Taiwan has granted its first three virtual banking licenses to consortia backed by investors from Taiwan and Japan, as it looks to speed up innovation in a market resistant to change. Financial experts say that if the challengers can turn a profit while overcoming regulatory and cybersecurity barriers, other traditional brick-and-mortar chains could follow suit in embracing virtual-banking.
The island's Financial Supervisory Commission on July 30 granted licenses to three groups. One is LINE Financial Taiwan, led by Japan's app operator LINE Group and includes Taipei Fubon Commercial Bank, CTBC Bank, Standard Chartered, Union Bank of Taiwan, and Taiwan telecom operator FarEastTone. The second is Next Commercial Bank, led by Taiwan telecom operator Chunghwa Telecom. The third is Rakuten International Commercial Bank, led by Taiwanese IBF Financial Holdings and Japanese e-commerce firm Rakuten Inc.
"One of the biggest advantages of operating an online bank is that operating cost are significantly lower than traditional banks that need to operate branches," a spokesperson for Rakuten, which has been operating online-only Rakuten Bank in Japan since 2010, said.
"We also make use of automation and AI which further help lower costs, which are then passed on to customers who enjoy low bank charges and higher interest on deposits."
Spokespeople for Rakuten and LINE Financial Taiwan both declined interview requests to discuss the specific services they would offer locally when they begin next year, while Chunghwa Telecom and Next Commercial Bank did not respond to ZDNet interview requests.
"Taiwan is a very important market for LINE, with a significant user base of 21 million people, so winning the permit to establish an internet-only bank in Taiwan is a significant milestone for LINE in the FinTech area," LINE said in a statement to the media.
Lee Cheng-hwa, an emerging Internet services analyst at the government-backed Market Intelligence & Consulting Institute in Taipei, says the consortia would likely focus on their existing services, such as LINE Group's LINE Pay mobile payment system or LINE app, and its various customer bases, such as Chunghwa Telecom's smartphone and MOD IPTV users, or Rakuten and IBF Financial Holding's e-commerce and credit card users.
He said they would need to design new system architectures in order to face any potential information security or data protection challenges. There is also competition from the many local banks that already offer online banking.
He said he was doubtful that cross-strait relations between Taiwan and mainland China would affect the banks, since the three consortia need to adhere to regulations in Taiwan, aren't based in or related to mainland China, and are unlikely to use mainland-China made IT systems. But malicious attacks from mainland China targeting banking transactions could be still be an issue.
"Attacks will surely get worse if the political situation cross-strait becomes more unstable, making virtual banks an easy target for hackers," he said.
Hank Huang, president of the financial research and education non-profit Taiwan Academy of Banking and Finance in Taipei, said that the island's government has been encouraging traditional banks to invest in human capital and infrastructure, but changes are slow. The island created a system in 2018 that allows for "sandboxed" financial experiments that can bypass traditional financial regulations, but the participants are limited.
The virtual banking licenses are a way to speed up innovation, he said, and traditional banks would follow suit if the consortia are successful, although he cautioned that virtual-only banks would not necessarily be cheaper to run than traditional banks.
He said that while physical infrastructure for virtual-only banks costs would be less, they would have to spend more on building trust with benefits and improving cybersecurity to prevent shutdowns that would be less damaging for physical-branch banks.
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