Virtual banking to launch in 2020
Each virtual bank is required by the FSC to have at least NT$10 billion (US$320 million) in capital, and at least one bank among its shareholders or 40% of its shares held by financial holding companies. The virtual bank is allowed to set up ATMs, but can only have one head office and is banned from setting up physical branches.
The virtual banks are expected to launch in 2020. “I take this as a positive rather than a negative. This will change the mindset of the incumbent banks in the industry,” says Jerry Harn, president, Fubon Financial Holdings. He suggests the incumbent banks need to start thinking about how to better understand their clients’ needs instead of asking them to simply follow the rules set by banks.
However, incumbent banks believe the virtual banks will have a limited impact on the banking industry. “In the short run, I do not think the virtual banks will impact us in the sense of taking large market share and profits,” Harn says.
In Asia, Japan was the first market to launch a virtual bank (Japan Net Bank) back in 2000, with China following in 2014 by rolling out Tencent’s WeBank, and South Korea in 2017 when K Bank and Kakaobank became fully operational. The Hong Kong Monetary Authority (HKMA) also granted operation licenses for eight virtual banks this year. And in Singapore, up to five new digital bank licenses will be issued, according to the Monetary Authority of Singapore (MAS).
However, virtual banks are not likely to fully replace offline banking branches in the near future. “Judging from the existing cases, virtual banking has a certain market share, but it has not dominated the market. In China, for example, Alibaba and Tencent are global tech giants, but their virtual banking businesses have less than 1% of market share,” says Joseph Huang, president of E.SUN Financial Holding Company and E.SUN Commercial Bank.
“The digital channel is complementary to real branches,” Huang emphasizes, noting that it is difficult for online channels to cover all the services that offline branches provide.
“For example, suppose someone who is retiring today has NT$10 million to invest, would this person just check online and make an investment decision online? I think this person is more likely to consult someone in person, seeking a sense of security. This is human nature,” Huang explains.
Although virtual banks are not likely to dominate the market in the short run, several incumbent banks have shown interest in the virtual banks by investing in them. Taipei Fubon Bank is among these investors with its 25.1% holding in LINE Bank.
“We believe investing in LINE Bank increases the chances of success. In our experience, when doing fintech business or online applications, the most difficult part is customer acquisition. But the last thing that we need to worry about in this joint venture is customer acquisition – LINE has 21 to 22 million users in this tiny island of 23 million. They have cracked the most difficult and costly part,” says Harn, who has about 12 million clients at Fubon Financial Holdings.
“This cannot be compared to the large client base of LINE,” Harn adds, noting that the users of LINE show more engagement and stickiness.
LINE, the free instant communication application, is operated by LINE Corporation, a subsidiary of Korea-listed internet search engine company, NAVER Corporation. As of January this year, the app has 194 million monthly active users globally, according to Hootsuite. Its mobile payment platform, LINE Pay, is also widely used in Taiwan.
CTBC is another investor in LINE Bank, holding a 5% stake. Yet this is not the first time the bank has worked with LINE. In February 2017, CTBC launched a credit card linked to LINE Pay.
“With LINE Pay, in the first year, we got 1.2 million cardholders. In the past two years, we issued 2.8 million cards with half of them being new clients,” says Daniel Wu, president, CTBC Financial Holding, noting that the majority of these clients are millennials. This growth is rapid compared to previous cases.
“With the credit card we launched with Costco, we took about five years to get to one million cardholders,” Wu notes.
However, such partnerships are not always popular. “LINE did the same thing in Japan, issuing LINE Pay cards, but they failed. Now with success in Taiwan, they are trying again in Japan,” Wu says. “LINE Corporation’s revenue still comes mostly from the advertising and content side.”
However, some incumbent banks are absent from the list of virtual bank shareholders, and for good reasons.
“When FSC revealed the three virtual banks, we had three plans for this. The first one was to invest about 40% in one of them and become the major shareholder; the second was to invest about 5% as a test to see how it goes; the last was not to invest and fully develop our own online business, which was the final decision,” Huang recalls.
Huang says E.SUN had a lot of debate internally, but finally decided their substantial existing business is the company’s core.
“E.SUN’s current market value is about NT$300 billion, which is about US$10 billion. This number was about NT$210 billion at the beginning of this year, meaning that we grew by almost NT$100 billion over eight months. This is the fastest growth among local peers,” says Huang.
E.SUN aims to maintain this growth momentum. “Investing in a pure-play online bank will not make our own digitalization pace faster. We need to use all our technology and personnel resources to enhance our core business as well as our own digital channels,” says Huang, adding that E.SUN was ranked number one by regulators in sectors such as digital loans, digital payments, and digital credit cards.
“In the next few years, Taiwan’s financial industry will be more exciting and diversified. The growth will be at a faster pace. Financial institutions that can best incorporate technology, attract talents, and understand customer needs will be on the right track to success,” Huang says.