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Tech Disruption In Retail Banking: Digitalization Will Divide Taiwan Banks

Taiwan is famous for its technological prowess, but the digital progress of its banks has lagged behind most key markets in the region. Slow fintech deregulation, low systemwide profitability, and a conservative organizational culture have long stifled the sector's digital transformation. S&P Global Ratings believes that regulatory barriers shelter the incumbent Taiwan banks from disruptive fintech challengers, creating low incentive to innovate, which may eventually translate into diminished competitiveness.

However, there is a risk of subpar profit and growth over the coming two to five years, if Taiwan lenders continue to fail to embrace technology. Over the medium term, technology disruption presents just moderate ratings risk to institutions.

We expect digital deregulation to evolve more quickly over the next few years, spurring Taiwan banks' fintech development. We believe the COVID-19 pandemic--and associated containment measures--have also propelled the industry's embrace of technology.


Industry: Disruption Risk High

Taiwan's banking system is highly fragmented and intensely competitive. The overbanked operating environment has contributed to low earnings compared with global averages. Taiwan banks' average return on average assets (ROAA) was only about 0.6% in 2016-2018, which compares poorly with most other markets in Asia-Pacific (see chart 1a).

At the end of 2019, the top three banks controlled only a quarter of total system assets, and state-owned banks controlled about half of total banking assets. Low pricing power due to too much competition has limited banks' ability to make large investment in the technology, infrastructure, and people necessary for digital transformation.

Chart 1a


Chart 1b


Digital transformation requires an overhaul of an entity's organization, culture, and business models. But Taiwan banks' top management are generally conservative, and are cautious in particular about the risks that come with introducing new technologies. In addition, Taiwan's limited local information technology talent pool has constrained Taiwan banks' digital transformation.

Nonbank Fintech Players Pose Limited Threat…For Now

Compared with Singapore or Hong Kong, Taiwan's fintech ecosystem is underdeveloped, drawing little attention from investors. The government has also not been able to facilitate much cooperation between banks and fintech firms.

Services offered by large technology firms (such as Apple Pay, Samsung Pay, and Google Pay) have come into Taiwan via partnerships with banks and nonbanks. These join other homegrown and international payment platforms such as Line Pay, JK Pay, and the government-backed Taiwan Pay, which have grown rapidly over the past year. Some fintech companies offer online lending, but this makes up less than 1% of system loans.

In 2019, Taiwan's bank regulator, the Financial Supervisory Commission (FSC), issued its first three virtual bank licenses to Next Commercial Bank Co. Ltd., Line Bank, and Rakuten Bank Ltd. Telecom operators, Taiwan's largest supermarket chain, and an online retailing company back these entrants, which should start operation by the end of 2020.

We expect that it will be a real challenge for these virtual banks to develop a profitable business model in Taiwan's overbanked market. The cost of attracting new clients is high against a backdrop of excess liquidity. Virtual banks also have to match the compliance standards of incumbent lenders, leaving new entrants little competitive advantage over existing commercial banks in Taiwan, except for savings on branch networks.

Although virtual banks pose little immediate threat to the incumbents, Taiwan banks risk seeing a gradual erosion of their competiveness if they do not embrace digital transformation. The biggest competitive threat over the next two years at least will likely come from other established banks--local or international--that do the best job of leveraging fintech to expand services, cut costs, and reach customers and build a more sticky client relationship.

Smaller players may no longer be able to compete using their old business model, given their market share erosion and falling revenues. This may weaken their business standing, earnings, capital, and funding--and eventually, their creditworthiness.

Preferences: Disruption Risk Moderate

Taiwanese people are comfortable with technology and adapt easily to digital banking. Most of the population has access to smartphones (a penetration rate of 80% is one of the highest in the world). Ninety percent of users have access to mobile internet, based on a 2019 National Development Council survey. Internet speeds are typically fast with most of the island covered by 4G mobile networks.

However, cash is still an indispensable part of daily routines in Taiwan. The industry still relies on brick-and-mortar branches, though they have been cutting outlets to save costs. Given that Taiwan's banking services are highly accessible with ubiquitous physical banking branches and ATMs around the island, customers have few incentives to go digital.

Credit cards and electronic stored value cards are widely used for their convenience. Many Taiwan banks have launched online and mobile banking platforms. However, use of online banking is mostly limited to simple services such as checking balances, transferring money, and paying bills. These online platforms function more as a digital supplement to the existing bank services.

