology to fulfill financial inclusion goals. Fintechs commonly use alternative data and methods to evaluate borrower risk, enabling them to make decisions on borrowers who do not currently have a credit profile. This approach is in contrast with traditional banks who typically rely on the recommendation by Taiwan’s Joint Credit Information Center to make loan decisions. Meanwhile, the use of technology and big data in the underwriting process brings new challenges for bank regulators in the areas of risk management, cybersecurity and data privacy.
Taiwan’s Growing Fintech Scene
The introduction of internet-only banks is part of a broader trend to encourage Taiwan to embrace fintech. Compared to the rest of Asia, fintech developments in Taiwan have been moving at a relatively slow pace. But in recent years, Taiwan’s financial regulators have unveiled a few initiatives to encourage growth. In 2017, Taiwan became the fifth jurisdiction in Asia to offer a fintech regulatory “sandbox.” The FSC also approved the Taiwan Bankers Association’s self-regulating guidelines that govern peer-to-peer (P2P) lending platforms, and encouraged banks to provide funding for P2P lenders. Licensing internet-only banks is the latest such step.
Policymakers hope that fintech will bring the much needed disruption to Taiwan’s banking industry. In particular, internet-only banks have the potential to generate efficiency-inducing disruptions by incentivizing traditional banks to adopt modern technology in order to maintain competitive edge. For the time being, however, Taiwanese authorities will likely adopt a gradual approach and take time to assess the impacts of internet-only banks before granting additional licenses, in view of the saturated banking market.