Industry Trend Analysis - Regulatory Hurdles Weigh On Positive Fintech Outlook - MAY 2018


BMI View: Taiwan has a solid technical framework for the adoption of fintech, but the slow pace of regulatory development and unenthusiastic addressable user base threatens to hinder meaningful progress to fintech development. There is limited room for growth, a lacking of a unique value proposition for investors and little incentive for companies to implement new technologies.

Taiwan's positive fundamentals put it in a good position to benefit from an increased interest in fintech and we believe that the economy has considerable potential. However, regulatory hurdles and the lack of fintech awareness are likely to see the industry develop at a considerably slower pace than regional hubs Singapore and Hong Kong. The passing of Taiwan's Act on Financial Technology Innovations and Experiments in parliament in late December after months of negotiations underscores the difficulties faced by the government as it attempts to create an environment conducive to the development of fintech in the country. However, continued concerns on the part of the Financial Supervisory Commission (FSC) and legislative hurdles suggests that fintech will struggle to gain traction in Taiwan and that conventional banking processes will continue to dominate over the coming quarters.

Fundamentals: Technologically Ready...

With commercial 2G networks turned off in mid-2017 and 3G spectrum set to be repurposed for 4G use by end-2018, the entire Taiwan mobile market will be linked to high-speed, data-capable networks. The well-developed mobile market, coupled with the country's small size, high financial inclusion and debit/credit card penetration means that the Taiwanese population is well equipped to embrace developments in digital payment platforms and other mobile-based fintech applications. We forecast Taiwan to have ended 2017 with a mobile penetration rate of 122.8%, while 91.4% of the population aged 15 and above have at least one bank account (latest World Bank data).

Taiwan Mobile Market Is Data Ready
Taiwan Mobile Market Trends
e/f = BMI estimate/forecast. Source: BMI, national sources

Taiwan also benefits from the National Communications Commission's (NCC) hands-off approach to regulating the sector; what intervention there is is largely aimed at promoting competition, assigning new spectrum/frequency and developing communication standards. A policy of non-intervention has allowed mobile operators to implement new technology and standards rather quickly, with market forces dictating provision of services and coverage. The strong telecoms regulatory framework is reflected in the Industry Risk pillar within the Q218 update of our proprietary Telecommunications Risk/Reward Index, which sees Taiwan score well above the Asia Pacific average. By contrast, banking regulations are not keeping pace with technological development, blunting the appeal of fintech.

Taiwan Benefits From Good Regulatory Environment
Taiwan v Regional Risk/Reward Index, Q218
Source: BMI

...But Consumer Base Remains Unenthusiastic

Taiwan currently does not have any Internet-only banks, while the mobile payments sector is dominated by foreign players Alipay, WePay, Apple Pay and Android Pay, although there have been attempts at local players entering the sector, namely through Taiwan Mobile Payment Co's T Wallet+ service which launched in mid-2016. The system was based on host card emulation (HCE) software which, despite being less secure than Apple Pay's secure element foundation, worked in fundamentally the same way. T Wallet+ ultimately faltered due to lack of adopters, despite having twice the amount of partner banks relative to Apple's payment solution, as a majority of Taiwanese still prefer cash for consumer transactions. The density of automated teller machines (ATMs) could also explain the preference of cash: state-owned Financial Information Service Co. (FISC) reports that there are 118 ATMs per 100,000 persons in Taiwan. Neighbouring China has 81.45 ATMs per 100,000 persons.

Adoption of local mobile payment solutions is also slow due to the nature of how these systems were introduced. Payment providers offered promotions and discounts to entice users to adopt the service, and struggled to retain customers after these promotions ended. The Institute for Information Technology (III), an NGO reporting to the Ministry of Economic Affairs found in a May 2017 survey that two-thirds of Taiwanese make less than four mobile payments a year, with nearly nine out of 10 making payments of less than TWD1,000 (USD34.2) per transaction.

Regulatory: Fintech Bill Positive...

The passing of Taiwan's Act on Financial Technology Innovations and Experiments in parliament in late December after months of negotiations underscores the difficulties faced by the government as it attempts to create an environment conducive to the development of fintech in the country. We note that the passing of the bill is a positive step indicating a gradual improvement in the regulatory environment. However, continued concerns on the part of the Financial Supervisory Commission (FSC) and other legislative hurdles suggest that fintech will struggle to gain traction in Taiwan and that conventional bank lending will continue to dominate in the medium term.

We highlight that Taiwan's fintech service experimentation 'sandbox', which was established in 2016, is based on those employed in the UK and Singapore and has the world's longest potential experimentation period. Businesses can renew their tenancy for up to three years. Those who do not meet the requirements can enjoy an initial one year and an extension of no more than six months on application. In addition, the law has stipulated that the committee has to decide within 60 days if a submission qualifies for the sandbox, which would help minimise bureaucratic red tape. We note that the establishment of a sandbox, particularly one with high standards, will be positive for the overall fintech environment and could encourage startups to launch their projects from Taiwan.

