Hot Topic: Last weekend domestic firms, international companies, regional banks, heads of financial bodies, and even President Tsai joined Taipei FinTech Expo 2019 to support the growing sector of FinTech.
Laws and regulations often change slowly to reflect technological and commercial development – it has happened with the gig economy, big data, and FinTech. Last weekend, Taipei held a conference inviting large institutional banks, global financial companies, fresh startups and even the general public to join in the conversation surrounding Taiwan’s developing FinTech sector. However, there was a large question on whether Taiwan was ready to achieve its aim of challenging Singapore and Hong Kong as a financial hub - in 2016 merely 0.37% of the total FinTech spending by financial holding companies in Asia was spent by Taiwanese firms. The Government has taken steps to increase investment but is it enough?
Regulatory controls and oversight
Much of the challenges of developing the FinTech sector come from the strictness and inflexibility of financial laws. For example, the cybersecurity laws alone include ‘The Security Control and Procedure Standards for Financial Institutions Handling E-banking Business’, the ‘Regulations Governing the standards for Information system and Security Management of Electronic Payment Institutions’, and the recent ‘E-Payment Act’. Rather than incentivizing institutions, this regulatory web means that companies have been persuaded that to enhance and develop their services or create new ones would be neither profitable nor easy. The small amount of ‘FinTech’ that has been provided from local institutions has simply been the digitalization of existing services.
For Foreign Service providers, only the rich may apply. There are high entry barriers such as the minimum capital for a third-party license being USD $10 million or the minimum capital for a purely digital bank to operate the same services as a traditional bank is just under USD $33 million. This means that startups, the most likely developers of FinTech services, are unable to join the market thereby removing the competitive aspect that makes this sector so promising.
Furthermore, general restrictions have been laid down by the Central Bank and the Financial Supervisory Commission (FSC) that have disrupted one of the largest areas of FinTech - cryptocurrency. Their decision to name Bitcoin as a ‘highly speculative virtual commodity’ rather than an actual currency with banks and financial institutions being directed not to accept, or interact with, Bitcoin. The rejection of Bitcoin is a major blow to the FinTech monetary process, especially for a Government that wants to see itself as a leader in the globalised sector. It is believed that this treatment would also be given to any other cryptocurrency that resembled Bitcoin.
However, the Government has been taking large steps towards invigorating innovation through various pieces of legislation and renewed policy in recent years. In 2017 the limitation of banks shareholder ceiling on venture capital was raised from 5% to 100% which enables banks and institutions to own all of the shares of a FinTech system thereby providing greater incentives to invest. The ‘FinTechSpace’ program was established by the Government to give advice and assistance to startups, whilst project investment in the banking sector has increased from NT$7.93 billion in 2018 to NT$14.3 billion this year. Furthermore, the Government has pushed for further developments in open banking, a difficult sector for an economy built on stability and security. In 2018 the Application Programming Interface Commission was established between banks and the FSC. However, there is still no specific legislation that governs open banking with the current Banking Act still requiring institutions to keep their customer information confidential.
Furthermore, the FSC handed down the first batch of virtual banking licenses to three consortiums allowing access for consumer activity online rather than at physical banks. This allows users who have struggled to gain access to mainstream banks, or who have not yet tried online banking to embrace the multi-currency services.
One of the most progressive steps Taiwan has taken has been to implement the ‘Financial Technology Development and Innovative Experimentation Act’ in order to stimulate investment and development in the financial market. This is primarily done through the ‘sandbox’ – a mechanism that suspends some financial regulation such as, among others, ‘The Banking Act’ and ‘The Act Governing Electronic Payment Institutions’ so as to allow companies to experiment for a limited period in order to demonstrate the benefits of the innovative business model or technology. It allows the FSC to survey the progress of the project as well as providing advice and supervision. The process insists that only companies that would break existing rules are able to apply. For example, it could be highly alluring to startups that wish to partake in services that only banks can offer, they are able to perform and test these services without the fear of being fined. This has been promulgated as a highly useful way in which to amend existing legislation as it uses hard proof of the technology’s success to be given as a reason for changing the law rather than deriving from a theoretical standpoint. Cryptocurrency companies, in particular, have looked at this with special interest. Despite Bitcoins restrictions, the sandbox would present an opportunity to prove the online currency’s potential. This is a promising mechanism which has received highly successful results in places like the UK in which 90% of applicants in the first round have gone to market, fostering a financial ecosystem.
Despite this, the Act is still restricted and so may not give the freedom that has been promised. The largest difficulty is that it does not stipulate that foreign institutions can apply to the FSC directly. Instead, if the institution wishes to conduct FinTech business, then it must conduct innovation experiments first, meaning that they must have set up a branch of a subsidiary in Taiwan before conducting those experiments. This ensures that foreign startups begin with a very large obstacle, being restrained to a physical place rather than being able to use their primary resource of being an online globalized firm. Furthermore, the sandbox does not have any tax incentives or perks from the Government and so there are little drawing foreign companies into the financial sphere where, after a lot of investment, the company may have to stop operating anyway after they reach the end of their time limit, with little to guarantee that their company would survive the change in regulations. This could further alienate smaller firms who would not risk large capital investment in a highly precarious project, ineffective given that the UK model reported that three-quarters of the firms involved were startups.
The lack of day to day consumer technology
The regulations are not the only hindrance to FinTech, however. Unlike other counties, the financial service system in Taiwan is developed and mature - banks have a huge number of physical locations, credit card applications have a waiting time of only 7 days, and insurance brokers in specific areas make insurance policies easy to take out. This has meant there is little incentive for powerful traditional institutions to invest into online banks and with 94% of adults having access to a bank account; there is not much of a consumer market for new firms. There is also a large difficulty in that banks themselves do not understand or feel the need to understand FinTech. For example, many banks still operate using passbooks where tracking accounts are updated through hardcopy receipts that are stamped with a machine or physical bank tellers, a method phased out of global banks nearly two decades ago. However, these domestic institutions are starting to be educated on the benefits of FinTech and how to mitigate the challenges. President Tsai commented this weekend that the domestic sector was relatively conservative and that to overcome this, the Government will be providing guarantees on a certain percentage of the projects carried out by firms, therefore helping to split the risk. Furthermore, the Government has formulated policies in line with developments in mobile banking in order to push traditional institutions such as banks into increasing their digital capabilities.
Therefore, while a specific area of Taiwanese FinTech is improving, there are still challenges that need to be addressed. Crucially, startups need to be fostered which means removing the barriers such as high entrance costs and the need to have a subsidiary based in Taiwan. The Governmental steps to help to fund and reduce risks are useful in this regard. Furthermore, the traditional banks will need to be educated in the benefits and allure of FinTech to provide incentives for large scale investment. Lastly, the development of the sandbox is highly advantageous and will help to shape policy in the long term, a benefit that might see Taiwan as being able to challenge its international competitors in the near future.