The Financial Supervisory Commission last week granted licenses to three Web-only banks, a move that surprised many, as the commission had said earlier that it intended to issue only two in light of an already crowded banking market.
The commission said that a nine-member review panel had made the decision based on the trio’s different operating models and intended client bases, which would boost convenience, meet demand, promote inclusive financing and encourage innovative development and financial technology.
Judging by the experience of Hong Kong, Singapore, Japan and South Korea, the commission believes that having three Web-only banks is viable, as the market share of Internet-based banks in other nations remains low and their impact on traditional banks and market competition is still limited.
The commission also stressed that the three were approved in a fair, just and transparent manner, denying accusations that there were external forces at play in the review process.
Even though some critics remain skeptical about the decision, it is likely that the issuance of the nation’s first virtual-banking licenses will trigger technological innovation and challenge existing banks.
The development of Internet-based banks in Taiwan has moved slower than in other nations due to consumers’ concerns about online transactions, information security and personal data protection.
At present, the Internet services provided by traditional banks are still largely limited to money transfers and balance inquiries. There are few innovative financial applications, while there are disruptive financial instruments across industries and sectors that use artificial intelligence, data analytics and other applications, so when the three new banks begin operations next year, one would expect them to redefine the relationship between banks and clients with innovations.
Internet banks can set different scenarios for retail and corporate banking to serve niche, underserved segments, differentiating themselves from traditional banks.
However, heightened price competition between new banks and existing players is undesirable, as that would undermine core services and profitability.
The planned launch of the Web-only banks will directly affect the nation’s crowded and fragmented banking sector, in which the combined market share of the top three banks is still below 30 percent.
Compared with brick-and-mortar banks, Web-only banks enjoy an advantage in leveraging the large established ecosystems they possess in non-financial industries. For instance, Next Bank, led by Chunghwa Telecom Co, and Line Bank, backed by Line Financial Taiwan Corp, will have the ability to create synergies with their mobile telecom platforms and social networking apps. Moreover, Web-only banks will be more cost-efficient and flexible.
However, in terms of deposits and profitability, it remains to be seen whether Web-only banks can successfully challenge traditional banks given that there has been little impact in Japan in the 18 years since they started there.
The new players will also face large start-up costs, small-scale economies, lower client loyalty and limited profitability, at least in the beginning, but as S&P Global Ratings has suggested, the new entrants and the development of new technologies will change how consumers view and use financial services over the long term, which would ultimately affect the strategic direction of traditional banks.
In the meantime, financial regulators must pay close attention to possible risks associated with virtual banks, including liquidity management, information security, money laundering and compliance issues.
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