...But Regulations Could Derail Positive Momentum

However, caution on the part of the FSC could see the sandbox fail to progress promising solutions to the implementation stage, with the FSC appearing reluctant to engage during the bill hearings. In addition, the FSC has been tasked with drawing up the sandbox applications procedures; it states that the rules will be likely released in Q218. We cannot rule out the possibility of the FSC creating tougher rules as it seeks to strike a balance between deregulating the industry and keeping Taiwan off the Asia Pacific Group on Money Laundering (APG) money laundering watch list. We note that the successful implementation of the sandbox will require a close coordination between the FSC and the industry to constantly fine tune regulations but the need to balance the various concerns could weigh on the development of fintech.

Furthermore, it appears that fintech does not feature prominently on the government's priority list as it seeks to develop its Asia Silicon Valley initiatives, move into AI, and implement the Forward-Looking Infrastructure Development plan. We highlight that one of the main proponents for fintech is lawmaker Jason Hsu, who is from the opposition Kuomintang (KMT). Hsu has been one of the bill's strongest champions and has been constantly seeking to create an environment that would be conducive for the development of fintech. However, given that the ruling Democratic Progressive Party (DPP) controls more than 60% of parliament, Hsu was only able to push through the bill after coordinating with DPP legislator, Karen Yu. We note that there was some disagreement on the degree of flexibility between Hsu and Yu, with Hsu stating that he had urged the DPP and FSC to remove as many restrictions as possible. In contrast, Yu had stated that stricter rules were unlikely to matter as the FSC had the final responsibility for drafting the applications procedures. This could result in the creation of stricter regulations, which would diminish the attractiveness of Taiwan as a fintech startup destination.

Cybersecurity Robust In Taiwan
Financial And Cybercrime Index
Source: BMI

As such, we believe that regulatory concerns are likely to present the biggest challenge to Taiwan's optimistic outlook as the authorities seek to balance various objectives. Taiwan has developed a reputation following its involvement in several international financial scandals and the FSC is concerned that the deregulation of the industry to allow for increased usage of cryptocurrencies could further tarnish Taiwan's reputation. We also highlight that Taiwan's score of 84.0 in our Financial and Cybercrime index places it in the middle of its peers and the slightly higher score is largely due to the smaller risks compared to regional financial hubs Singapore and Hong Kong. As we expect fintech to take some time to gain traction, the conventional banking will likely maintain its dominant position and we maintain our forecast for loan growth to expand by 3.5% in 2018, up from 3.0% in 2017, due to the still-positive economic outlook.

Macroeconomic Forecasts (Taiwan 2014-2020)
Indicator 2014e 2015e 2016e 2017e 2018f 2019f 2020f
e/f = BMI estimate/forecast. Source: National sources, BMI
Population, mn 23.41 23.49 23.56 23.63 23.69 23.76 23.82
Nominal GDP, USDbn 531.2 527.8 531.7 573.2 615.0 654.9 689.4
GDP per capita, USD 22,126 21,950 22,082 23,782 25,491 27,126 28,545
Real GDP growth, % y-o-y 4.0 0.8 1.4 2.9 2.5 2.8 3.2
Industrial production, % y-o-y, ave 6.4 0.0 -0.3 3.0 5.2 3.1 3.3
Consumer price inflation, % y-o-y, ave 1.2 -0.3 1.4 0.6 1.5 1.8 2.0
Consumer price inflation, % y-o-y, eop 0.6 0.1 1.7 1.2 1.6 2.0 2.0
Central bank policy rate, % eop 1.88 1.63 1.38 1.38 1.50 1.63 1.75
Exchange rate TWD/USD, ave 30.33 31.77 32.26 30.43 29.50 29.00 29.00
Exchange rate TWD/USD, eop 31.66 32.86 32.33 29.73 29.50 29.00 29.00
Budget balance, TWDbn -136.7 17.1 -54.8 -151.8 -191.4 -208.5 -228.0
Budget balance, % of GDP -0.8 0.1 -0.3 -0.9 -1.1 -1.1 -1.1
Goods and services exports, USDbn 421.2 376.7 351.3 394.9 416.3 441.9 464.3
Goods and services imports, USDbn 370.4 314.4 291.0 322.2 366.8 390.8 413.6
Current account balance, USDbn 62.5 75.5 72.8 84.1 86.5 90.1 92.0
Current account balance, % of GDP 11.8 14.3 13.7 14.7 14.1 13.8 13.3
Foreign reserves ex gold, USDbn 419.0 426.0 434.2 451.5 538.0 628.1 720.1
Import cover, months 13.6 16.3 17.9 16.8 17.6 19.3 20.9
Total external debt stock, USDbn 177.9 159.0 172.2 162.0 154.7 147.8 141.3
Total external debt stock, % of GDP 33.5 30.1 32.4 28.3 25.2 22.6 20.5
Crude, NGPL & other liquids prod, 000b/d 1.7 1.7 1.7 1.7 1.7 1.7 1.7
Total net oil exports (crude & products), 000b/d -946.3 -967.0 -970.9 -975.9 -978.9 -980.9 -982.9
Dry natural gas production, bcm 0.3 0.3 0.4 0.4 0.4 0.4 0.4
Dry natural gas consumption, bcm 16.4 19.7 19.8 20.0 20.3 20.7 21.1