Corporate E-Banking in Taiwan*
Chi-Chu Chen (陳季筑)**
(A) Dilemma facing Taiwanese small and medium businesses (SME)
The so-called Taiwan economic miracle for the last 30 years had actually been
painstakingly built up by the roughly 1 million SME’s in Taiwan. They are
nimble in adapting their production and promotion in tune of the market conditions.
They are great price cutters as they squeezed their production costs to the limit.
This was done first by utilizing the cheap labor and land costs, and also exploiting
lenient environmental control regulations in Taiwan. Then, when labor and land
costs rose on top of higher environmental control costs as a result of stricter
regulations, the SME’s moved their production facilities to less developed countries
in South East Asia, especially to China. This move enabled the SME’s to maintain
their competitiveness vis-à-vis their foreign competitors for a while longer and thus
gave them some breathing room for staying in business. However, with each
passing day, the businessmen in South East Asia are honing their skills and
sophistication in management and are increasingly posing strong competition
against the Taiwanese SME’s. As a result, their competitiveness has been whittled
away day by day. One the other hand, they had not been successful in moving
up the ladder of management skills, vis-à-vis their competitors in the advanced
economies, such as Japan or the United States. Taiwanese SME’s are thus under
siege and this is the dilemma facing them.
(B) Dilemma facing Taiwanese local banks
Taiwanese local banks have caught a world-wide banking disease. The disease is
called “disintermediation”. In the past, the banks intermediated between the
depositors and the corporate customers by giving the funds that were deposited by
the depositors to the corporate borrowers. In the process, the banks earned a
spread that was the difference of the interest charged to borrowers and paid to
depositors. In other words, the banks played the role of an intermediary.
However, in recent days, the big corporations bypass the banks by directly going to
capital or money market for their funding needs. As a result of this process of
‘disintermediation’, the banks have been steadily losing the business. To
*
Opening Keynote Address on Financial Technology Forum 2002, Taiwan, ROC, August 27, 2002.
Chairman of General Banking Committee & Ecommerce Group Leader, Bankers Association of the
Republic of China.
**
compensate this loss of big corporate customers, the banks have to cultivate more
and more their SME customers. However, there are two drawbacks in dealing
with the SME. First, the processing costs per SME customer are higher than that
of a big corporate customer because the volume per SME customer is much smaller
than that of the big customer. Second, SME’s financial statements are not as
dependable as those of the big corporations. Without collateral, lending to SME’s is
a risky business. Traditionally, Taiwanese banks have operated in the fashion of
the pawn shop in dealing with SME, i.e. no collateral, no loan. Thus, the local
banks are facing a dilemma. To fill the vacuum left by the less risky big corporate
customers, the banks has to go down one or two rungs lower to reach riskier and
costlier SME’s. Without SME’s, the banks cannot find enough business for their
survival. But with SME’s, the banks may face potential high processing costs and
high loan losses.
(C) Electronic banking—a proverbial stone which may kill two birds in one shot
With recent advancement of the electronic banking (E-banking), especially
internet banking, we may find a solution to extricate Taiwanese SME’s and their
banks from their unique dilemmas as I mentioned before. It may go in this way:
For the banks, with careful design that utilizes data warehousing and data mining
capability, by offering E-banking to their SME customers, the bank may monitor
their customers’ activities online. By detecting early warning signs via
E-banking, the banks can take corrective actions such as reducing line of credit
to reduce the credit risks. Furthermore, the processing costs of the E-banking
are only a fraction of the traditional manual banking. E-banking solves the
problems of high processing costs and high credit losses on SME’s. For the
SME’s, the adoption of E-banking will facilitate their treasury operations with
the banks. Especially, if the E-banking is embedded to their supply chain
network, the efficiency of their operations will be greatly enhanced. Ideally, if
the E-banking is integrated with the ERP system, the SME’s managerial
sophistication will receive a quantum boost. We Chinese love to say, “Like
adding wings to a tiger”. A well thought-out E-banking smoothly integrated
with a SME’s ERP system and linked up with their supply chains will endow
those little SME tigers with electronic wings. This will give them a fighting
chance against their Japanese or American competitors.
(D) The recent developments of the E-banking in Taiwan

