Internet-Only Banks in Taiwan: A New Era of Financial Innovation

In the rapidly evolving financial landscape, internet-only banks have emerged as a new player in the market, offering customers convenient and innovative ways to manage their finances. However, these digital banking institutions face unique risks and challenges that require careful management.

Similar Risks, Unique Challenges

According to a recent report by the Financial Stability Report, internet-only banks in Taiwan are subject to similar strategic, credit, market, operational, liquidity, and reputational risks as traditional banks. However, they also have distinct features that set them apart from their brick-and-mortar counterparts.

• One of the key challenges facing internet-only banks is managing:
  • Liquidity risk
  • Operational risk (including customer data protection)
  • Reputational risk
  • Potential risks related to money laundering, consumer protection, and using non-traditional data (such as social networking data) for credit review

Regulatory Framework

In Taiwan, the Financial Supervisory Commission (FSC) has set out to regulate internet-only banks by formulating a new policy for their establishment. The FSC proposes that only two licenses be issued to mitigate competitive pressures in the banking sector.

• To evaluate applications, the FSC established an evaluation panel comprising external experts and scholars, as well as representatives from the agency itself.
• The panel will assess applicants based on:
  • Financial capabilities (10%)
  • Fit and proper qualities of founders with shareholdings over 10% and major senior managers (20%)
  • Business model feasibility (40%)
  • Management mechanism appropriateness (30%)

Applicants

Three groups have applied for internet-only bank licenses, each with its own competitive advantages. The applicants are:

• Line Commercial Bank
• Next Commercial Bank
• Rakuten International Commercial Bank

These banks employ similar business models to those in Japan, South Korea, and Mainland China.

Competitive Landscape

Despite the challenges, Taiwan is well-positioned to accommodate internet-only banking businesses due to high internet and smartphone penetration rates. The implementation of a financial regulatory sandbox also provides opportunities for these banks to innovate and offer new services.

Conclusion

As the FSC prepares to announce its approval list by the end of July 2019, it remains to be seen which applicants will emerge victorious in this competitive landscape. One thing is certain, however: internet-only banks are poised to revolutionize the way we do banking, and Taiwan is at the forefront of this digital financial evolution.

Key Takeaways

• Internet-only banks face unique risks, including liquidity risk, operational risk, and reputational risk.
• The FSC has set out to regulate these banks through a new policy for their establishment.
• Three groups have applied for internet-only bank licenses in Taiwan.
• The country’s high internet and smartphone penetration rates make it an attractive location for online banking services.
• The implementation of a financial regulatory sandbox provides opportunities for innovation and growth.