The Taiwan Banker

Taiwan's fintech sector has made important strides in the past two years. While overall fintech investment remains modest, the government has taken steps to encourage industry growth, including the creation of a fintech regulatory sandbox and accelerators, adopting regulations for security token offerings (STOs) and issuing three virtual-banking licenses. Some industry observers worry that Taiwan's approach to fintech remains overly conservative. They point to a focus on facilitating cooperation between incumbent banks and fintech startups, regulations that restrict the business activities of fintech startups and a lack of incentives to encourage fintech investment. There are several reasons Taiwan has approached fintech cautiously. First and foremost, the Taiwan market does not have a pressing need for native digital banking services. Taiwan's financial system is mature and the rate of financial inclusion in Taiwan is high. While many developing countries in Southeast Asia are underbanked, Taiwan is actually overbanked. For a population of just 23 million, Taiwan has 37 banks with assets of US$1.6 trillion. To be sure, some small businesses struggle to gain access to credit. However, data from the Financial Supervisory Commission (FSC) show that small and medium-sized enterprises (SMEs) received almost 61% of the bank loans extended to all firms in Taiwan as of December 2018. Another reason that fintech investment remains modest in Taiwan is that fintech itself has not been highlighted as a priority industry by the government - at least not yet. In a regulator-driven financial sector environment such as Taiwan's, industry tends to wait for signals from the government before making big-ticket investments. That's especially true for the financial industry here. Yet, when the government has signaled its support for specific fintech industry segments, incumbents have been quick to act. For instance, when the FSC announced last year that it would issue two virtual-banking licenses (eventually it decided to issue three), consortia made up of telecoms and financial-industry incumbents as well as technology firms quickly formed and announced their intention to apply for the licenses. In July, the FSC issued internet banking licenses to teams led by Chunghwa Telecom Co., Line Financial Taiwan Corp and Rakuten Inc. Chunghwa's consortium includes Mega Holdings, KGI and Shin Kong. Other shareholders in the group led by Line include Taipei Fubon Bank, CTBC, Union Bank and Standard Chartered from the financial sector as well as the telecom groups FarEasTone and Taiwan Mobile. Rakuten, meanwhile, is partnering with Taiwan's Waterland Financial Holdings. Indeed, despite the concept of fintech as a "disruptive force" in the banking industry, regulators throughout Asia have been encouraging fintech startups to cooperate with incumbents rather than topple them. This is the case in all of the developed East Asian economies, from Taiwan and Japan to South Korea, Hong Kong and Singapore. Using variations on this approach, Singapore and Japan have been especially successful developing unique fintech niches. Their experiences could be instructive for Taiwan. Fintech-forward policies During fintech's emergence over the past decade, Singapore has positioned itself as the leading hub in Asia for the industry. By funds, Singapore is Asia's No. 3 market, behind only China and India, countries more than 200 times larger by population. While Hong Kong has attracted nearly as much fintech investment as Singapore, the industry there is heavily focused on the mainland China market. That makes sense for Hong Kong fintechs given China's massive size. Fintech in Singapore has a stronger regional orientation out of necessity. To scale up, fintechs in Singapore must expand to numerous neighboring markets. That's how the city-state's ride-hailing sensation Grab - now trying to reinvent itself as a leading digital bank - became Southeast Asia's most valuable startup. From its Singapore base, Grab has built up a strong presence across Southeast Asia, including Malaysia, Thailand, the Philippines and Indonesia. Grab is valued at roughly $US14 billion. Much of what makes Singapore attractive to the traditional finance industry also appeals to fintechs: strong rule of law, favorable taxation rates, minimal red tape for new business ventures, international orientation (including English as an official language) and high quality of life. This unique combination of attributes helps to explain why the UK's Revolut, one of the world's most valuable neobanks with a valuation of US$1.7 billion, chose Singapore for its Asia-Pacific headquarters. Crucially, the Singapore government has prioritized developing the fintech industry, but on its own terms. In lightly regulated segments of the financial industry, fintech startups have been allowed to flourish, such as cross-border payments, digital fundraising and online insurance, but they have not been allowed to enter retail or corporate banking. That will only change with the issuance of virtual banking licenses