Corporate E-banking through EDI (Electronic Data Interchange). For
last several years, Taiwanese banks had been pushing the corporate
E-banking through the format of EDI. EDI theoretically provides a
common format for domestic and international interchange of computerized
messages in a secure environment. With hard works by the banks and
their customers alike, E-banking over EDI has progressed rapidly, with
more than 5 thousand corporate customers actively using the network for
mostly paying and receiving activities. However, there are 3 drawbacks.
The 1st one is that EDI mostly operates under a closed network. Compared
with internet banking, it is much less versatile. The 2nd one is that
software provided to the customers has to be installed by banks’ specialist in
the customers’ premises. This is very cumbersome and time-consuming.
It is also costly to maintain the turnkey software. The 3rd drawback is that
the development of the international standards for EDI has been somewhat
stunted and the EDI’s international linkage turns out to be problematic. As
a result of these drawbacks, the E-banking over EDI is destined to be
phased out in the future.

Internet E-banking by the individual banks in Taiwan. With the
progress of the internet applications, the Taiwanese banks have been taking
advantage of the technology advance and pushing the internet banking,
mostly for retail customers. Also certain banks have been conducting the
experiment in internet corporate banking. However, there are certain
limitations for the experiments. The first one is that they are stand-alone
in house operations without much of networking with other banks. For
example, there is no account-aggregation function performed. The second
vexing problem is the security certificate issued by one bank for accessing
services cannot be accepted by another bank. Even worse, certificate
issued for one type of banking services cannot be used for another type in
the same bank. For example, certificate for paying and receiving cannot
be used for credit cards operations. The third limitation is that the internet
banking is not linked to the customers’ supply chain network or ERP system.
This renders the effectiveness of the services to be much limited.

C-Project, a pilot project to link supply chain, logistic automation and
E-banking for information industry, funded and sponsored by the
Government and supported by Bankers Association of Taiwan. Since
last year, the Ministry of the Economic Affairs (MOEA) had invited and
approved 9 banks to join the C-project. C-project is an internet banking
pilot project linking participating banks with their information industry
customers to form a seamless network of supply chain, logistic automation
and E-banking. The network will be operated under XML internet
environment. All the message formats relating to the banking side is being
coded by Bankers Association’s technology task forces that comprise of
more than 100 staffs from the member banks. The C-project is expected to
be completed in the Year 2002. By that time the participating 9 banks and
over 10 major information high tech companies and their over 3000 satellite
suppliers will be linked together for online business. As for E-banking
services provided, they will comprise, among other things, online financing,
online domestic and international paying and receiving, online account
aggregation and online foreign exchange dealing.

An Inter-bank common platform (ICP) sponsored by Bankers
Association. To facilitate the operations of the C-project, the banks need
an ICP for centralizing data interchange, inter-bank paying and receiving,
accounts aggregation and other inter-bank switching services. The ICP will
be operated by Financial Information Service Co. (FISC), a financial service
provider jointly owned by the Taiwanese banks. To avoid duplication of
efforts, FISC can also provide turnkey services for other non C-project
participating banks to serve their corporate customers over internet banking.
To provide objectivity and credibility, the ICP has to be sponsored and
supervised by the Bankers Association.

Bankers Association sponsored a Root CA (certificate authority) to
provide inter-operability of access certificates. Bankers Association has
selected Taiwan-CA.COM to operate as Root CA. The certificates issued
by any bank in Taiwan will be recognized and accepted by other banks.
(E) A Concluding Remark
David defeated Goliath by using the then high tech slingshot. Taiwanese
businesses and banks are a bunch of Davids in the international business arena.
To beat the Goliaths, they need technology over the brute force. The internet
environment provides ideal technology leverage to leap-frog over the sophisticated
businesses and banks in the advanced countries. Besides, the individual David
who works alone is too poor in resources. If a Citibank could shell out billion of
U.S. dollars per year in IT investment, how could a Taiwanese bank, even Bank of
Taiwan, the largest bank in Taiwan, ever hopes to match its spending? The only
way is to license cutting-edge softwares from the existing software providers, and
to pool the resources together among the banks and businesses to form common IT
platforms. With the joint efforts from the Taiwanese banks and businesses, under
the umbrella of Bankers Association in Taiwan, and with active support from our
government, I am very pleased to report to you that we have taken a first step
toward internet banking in Taiwan and potentially it will become a giant leap
toward a seamless electronic community for Taiwanese businesses and their banks.
In this way, Taiwan will be at the forefront of the internet revolution which
definitely will overshadow the Industrial Revolution in its positive and profound
implications for the advancement of the human society.