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Taiwan’s first two digital banking entrants have just completed their first year in business, with strong customer growth coming at the expense of profits.
LINE Bank, a subsidiary of LINE Financial, lost NT$2.3bn ($78.7m) between April 2021 and March 2022, and Rakuten Bank, a subsidiary of Japanese e-commerce giant Rakuten, lost NT$705m ($24.1m) between March 2021 and March 2022.
On the bright side, LINE Bank pointed to its swift customer growth and high debit card uptake as reasons to be cheerful.
After launching in April 2021, LINE Bank said it now boasts more than 1.1m customers. This is an impressive feat in a country of 23.5m people, and even more so considering that Taiwan — which now has 39 licensed lenders — is often considered overbanked.
Moreover, 75 percent of LINE Bank’s customers in Taiwan are between the ages of 20 and 39, and describe themselves as familiar with digital technology, according to LINE Bank’s internal data.
In a company statement, LINE Bank also said that, based on data from Taiwan’s National Credit Card Center (NCCC), its debit card transaction volume and value per card during its first year exceeded “all industry peers”.
In reality, what this really means is that LINE Bank’s debit card proved to be more popular than Rakuten Bank’s, which was LINE Bank's only challenger for most of that time.
This changed in January this year, however, with the trial launch of Next Bank, whose official launch followed in March.
Next Bank is Taiwan’s third and latest entrant to the digital banking arena, and will also be offering a debit card issued by Visa.
But of all of LINE Bank’s first-year results, perhaps the most interesting are its loan and deposit figures.
By the end of March this year, LINE Bank’s total deposits grew 45 percent compared to the previous quarter, and its total loans issued grew 115 percent compared to the previous quarter.
Moreover, 70 percent of LINE Bank loan customers opted to apply for or draw down loans outside of office hours, a statistic that LINE Bank executives say highlights the platform's strong product-market fit.
“In just one year of operations, we’re already seeing changes in how financial services are being used and who is using them, as Millennials and Gen Z users expect their app platform to solve their everyday financial needs in a convenient and intuitive way,” said In-Joon Hwang, chairman of LINE Bank Taiwan.
“As a challenger to the traditional banking industry, LINE is using its experience and knowhow as a technology platform to develop convenient and innovative financial services faster and on a larger scale, and can reach end-users directly via mobile devices.”
Cost of customer acquisition
As VIXIO reported earlier this week, the biggest challenge facing fast-growing digital banks is how to turn strong customer growth into strong revenue growth.
This was noted by the International Monetary Fund (IMF) in its report on “fast-moving” fintech, alongside the curious observation that the fastest-growing digital banks tend to lose the most money, often by spending large amounts on marketing.
LINE Bank appears to be a good example of this pattern, as noted by Phil Tong, chief secretary of the Banking Bureau at Taiwan’s Financial Supervisory Commission (FSC), who said the bank’s NT$2.2bn loss was the result of its aggressive marketing outlay.
According to local media outlets, Tong was moved to comment on LINE Bank’s heavy losses due to a rule that forces online lenders in Taiwan to limit net losses to one third of their paid-in capital.
Since LINE Bank’s paid-in capital is only NT$10bn, the FSC said the bank is now considering taking on new investment.
From additional FSC data, we also know that, at the end of December last year, LINE Bank had a depositor base of 732,600, which is almost ten times that of Rakuten Bank.
Zennon Kapron, director of financial technology research and consulting firm Kapronasia, said both sets of results are typical of newly-launched digital banks, but he added that Rakuten Bank’s losses should be seen in light of its target market.
“It is no surprise that Taiwan's digital banks lost money in their first year of operation,” said Kapron.
“Online lenders tend to do that”, he said adding that both have strong respective ecosystems. “LINE is the closest thing Taiwan has to a super app, while Rakuten has carved out a niche in cross-border e-commerce with Japan, Taiwan's third largest trading partner.
“Still, they face an uphill battle in persuading Taiwanese to choose them as primary retail banks.”
Kapron notes, for example, that as of January this year, LINE Bank’s average deposit was around NT$39,312 (US$1,345) per account, suggesting that few depositors are using it as their primary account.
“Many Taiwanese already have multiple retail bank accounts, owing to local business culture which requires people to receive their salaries at the employer's bank. Change your job in Taiwan and you often need to open a new account.”
In the IMF’s recent report on neobank regulation, it also warned of the systemic risks posed by fast-growing digital banks that target younger, high-risk loan customers, who are typically less “sticky” with their deposits.
Among other regulatory proposals, the IMF called for digital banks to operate with higher liquidity coverage ratios in line with Basel III requirements.