later this year, but these will come with certain caveats. For its part, rather than aiming to be a regional hub for digital banking, Japan has sought to develop a competitive advantage in one segment of fintech: virtual currency. Japan has been open to cryptocurrency since Bitcoin first appeared in 2009 and gradually developed some of the world's largest crypto exchanges. As part of a drive to boost cashless payments and revitalize the long sluggish Japanese economy, Tokyo chose to legitimize cryptocurrency rather than crimp its use like China and South Korea. Since 2017, Japan has officially recognized crypto as legal payment tender and brought it under the auspices of the Financial Services Agency, the Japanese financial regulator. Japan's Virtual Currency Exchange Association, a group of 16 regulated exchanges, works to develop industry best practices. The organization focuses on making virtual currency more secure and user friendly for Japanese consumers while acting as a bridge between regulators and exchange operators.Currently, Japan's cryptocurrency adoption is among the highest in the world. About 3.5 million Japanese trade crypto. Cryptocurrency payments are increasingly accepted, including by budget airline Peach Aviation and at major retailers like Bic Camera. Japanese banks, meanwhile, are beginning to adopt crypto's underlying blockchain technology. In November, Japan's SBI Holdings and Fukushima Bank announced that they would use the blockchain remittance network MoneyTap as part of their new partnership. At the same time, crypto could provide significant tax revenue to the Japanese government. An early 2018 estimate by Credit Suisse puts the figure at roughly 1 trillion yen (US$9.2 billion), including capital gains taxes from retail investors and businesses. The right fintech niche for TaiwanThe budding fintech sectors in Singapore and Japan illustrate how digital finance can develop successfully in Asia without unsettling the existing financial order. In both countries, regulators have helped create the right conditions for fintech to flourish. One industry segment that looks promising for Taiwan is digital remittance services. In February, the cross-border settlement firm EMQ became the first startup accepted into Taiwan's fintech regulatory sandbox. From Taiwan, EMQ will provide digital remittance services for Indonesian, Vietnamese and Filipino migrant workers. The market is significant: Data from Taiwan's central bank show that migrant workers here sent home more than US$3 billion in 2018. “Taiwan is one of the most important strategic growth markets for EMQ and the regulatory approval from the FSC represents a significant milestone for our operation in Taiwan," Max Liu, co-founder and CEO of EMQ, said in a press release.It makes sense for Taiwan to develop fintech business in Southeast Asia as part of a broader push by the financial sector into the region under the government's New Southbound Policy. In recent years Taiwanese banks have made inroads into Southeast Asia, focusing on traditional segments like corporate lending. Fintechs could work together with banks to strengthen links between the local financial sector and Asean markets. Taiwan should also consider revising its STO regulations to allow larger security token offerings and greater investor participation. Currently, STO fundraising is capped at NT$30 million, although companies approved for the fintech regulatory sandbox are permitted to raise up to NT$200 million. This amount would be sufficient for most startups' Series A round of founding, but the relatively long consultation period for the sandbox - four to six months - could deter firms from applying in the first place. A shorter consultation period for the sandbox could be the answer - or a higher cap on overall STO fundraising. Similarly, accredited investors are only allowed to invest a maximum of NT$100,000 in an STO. Yet, large institutional investors don't typically make such small investments. Without raising this threshold, it will be difficult for Taiwan to attract interest in STO fundraising. Finally, Taiwan could consider expanding its visa program for top foreign professionals by creating a dedicated fintech entrepreneur visa. The visa could serve as a one-stop shop for establishing a fintech business in Taiwan, featuring expedited approval for registering a business, establishing a corporate bank account and the other related procedures which can be otherwise time-consuming and an impediment to foreign entrepreneurs. Compared to its fellow Asian tigers (South Korea, Singapore and Hong Kong), Taiwan has the best engineering talent, the lowest costs and the highest overall quality of life - especially when taking into consideration its outstanding healthcare system and pleasant living environment. Further, Taiwan has already lain the foundation for a thriving fintech sector. The next step is to improve the business environment, such that firms choose to base operations in Taiwan rather than elsewhere. If Taiwan can do that, perhaps a fintech startup will become its first unicorn.