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(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-a-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-a-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 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.
* 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.
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