Economy & Business
FinTech's promise and potential in Taiwan
FinTech is technology-enabled financial innovation, which, in many countries, is changing the way financial institutions provide – and consumers and businesses use – multiple financial services. But what is the current state of play for FinTech in Taiwan? Is it really being adopted to its full potential and benefiting Taiwanese consumers?
By Paul Shelton
In other global centers FinTech is driving rapid change and diversification in all major financial jurisdictions. FinTech should be fundamentally changing the way financial services firms operate and transforming the way Taiwanese residents transfer, borrow, protect, and manage their money if they are to mirror international jurisdictions.
It is said that, for FinTech to prosper in any country, you need world-class talent, locally based expertise, a forward-thinking approach to regulation, access to capital, and proximity to an innovative financial services sector. While all of these elements are present in Taiwan, some commentators have described Taiwan as a laggard in the FinTech arena. Nevertheless, it is also clear that FinTech has the clear support of the Taiwan government, the Financial Services Commission (FSC, the principal financial regulator) and industry associations in Taiwan.
So, what is the real story?
In terms of Taiwan’s history with FinTech, some commentators argue that FinTech, in some form or other, as we know it today really started back in 2008 right after the global financial crisis. This era also saw a massive increase in financial regulations due to declining trust in the traditional financial environment and, this then created a vacuum into which stepped financial technology.
But I believe it was not until at least 2014 that Taiwan started, ever so slowly, to pay attention to FinTech due to the impact of continuing technological developments and innovations in the global financial sector and the resulting changes in the financial value chain.
In 2014, the FSC came up with a concept of FinTech 3.0, which recognised five changes to Taiwan’s financial sector, namely:
- Digital technology as the core competency in the sector
- Bank branches devolving to more of a support orientation
- The internet becoming the main medium for marketing strategies
- Social media and real-time online transactions making customers more dominant
- Finance merging with e-commerce.
If we take a step back, I think that most of these changes have occurred to one degree or another but perhaps not quite as envisaged in 2014.
In late 2015, the FSC then went on to propose further measures for the continued development of FinTech with plans to promote the support of FinTech start-ups and to help other related industries. These proposals saw the FSC establish a FinTech office (directly reporting to the FSC) and, by the first quarter of 2016, we saw the release of the FinTech Development Strategy White Paper which set out Taiwan’s vision and strategy to promote innovative FinTech services as well as become the guiding principle for any subsequent policies. The “vision” included five facets of financial services that would benefit from FinTech, namely payments, insurance, financing, fundraising, investment management and market supply.
Again, I think to one degree or another, the proposals in the White Paper remain relevant (some have had more success than others) but all continue to be part of the core architecture of Taiwan’s FinTech journey.
The next step along Taiwan’s journey came about because of a desire for more FinTech innovation, although coupled with risk prevention, a core element for the FSC as the primary financial regulator in Taiwan (and this risk prevention element warrants further review later in this article). This stage of the journey saw the development of a “regulatory sandbox” for startups and financial institutions. Put simply, the sandbox, which was launched in 2018, offers a platform through which startups and financial institutions can experiment freely without threatening the wider financial system. This is achieved by allowing these institutions to operate without the usual licenses necessary to work within the realms of banking, securities, or insurance. But to be frank, the number of institutions that have taken advantage of the sandbox remains low perhaps because of internal hurdles within the sandbox. As of June 2022, only 15 applications had been received from institutions seeking to take advantage of the sandbox. Of those, nine have been approved by the FSC (of which five have been successfully completed).
The FSC also implemented a “business trial” mechanism solely for financial institutions. This mechanism was deployed in June 2019 to provide a dedicated testing environment for financial institutions and, as of May 2022, 47 applications have been received and 36 cases approved (better numbers than from the sandbox).
Despite the low numbers within the sandbox environment, the Taiwan government has defended the performance of the sandbox by observing that the success of the programme doesn’t rest purely on how many companies enter the sandbox. The FSC’s view is that through the process of getting to know companies wanting to enter the sandbox, the FSC has frequently been able to take care of the regulatory hurdles that stood in the way, even citing the case of a company seeking to make fixed-term, fixed amount purchases of foreign mutual funds. The FSC stated that this company did not need to enter the sandbox because the FSC stood ready to amend related regulations to help them start their operations. Regardless of this example, I’m sure the government and the regulator would still like to see many more active sandbox participants.