Taiwan's demographics do favor adoption of digital banking. Millennials (people born between 1980 and 2000) make up about one-third of the population and almost half of the work force. They are young, tech-savvy consumers with high spending habits and a preference for virtual wallets. However, the population will age rapidly over the next decade, which will limit the potential of a higher speed adoption of fintech products and services over the mid to longer term.

Chart 2a


Chart 2b


People's willingness to share data with banks is somewhat low. Based on research by Unisys Corp. in 2018, concern about privacy and the robustness of banks' data security have made people reluctant to share personal data with banks. Price incentives could lure people to try digital banking services. However, most people will likely remain loyal to their existing banks, which they trust when it comes to major financial purchases.

However, there has been some retail behavior changes over the past two years. Mobile payments jumped in 2019 as the result of aggressive promotion by digital wallet providers, and government support for mobile payments. Mobile payment usage climbed to 40.9% of total payments by the end of 2019, from 30.5% three years ago, according to a survey by Market Intelligence & Consulting Institute. This indicates that retail behavior in Taiwan can change when sufficient incentives are in place (see chart 3).

Chart 3


Regulations: Disruption Risk Low

We expect that regulation poses a low disruption risk. The regulator wants to use fintech to stimulate existing bank business models, but to put innovation on a short leash to keep Taiwan's banking sector stable. The FSC has prioritized financial stability over innovation and typically vets new financial technologies with that mindset. Regulators closely scrutinize any new financial service offering, a process that views fintech start-ups skeptically, stymying their growth.

That said, the FSC has started to support fintech innovation over the past two years. The commission established a fintech "sandbox" in 2018. This has allowed developers to experiment with new financial products and services with an exemption from some regulations and liabilities during a trial period. In another milestone, the commission issued its first three virtual bank licenses, in 2019, with the entities likely operational by the end of 2020, at the earliest.

The commission has also recently accelerated the adoption of open application programming interface (API)--one of the FSC's key fintech initiatives since 2018. Open API lets third-party service providers use bank-generated data to offer services, and the rate of fintech growth is typically better in such open-banking markets.

The FSC announced that "open banking" will be implemented over three phases to allow banks to voluntarily work with third-party providers for sharing their API, similar to Hong Kong's approach. However, the FSC has not set any timeline for the implementation of each phase, which may prolong the rollout.

Recent deregulations may have shown regulators' determination to push for digital innovation but the initiatives have yet to translate into much fintech development. For now, the regulatory framework appears to encourage existing banking players to explore fintech innovation while setting higher barriers to entry to new entrants from the tech sector.

For example, Taiwan's regulation of money laundering and hacking threats--which are not exempt from sandbox trials--sets the bar high for small fintech companies, given the substantial investment required for compliance. A more supportive and flexible regulatory approach is needed to build a vibrant fintech ecosystem in Taiwan, in our view.

Table 1

Major Regulations Implemented In Taiwan Over The Past Two Years
Goal Action
Innovation Establishment of a fintech sandbox in 2018 to allow developers to experiment with new financial products and services
Virtual banking Three licenses granted to virtual banks in Taiwan in 2019, targeting launch before end-2020
Financial information sharing and analysis center Collaboration network for cybersecurity across industries and borders
Strengthening the financial market cybersecurity supervisory mechanism
Open application programming interface The first phase--opening banks' commodity information/public information--is complete
During the second phase, banks may share customer information with the consent of the customers. At such time, consumers can view and check their account information held by different banks via one platform without the need to access the system of each bank. Targeted to roll out in the third quarter of 2020
In the third phase, banks will be able to share transaction information, and consumers will be able to easily conduct interbank transactions on one platform, such as wire transfers and bill payments
Source: S&P Global Ratings.

Technology: Disruption Risk Moderate

We do not see technology as a constraint for Taiwan banks in digitalizing their business models. New technologies are readily available. Internet penetration is high. Banks have access to an established infrastructure.

Taiwan ranks high globally for innovation and willingness to embrace new ideas (12th out of 141 countries, according to the 2019 World Competiveness Report). It is home to well regarded global technology firms, and has good broadband and mobile infrastructure.

The key constraint to adopting leading-edge fintech is embedded in Taiwan banks' business model. Institutions have little incentive to invest, and the slim profitability of the lenders gives them little spare capital to invest. Moreover, institutions lack the talent needed to implement a digital transformation. Fintech investment remains small in Taiwan compared with the rest of the world. Global investment in fintech was US$137.5 billion in 2019. Taiwan's fintech investment was merely US$700 million over the same period.

To accommodate new technologies, a bank's core system often needs an overhaul. This requires the determination of the top management. They will need to commit to substantial investment even as the returns are modest--and may not even by measurable—when the technology is first applied.

