The Taiwan Banker

Credit cooperatives are a cornerstone of Taiwan’s community financial system. They provide financing to improve members’ livelihoods and meet the funding needs of small and medium-sized enterprises, support government policies, supply capital to cooperatives and agricultural producers, and promote social welfare. They have made significant contributions to local prosperity, economic development, and members’ financial well-being. In recent years, however, changes in their operating environment and advances in IT have placed their development under pressure. They face competition from commercial banks and other financial institutions, changing consumer behavior, shortages of technology professionals, and challenges to their traditional businesses and customer base. They must overcome their limited resources to rapidly introduce innovative services to meet members’ needs. Credit cooperatives have long pursued growth through regional presence, yet fintech development and digital transformation require steadily increasing investment in IT infrastructure. Such infrastructure offers substantial economies of scale, putting smaller community financial institutions at a disadvantage, including credit cooperatives as well as the credit departments of farmers’ and fishermen’s associations. They often find the cost of new planning system upgrades beyond their means. Credit cooperatives currently use one of two models for operational automation and service digitalization: operating their own host systems, or joining the shared platform of the Southern Regional Information Center. Some choose to maintain their own systems because of preferences concerning hardware brands and decision-making autonomy, as well as the need to support their individual business strategies. The greatest constraints are funding and personnel. Credit cooperatives have fewer members and customers than banks, and not every investment can generate economies of scale. If members make little use of a new service, the investment may be wasted. Some cooperatives have therefore entered digital finance through shared information centers, integrating resources and using existing online ATM, internet banking, and mobile banking functions. Faster-moving ones may want capabilities beyond standardized services, however, and consequently retain their own host systems. Shared information centers seek to strengthen competitiveness through collaboration, resource sharing and data connectivity. The Southern Regional Information Center is funded proportionately by its member cooperatives. Yet those members are relatively small, the center’s IT capacity is approaching its limit, and its regional location makes recruitment of technology professionals difficult. Therefore, it is unable to accept additional members for the time being. If the center cannot meet the system development requirements of a member cooperative, that cooperative’s growth may be constrained. It may also lose the ability to customize its services. Credit cooperatives operating their own host systems face a different set of challenges, particularly in funding and staffing. Although profit maximization is not their primary objective, they must bear the costs of purchasing equipment, recruiting IT professionals, conducting routine maintenance, and funding research and development. Cybersecurity and anti-money laundering regulatory requirements add further expense. These investments may not be fully recoverable, and could even erode competitive advantages. Credit cooperatives currently use both closed and open IT systems. Closed mainframe systems create particular difficulties in workforce development. Mainframe development and programming skills are rarely taught in schools, while the software, terminals, and development technologies used by individual cooperatives can vary. Even existing employees often begin learning only after moving into an IT role, resulting in lengthy adjustment. COBOL, for example, remains a principal programming language for core systems. Professionals with these skills are aging, while few younger specialists are entering the field. Legacy code may continue to function, but insufficient documentation often makes it difficult to update or modify. As workforce development and software modernization fail to keep pace with technological progress, credit cooperatives will find it increasingly difficult to absorb rapidly rising IT costs. The digital capabilities of the Southern Regional Information Center remain somewhat behind those of the most advanced credit cooperatives, giving these institutions little incentive to join. Yet cooperatives with their own systems must still determine whether their IT investments are cost-effective for existing members, or sufficiently attractive to bring in new ones. This has prompted discussion of two alternatives: establishing a new shared center jointly funded by cooperatives that currently operate their own systems, or adopting systems developed by the government-linked Agrifinance Information Service Co. Because credit cooperatives currently use different IT systems, a new shared center would inevitably require a dedicated funding plan. The first challenge would be allocating costs among institutions of different sizes. Some smaller cooperatives already struggle to meet their daily operating needs with existing resources. Even if they remain profitable, their margins may be narrow, and additional capital and staffing requirements for a restructured shared environment would add considerably to their burden. Some institutions may also have little interest in integrating their systems. The principal challenges in developing a shared system are therefore system integration, flexibility in subsequent service development, and cost allocation. Credit cooperatives provide different types of services, making dedicated solutions for one locality or individual customer difficult on a common platform. Determining who should pay for such development would become a central issue. If a new shared information center is established, its operating model should differ from that of the Southern Regional Information Center, providing a more sustainable basis for operations. It could, for example, be incorporated as a company and charge participating cooperatives according to weighted measures such as business volume and actual system usage. Any assessment of a shared platform must consider not only the feasibility and growth potential of each proposal, but also whether its technologies and architecture reflect current trends and future requirements. Most credit cooperatives use a hybrid architecture comprised of a closed core system and open peripheral systems. Implementation could be divided into stages, beginning with the peripheral systems, and proceeding onto the core. Existing highly compatible equipment could remain in use, while application programming interfaces could connect legacy and new systems, reducing dependence on traditional programming languages. The platform could then gradually develop the capacity to operate independently, supporting external business growth while safeguarding internal information security. The agricultural finance information system, meanwhile, provides shared IT services to the credit departments of farmers’ and fishermen’s associations under the Agricultural Finance Act, promoting integration of their systems. Led by the Agricultural Bank of Taiwan, its government background and large membership base give it stronger long-term prospects. Cooperatives joining the system would also be less exposed to sharp increases in their cost-sharing ratios when another cooperative is acquired. Participation in a sufficiently large shared center could reduce the difficulty of system construction, development, and testing. It would also allow operating costs to be spread across a larger number of users while giving participants access to existing system functions. Joining the system would nevertheless involve significant implementation expenses, including purchases of IT equipment, recruitment of technology professionals, and system conversion. Because cooperatives operating their own host systems may use different technologies, their IT staff would also need to learn and adapt to the new environment. In addition to instructors provided by Agrifinance Information Service Co. and assistance from hardware vendors, cooperatives may incur further training expenses or need to recruit additional IT staff to maintain the productivity of their existing IT departments. Overall, funding, talent and technology are all indispensable to the establishment and subsequent operation of a shared platform, and meaningful support from regulators and active participation by member institutions are equally important. The development of shared IT platforms for community financial institutions in Japan demonstrates the importance of all these factors. Ultimately, however, IT integration comes down to cost. Whether cooperatives integrate their independently operated systems, or join an existing shared center, they will require strong incentives to consider the change. Key considerations include enthusiasm by senior management, cost-benefit analysis, regulatory support, IT staffing, and overall operational efficiency and ability to develop new services. Planning should therefore begin early. It must identify the entity responsible for leading the project, sources of funding, the scope and functional requirements of the integrated architecture, participants’ decision-making roles and willingness to cooperate, the location of the shared data center, and expected conversion costs. If potential members continue waiting for the perfect moment, they may find that the market has already moved on. The author is an associate researcher at the Financial Research Institute of TABF.