Then, 2018 also saw the creation of the FinTechSpace. This was an initiative by the FSC and was co-funded by the Taiwan Financial Service Roundtable (TFSR). It was the first FinTech focused co-working space in Taiwan. The intention was to provide a tech-based environment for stimulating and accelerating the latest FinTech innovation. FinTechSpace aimed to gather the whole Taiwan FinTech ecosystem together and open the window for Taiwan’s FinTech industry to attract talent from campuses and tech startups from around the world. The FinTechSpace was designed to offer: A FinTech accelerator programme, regulation clinic, digital sandbox and global connection.
Whilst it appears that the FinTechSpace has had some success, actual hard statistics are hard to come by. A quick review of the FinTechSpace’s webpage shows numerous global webinars, which we must assume helped to contribute to Taiwan’s FinTech global connection aspirations.
2018 was certainly a busy year for the FinTech market in Taiwan. Next off the shelf, so to speak, was the FSC accepting applications for internet-only banks. This was seen as a way to support financial innovation, popularise finance and apparently satisfy customer demands (although I’m not fully convinced on this “customer demand” point as I’ll explain later). Arguably it was also Taiwan wanting to keep up with international business model trends (this I find more compelling than the customer demand argument). This step saw the late July 2019 approval of the establishment of Next Bank, Line Bank and Rakuten International Commercial Bank.
Based on recent observations, these internet-only banks have quickly accumulated customers, and are likely to continue to do so. However, their success in Taiwan’s oversaturated banking market will require that these digital lenders adopt new tactics and technologies to become competitive and it is clear that where digital banks have a clear advantage is in the functionality of their apps.
Whilst Taiwan is overbanked, the financial sector remains arguably under-digitised, and one need only point to the ageing legacy information technology systems of traditional lenders to confirm this. So, for these internet-only banks to succeed in the long term they must tailor their banking services to those Taiwanese who spend a lot of time online, especially younger people where there is strong demand for banking services tailored to their lifestyles.
The FSC certainly hopes these new internet-only banks can shake things up by introducing what is referred to as a catfish effect, that is, the impact of a strong competitor inducing weaker rivals to improve, with internet-based service and product innovation driving digital transformation.
Whilst these internet-only banks have had some initial success it is clear they have not led to a transformation Taiwan’s financial industry. It also seems from FSC data that the traditional banks have no intention of yielding ground to the new internet banks. The latest figures show that Taiwan is home to some 38 banks offering digital accounts in addition to the three internet-only banks and that some 11.74 million digital bank accounts have been opened. The three internet-only banks do have a real challenge on their hands.
Another recent innovation is open banking. Simply put, open banking requires banks to open customers’ information to other non-bank third party providers. Internationally, different countries have different views on open banking. Whilst open banking has the support of the FSC and it does appear to be slowly making headway in the marketplace, there is still some industry resistance and the primary issue boils down to implementing open banking FinTech capabilities whilst maintaining “sound financial mechanisms”, which is simply another way of saying that there is concern surrounding customer data privacy issues, particularly in the areas of information security, personal information protection and identity theft. The FSC and the Taiwanese financial market needs to find a balance between encouraging innovation and managing risk.
The FSC also sees FinTech as integral to finding solutions in the areas of artificial intelligence (AI), anti-money laundering (AML), biometrics, blockchain, cloud services, cybersecurity, data analytics, payments, identity management, regulatory technology (RegTech), and robo-advisors.
Observations are not available on all these areas but observers of Taiwan’s ongoing FinTech development have noted the following:
Taiwan banks are required to protect sensitive personal information contained in their records. This requirement is seen as a major regulatory impediment to the path of FinTech in Taiwan. There is a tendency by banks to create in-house analytics teams as an alternative to purchasing data analytics solutions from major software vendors (some of this may be due to the unique characteristics of Chinese, considered the hardest language for processing) but this argument simply does not hold water in 2022. Local and international data analytics companies can provide a range of state-of-the-art services, including network activity, intelligent automated customer service, real-time marketing, customer segmentation, and cross-industry marketing solutions. But Taiwanese banks first need to be willing to adopt them.
This is one area in which Taiwan has seized the FinTech initiative and has received international recognition in its fight against global financial crime, particularly money laundering prevention. As noted in my earlier article on AML, successful money laundering prevention depends upon industry-wide cooperation with regulatory reporting systems and use of proper RegTech solutions, including risk analysis tools, abnormal activity monitoring, and due diligence tasks through various data sources, like social media, and trade surveillance. Providers of such technologies will continue to enjoy a strong market in Taiwan as the FinTech industry expands.