The ability to invest and adopt new financial technologies varies among lenders. Lead private banks with a retail focus, such as CTBC Bank Co. Ltd., Cathay United Bank Co. Ltd., and E.SUN Commercial Bank Ltd., have been more aggressive in adopting digital innovations. These top private banks have good access to capital markets, funding their fintech plans. They have been upgrading their core banking systems over the past few years and are now mostly ready to digitalize their business models.

State-owned banks, by contrast, have been more gradual in their digital investments, partially constrained by their conservative organizational culture and rigid budgeting and procurement requirements. For them, digitalization is a "should have" over the long run, but has yet to reach the highest priority because it does not deliver immediate business payoff.

The priority for now has been mainly to support the regulator's key fintech initiatives; for example, the promotion of the official payment tool, Taiwan Pay. Banks have also been quick to incorporate artificial intelligence into their customer service operations, transaction processing, as well as fraud and risk management. Many of the incumbent banks have introduced artificial intelligence to some aspects of their customer service.

Small to midsize banks, general speaking, lack resources to invest substantially in the upgrading of their core banking systems. These small lenders have been utilizing technology to improve their processes, digitalize existing products, and enhance service efficiency. However, the benefit of these stand-alone technology applications has so far been limited, with little profit benefit.

Regulation has also constrained Taiwan banks' fintech adoption. This will likely evolve more quickly over the next few years. We view the recent regulation amendments on cloud computing and open banking as signs that the regulator want to push Taiwan banks to greater fintech adoption. Through cloud computing to store and process vast amounts of information, and open API to foster innovative banking using wide access to customer data, banks will increasingly participate in a thriving ecosystem of e-commerce and internet-based business.

COVID-19: An Expediter Of Tech Adoption

Low COVID infection rates in Taiwan have meant the island has avoided the large-scale lockdowns seen in many countries. Most of Taiwan's economic activities remain business as usual. Bank branches were open through the first half of 2020.

The virus has still hurt Taiwan banks. Many people have cut visits to brick-and-mortar branches. This has hurt sales of fee products such as bancassurance, which were sold mostly through physical channels, involving financial advisors. The ability to service customers remotely and digitally has become even more critical for banks' business stability.

Indeed, the crisis has changed people's mindset and way of living. Social distancing and other countervirus measures have altered some consumer behavior for banking. People have more incentive to seek online banking, such as through mobile apps. Like most digital offerings, people tend to stick to an online service once they get used to its convenience and efficiency.

We believe COVID-19 will accelerate the development of digital banking in Taiwan, though the numbers do not make this immediately apparent. Banks have also used the crisis to acquire new customers using digital services, including payment apps. For example, large retail banks have launched promotions linked to the government-issued digital stimulus vouchers, to boost consumer spending amid weak economic growth. In addition, COVID-19 has also raised government's awareness of some key digital fundamentals, for example, the criticality of digital ID verification, which may open regulatory approval of new fintech.

Related Research

  • Tech Disruption In Retail Banking: Korean Banks Accelerate Digital Transformation, July 31, 2020
  • Tech Disruption In Retail Banking: Australia's Big Banks Hold Their Ground As Tech Takes Center Stage, June 3, 2020
  • Tech Disruption In Retail Banking: Hong Kong's Large Banks Are Pioneering The City's Fintech Development, June 3, 2020
  • Tech Disruption In Retail Banking: Singapore Banks Are Front-Runners In Digital Race
  • The Future Of Banking: Research By S&P Global Ratings, Feb. 19, 2020
  • Tech Disruption In Retail Banking: Better Late Than Never For Japanese Fintech, Feb. 5, 2020
  • Tech Disruption In Retail Banking: U.K. Banks Embrace The Tech Race, Nov. 14, 2019
  • Tech Disruption In Retail Banking: German Banks Have Little Time For Digital Catch-Up, May 14, 2019
  • Tech Disruption In Retail Banking: China's Banks Are Playing Catch-Up To Big Tech, May 14, 2019
  • The Future Of Banking: Will Retail Banks Trip Over Tech Disruption? May 14, 2019
  • Tech Disruption In Retail Banking: Swedish Consumers Dig Digital--And Banks Deliver, May 14, 2019

This report does not constitute a rating action.

Primary Credit Analyst:YuHan Lan, Taipei (8862) 8722-5810;
Secondary Contacts:Eunice Fan, Taipei (8862) 8722-5818;
Andy Chang, CFA, FRM, Taipei (8862) 8722-5815;

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