Taiwan’s fintech strategy takes shape
Local banks are enhancing digital channels, and fintech innovations are being supported by FSC
31 Oct 2019 | Janette Chen
The regulator’s recent approval of virtual banking licenses and other supportive measures affirm the Financial Supervisory Commission (FSC)’s aim to build bridges between the financial industry and technology industry.
There is a strong demand from clients for more digital solutions and online channels, which local financial institutions are becoming very active in developing. Mobile-first has become a major strategy for many of these players.  
One of these is Fubon Securities. “Among all the major securities companies, our securities company has the highest percentage of trading volume through the online channels,” says Jerry Harn, president, Fubon Financial Holdings.
“We initiated a digital transformation program for the whole group. The technology disruption is happening globally. It is more important to have a good transformation process to help every employee understand the technology disruption, learn new skills and change their mindset so that they can utilize digital tools to provide better services and products to our clients,” says Chang-Ken Lee, president, Cathay Financial Holdings.
Taiwanese banks are starting to experience the significant impact of technology in expanding financial inclusion.
“In the past, we had the 80/20 rule in which 80% of revenue comes from the top 20% of clients. But the servicing cost was too expensive. That is why we could not serve everyone. Instead, we drew a line, and below that, we were unable to serve clients. With new technology, for example, robo-advisory, we can now provide wealth management service for clients with NT$1000 (US$32.2). As long as the robot is there, we will be able to use the technology to serve more customers,” says Daniel Wu, president, CTBC Financial Holding.
“We are not just eyeing Taiwan. For the overseas subsidiaries, we are thinking about how to use technology to enhance our existence,” Wu says.
CTBC now has branches and offices in mainland China, Hong Kong, Singapore, India, Indonesia, the Philippines, Vietnam, Japan, and the US.
Taiwan is ranked fourth in innovation capability among 140 economies and seventh for its financial system, according to the World Economic Forum’s global competitiveness index in 2018.
FSC’s fintech blueprint
“We are building the bridges between the financial sector and the technology industry,” says Wellington Koo, chairman, Financial Supervisory Commission.
But this is never easy. “Three years ago, we suggested that the biggest challenges for Taiwan in building a digital economy was regulation and governance,” says Joseph Huang, president, E.SUN Financial Holding Company and E.SUN Commercial Bank.
On one hand, some fintech players such as virtual banks do not have physical branches, which challenges the FSC’s supervisory practice. On the other hand, finding a balance between encouraging innovation and managing risks is a persistent challenge.
The FSC is trying to find that balance so that financial institutions can innovate using technology but at the same time safeguard the clients’ interests and the stability in the financial system. “We maintain the balance based on risk control. The supervision can vary depending on the risk level,” says Koo.
With responsible innovation as the core aim, the regulator implements supervisory frameworks and regulations on various aspects of the industry and the level of risk to prevent regulatory arbitrage and over-supervision.
“We have been discussing the possibility of offering limited licenses to fintech companies and not letting the financial institutions do everything. My feeling for the past two years is that fintech companies must collaborate with financial institutions so that they understand the costs of running a financial business, such as the cost of maintaining personal data security. We now have the FinTechSpace [a physical hub]. The tech companies can come and get involved,” says Koo.
The regulator has also set up a dedicated unit, “Fintech Development and Innovation Center” to supervise fintech development in Taiwan. The FSC has been providing support to and helping facilitate innovative practices such as virtual banks, mobile payment, open banking, security token offering, robo-advisory and online insurance.
Virtual banking licenses were granted to LINE Bank, Next Bank, and Rakuten International Commercial Bank in July. As of May this year, mobile payment transactions amounted to NT$100.6 billion; as of June this year, six financial institutions are providing robo-advisory services, managing total assets of NT$607 million; and 32 insurers were granted licenses to operate an online insurance business, accounting for 62% of all insurers, according to the FSC. 
In the meantime, the FSC is rolling out an experimental mechanism for fintech innovation. A fintech regulatory sandbox was first established in April last year.
Koo hopes to see more breakthroughs in technology so that fintech can develop further. “So far, fintech’s advantage is still on the mobile payment side. The current fintech technology is not strong enough to support all financial products and services. For example, the reason that Netflix has replaced the videotape is that people can use their mobile phone and watch online videos for more than two hours without interruption. Mobile internet technology supported the development of Netflix. But fintech has not yet reached this stage,” Koo says, noting that risks in areas such as identity verification and assessing credit cannot be prevented using existing technology.
Also, fintech is not yet in a position to take significant revenue away from the traditional financial firms. Virtual banks in Taiwan, for example, are not expected to have a great impact on conventional banks, especially the large ones, according to Wu.
“I don’t think the fintech companies can take a lot of revenue from the incumbents. If you look at China, how much revenue or profit has been taken from the banking industry by fintech companies? My guess is less than 3%,” says Harn. Although fintech is not going to replace what the traditional financial industry is doing, “you cannot stick to your comfort zone. You have to build a new ecosystem using the new technology so that you can increase the engagement of the clients and content frequency. It is not easy doing this by ourselves,” says Harn, highlighting the importance of collaborating with tech companies.
Technology as an accelerator
Technology is an accelerator for the evolution of the financial industry.
“The average life cycle for electronic products is about half a year. If financial institutions can make good use of technology as a tool, the developing pace will be much faster. With the approvals of the three virtual banks, I feel that embracing technology is a good opportunity for the financial industry,” says Joseph Huang, president, E.SUN Financial Holding Company and E.SUN Commercial Bank.
“Five years or so from now, the entire financial industry will be reshuffled. Technology can be the key to success in the next three to five years,” says Huang.
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