The financial services industry has been slow to digitalize in Taiwan. Not long ago, I opened an account at a well known Taiwanese bank. I was surprised when the teller handed me a passbook: I hadn't seen one in years. Updating the passbook requires inserting it into a clunky machine that stamps the pages. The technology is archaic, and the machine often malfunctions.

Passbook accounts in Taiwan are a holdover from pre-digital banking. To be sure, older customers use them regularly, and might be unhappy if banks here phased them out. And they have an important historical legacy, dating back to the 18th century. It was passbooks that first allowed customers to have a handy record of their transactions. Before that, only the bank recorded transactions in its own records.

But the fact that passbook accounts remain commonplace - and even the default in some cases - shows that banks in Taiwan aren't catering to younger customers. People in their late 30s (the first millennials) are old enough to remember banking before the internet but prefer to manage their day-to-day banking from the convenience of a desktop PC. Those in their 20s came of age in a connected world, where smartphones are the go-to device. Yet most financial institutions in Taiwan offer little in the way of mobile banking.

Some analysts say that Taiwanese hesitate to use their smartphones as wallets for security reasons. There's some truth to that. But more importantly, the digital banking experience is not seamless.  A May 2018 survey by Unisys Corporation found that Taiwanese bank customers are vexed by "a fragmented experience."

"They are keen to use digital services but they seek a seamless omnichannel relationship so that they can start a transaction in one place and pick it up in another without having to start over," Richard Parker, Unisys Asia Pacific's vice president of financial services, said in a press release. "Banks must remove the organizational, process and technology silos between business functions."

I know what he's talking about. The local bank mentioned above does offer internet banking - on a website that could have been designed in 2003; it's Web 2.0, barely. Paying bills on the site is just slightly less frictionless than paying them at 7-Eleven. In fact, the latter might be easier as the clerk can scan the barcode that's emailed in a secure PDF file. But that defeats the purpose of digital banking. It's no easier than receiving a paper statement in the mail and then paying it at a convenience store.

Digital banking growing pains are hardly unique to Taiwan. In the U.S., where mobile banking penetration has reached just 15-20%, the financial services industry still caters to baby boomers (born between 1945 and 1964) and Gen-Xers (born between 1965 and 1979). Meanwhile, the millennial generation, which numbers 73 million according to a 2016 study by Gallup, is now the largest generation in the country.

Gallup forecasts that over the next three decades baby boomers will transfer roughly $30 trillion in wealth to millennials. Banks will need to up their digital game to win business from these younger consumers.

Digital premium

When choosing a bank, millennials usually place a premium on its digital offerings. A 2017 survey by UK research firm ieDigital found that 39% of millennial consumers said they preferred to bank online with a smartphone. Just 11% of millennials surveyed said they preferred to bank on a desktop PC, compared to 23% of people over 35. ieDigital didn't ask about passbooks, but we can with relative certainty say that millennials don't favor them over handsets for banking.

Research by the Banking Administration Institute (BAI), a U.S. financial services think thank, has found that half of mmillennials would switch to another bank or credit union if they found it offered an app better than the one offered by their current financial institution.

A 2016 survey of 700 millennials by digital verification specialist Jumio found that 85.5% of the respondents were not pleased with the ability to access financial services from traditional providers on their handset.

Incentives for banks to digitalize are numerous. Research by Boston Consulting Group (BCG) published in a 2017 report shows that retail banks that digitalize can boost revenue by 20% and reduce costs by 30%. Wholesale-banking digitalization programs can achieve 12% reduction in cost-to-income ratios, BCG says.

Banks who do not get their digital house in order, which means sorting out "clunky legacy systems, organizational resistance, talent gaps, and weak data architecture" are likely to find digital transformation to provide a disappointing return on investment, BCG says.

Ominously, traditional banks could ultimately lose customers - particularly people under 40 - to upstarts like challenger banks, tech giants and peer-to-peer lenders. Those new entrants to the banking sector have generated one-third of the industry's new revenue, Accenture said in an October 2018 report. Thus far, banks' cautious approach to digital investment has stymied their ability to develop new sources of growth, which they need to fend off digital upstarts and negate falling returns, the report said.

At the same time, incumbent banks have been complacent in the face of the challenge posed by new entrants, claiming they have failed to innovate but simply put a new face on old banking products. Traditional banks also have doubted their new competitors' ability to generate revenue and profitability. Accenture advises the incumbents to wise up, forecasting that new entrants will continue to eat away at their market share, eventually hitting the bottom lines of incumbent banks.

Embracing alternative banking

To be sure, some banks in less developed markets - where traditional banking infrastructure is less robust - have rolled out impressive digital capabilities. A February report in EuroMoney notes that Polish, Slovakian and Russian banks have launched multichannel platforms much faster than their Western European counterparts. Banks in central and Eastern Europe have digitalized in many ways, whether by building their own in-house digital ecosystems, focusing on e-commerce opportunities, or partnering with fintechs (financial technology firms).

Industry experts say that banks in the former Soviet bloc - much of which was impoverished when the Soviet Union collapsed in 1991 - are driven by a desire to catch up to the developed world. In those countries there is "an enthusiasm for things new and forward looking," Michal Lady, CEO of Slovakia's Tatra banka, told EuroMoney. 

In developed economies, incumbents insulated from competition are more likely to rest on their laurels. In the U.S., fintechs that provide lending, brokerage, money transmission or exchange services face onerous licensing requirements at both the federal and state level (a license for every state where they wish to operate). In July 2018, the federal government said it would allow fintech firms to apply for a federal charter. State regulators say that the charter would represent federal overreach in their jurisdictions. Others say that the charter could potentially let fintechs sidestep strict banking rules.

Existing regulations will inevitably stall fintech's rise in some countries, but traditional banks will still need to partner with them to attract more business from millennials. Indeed, fintechs have a branding edge over banks with many millennials, who came of age in the wake of the global financial crisis of 2008-09. The Great Recession, caused in part by banks' reckless behavior, did long-term structural damage to the U.S. and European economies. The wealth of many middle-class households, tied up in their homes and the stock market, was wiped out. Yet taxpayers still bailed the banks out.

Among millennials today, there remains a lingering distrust in traditional banks.  A 2016 report by Facebook found that a whopping 92% of millennials didn't trust banks.

In Taiwan, which was less affected by the Great Recession than the U.S. or Europe, consumers are less resentful of banks. Still, fintechs can play a vital role serving the banking needs of Taiwanese millennials. Many of these young entrepreneurs have good ideas for business ventures, but lack the collateral (typically a piece of property) that banks require to qualify a loan. They may not have a sufficient credit record either. Online peer-to-peer (P2P) lending can act as an important source of funding for these people.

Unfortunately, P2P lending exists in a legal gray here and is subject to a fair bit of malfeasance, including exorbitant interest rates and illegal debt collection. It could benefit from integration into the formal financial system, which would include draft trade rules and the participation of banks.

In a positive sign for Taiwan's financial industry, the government has established a fintech regulatory sandbox that allows firms to experiment with financial innovation without violating existing rules. The first sandbox project, which kicked off in December and is being run by KGI Securities and Chunghwa Telecom, permits consumers older than 20 years of age to apply for small loans via mobile devices without having to pass a credit check or submit bank account information.

The Financial Supervisory Commission (FSC) will review the project after six months. If it is deemed a success, other banks besides KGI may be permitted to participate.