Can virtual banks carve out niche in overbanked Taiwan?

純網路銀行能否在銀行過多的台灣開拓市場？

Regulators set bar too high for digital lenders to disrupt Taiwan’s banking sector, but they could still build market share on strength of their ecosystems


TAIPEI (Taiwan News) — Across East Asia, digital banks have been gaining traction from financial centers like Singapore, Hong Kong, and South Korea.

Taiwan greenlit three online-only banks — it uses the term “virtual banks”— in 2019. After prolonged pandemic-induced delays, two of the three went live this year, Rakuten Bank and LINE Bank, while Chunghwa Telecom and PX Mart-backed Next Bank is expected to launch before the year's end.

Yet the virtual banks will not have an easy time in the overbanked Taiwan market, which already has 37 retail lenders.

It is not that demand does not exist for their services, however. Taiwan’s high degree of smartphone penetration, growing preference for contactless transactions, and the generally weak digital offerings of incumbent banks offer the digital lenders an opportunity.

The problem is that Taiwan’s financial regulators are hesitant to let the virtual banks grow organically.

“Setting up a virtual bank in Taiwan is as difficult as a physical bank because the government has set the thresholds too high, making Taiwan not so competitive when it comes to establishing a new virtual bank,” Lee Cheng-hwa, a senior industry analyst with MIC told Taiwan News in an interview. “With virtual banks, there are even more restrictions in Taiwan when it comes to the availability of supervision regulations, shareholder composition, and physical facilities such as ATMs.”

Despite this regulatory burden, Lee says that there is still plenty of market potential in the country for digital lenders.

In the two decades since the last new license was granted, Taiwan's retail banking market has become ossified, with tepid innovation. Digital lenders could tap into the demand among Taiwan’s younger generation for a banking experience tailored to the internet age.

“The key is that Taiwan has not granted a new banking license for 20 years, and these virtual banks have seen some untapped market opportunities in Taiwan as they do not follow the traditional business models of incumbents,” he said. “Instead, they focus more on the establishment of the ecosystem through their existing user base in [the] e-commerce, online community, and telecom sectors.”

All three of Taiwan’s digital lenders have heavyweight backers. LINE Bank is backed by its eponymous parent app and hopes to convert a portion of its user base into banking clients. I

ts chances look good, given the popularity of its ecosystem in Taiwan, where there are roughly 21 million users of the LINE messaging app, or roughly 89% of the population. The LINE Pay e-wallet has 7.3 million users.

For its part, Rakuten Bank, a subsidiary of Japan’s Rakuten, aims to target existing users of its ecosystem in Taiwan as well as others with an affinity for Japanese products. In January, when Rakuten Bank launched in Taiwan, the company said it sought to sign up 500,000 digital savings accounts in its first year of operation.

In May, Rakuten Bank announced its partnership with local e-wallet Pi Mobile and said it would integrate the latter’s mobile wallet into its banking app.

“We need to expand our ecosystem if we want to be as successful as our affiliate, Japan’s Rakuten Bank,” Rakuten International CEO Saiki Kazuhiko said in a statement. “Working with a local partner to provide mobile payment services should be a good approach.”

Lastly, Next Bank, which is awaiting regulatory approval to go live, can tap into the resources of Chungwa Telecom and PX Mart. Chunghwa has 10 million subscribers while PX Mart has 9 million members in its loyalty program.

While all three of Taiwan’s virtual banks should have no problem signing up accounts, growing significant deposits (which they will need to build successful lending businesses) could prove challenging, especially as regulators have repeatedly warned the digital lenders against offering high-interest rates or other promotional tactics that might disrupt the market.

Still, according to MIC’s Lee, “virtual banks may be able to carve out a meaningful niche” by focusing on Taiwan’s underbanked youth market in segments such as microfinance.