Here Taiwan has shown an admirable willingness to cooperate globally in the fight against cyber-attacks (however defined) and FinTech is a major tool in the cybersecurity arsenal. Actions taken by Taiwan have led to a reduction in systematic cybersecurity vulnerabilities and allowed for a coordinated response protocol to cyberattacks on the Taiwan financial system by encouraging the development of intra-industry best-practices including cybersecurity information sharing, intelligence analysis, cyberattack reporting, incident simulation, and incident assistance.
The blockchain is considered to be a cornerstone of the FinTech industry, and banks are discussing partnerships with offshore companies. In June 2019, the National Development Council formed the Taiwan Blockchain Alliance to increase policy coordination and implement a blockchain proof of concept. Local financial institutions also participate in international blockchain alliances even though Taiwan banks are currently more focused on the information flow function of blockchains than on currency flow. Many banks are cooperating with local vendors and university research labs in R&D to explore possible blockchain applications. It is anticipated that investing in blockchain in the long-term will continue.
As of earlier this year, 15 Taiwanese financial institutions provide automated investment advisor services. The current assets under management amount to some US$164.79 million and are expected to grow.
Currently, nine life insurers provide health management (or biometric) services to Taiwanese residents.
It is well known that e-payments can keep the costs of administering cash payments down, stimulate private consumption to drive economic growth, restrict the scale of the underground economy and improve financial transparency. But e-payments are also probably the most basic of FinTech applications.
Taiwan’s information technology infrastructure is extremely well developed and Taiwan is a strong market for e-commerce, online entertainment, mobile payments, and other technology-driven services. The latest figures from the FSC show there are 31 electronic payment institutions active in Taiwan. In 2021, total transaction value reached US$10.8 billion (and that for a country with a population of less than 24 million). FinTech that supports transaction security such as user authentication, data protection, and fraud prevention, has found good opportunities in Taiwan but, as is often the case, it remains mainly a domestic market and foreign payment service providers, especially those providing solutions for cross-border transactions, face intense competition with local banks and regulatory obstacles when entering the market.
Overall financial service investment in Taiwan FinTech
The latest FSC data shows the following:
- Investment amount: US$656 million in 2020 and US$846 million in 2021
- Main investment areas: cybersecurity, payments, big data, robo-advisors, and AI
- From 2006 to 2021 Taiwanese financial institutions filed 3,944 patent applications and obtained 3,005 patents.
So, clearly there is appetite, development and improvement occurring in Taiwan’s FinTech environment.
Also, the Taiwan government and the FSC have maintained a consistent message of stressing the importance of FinTech in Taiwan and made it clear FinTech will be at the heart of the important Green Finance Action Plan 3.0 and the 2050 net zero pathway initiatives.
Is FinTech developing at the right pace in Taiwan?
Despite the indicators of growth and the support of the government and the regulator, we should not assume that Taiwan’s FinTech market is set for clear sailing. The development of the FinTech market in Taiwan certainly made rapid progress in 2021, although the actual consumer applications and implementation are not as popular as those in the other economies in Asia. The major obstacle to the development of the FinTech market in Taiwan is still the strict regulations imposed on the financial industry (this is despite the sandbox and the business trial initiatives discussed above).
Another practical obstacle is user habits (hence my skepticism of the consumer demand argument above). Consumers in Taiwan have long been used to making payments by credit cards and collect the items that they ordered on-line at convenience stores. Certainly Covid-19 saw a trend that both financial service providers and consumers have been trying to reduce physical banking activities, by which the fintech market in Taiwan has been driven to grow. But if e-payments (which are often simply backed by credit card applications) represent by far the largest FinTech product in the Taiwanese market, FinTech still has a long way to go.
Perhaps development will be helped along by the FinTech Taipei Forum (FinTech Forum), due to be held from 28-29 October. The objective of the forum is to showcase the latest in FinTech development and enhance worldwide visibility. It will be the 5th such forum, and is touted as having an international in focus, which will include innovative forums, start-up demonstrations and even matchmaking events. Prior forums have attracted more than 80,000 visits and averaged 200+ exhibitors annually. I certainly plan to attend with an open mind.
I am convinced that Fintech is the most cost-effective option for consumers, businesses, and financial institutions. Globally, the cross-industry integration of financial services is happening now and developing rapidly. Wherever you find entrepreneurial minds, financial expertise, investment capital, technology skills, engaged regulators and proactive policy makers, you’ll find FinTech, and I look forward to finding more of it in Taiwan in the very near future.
Paul Shelton is a consultant with 30 years of experience in the international financial services and related industries with skills in all aspects of legal and financial crime compliance and regulatory relationship advisory and management.