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Cherry Pay in trouble: Taiwan's potential fintech unicorn trapped in banking laws

The incident shows the glitch between Taiwan's financial innovation and laws

(Screenshot image of Cherry Pay website)

(Screenshot image of Cherry Pay website)

TAIPEI (Taiwan News) -- One year ago, a Taiwanese fintech startup clinched a top award from Singapore among 300 contestants from around the world, but it has recently been forced to temporarily halt services while under investigation for providing an international remittance service that does not comply with the Banking Act.

Cherry Pay, a peer-to-peer (P2P) money transfer matching platform, aims to provide international remittance services at significantly lower costs than traditional over-the-counter services by using mid-market rates. It has become a popular tool among migrant workers and international students in Taiwan who want to avoid expensive international wire transfer fees. The two foreigner groups account for 10 percent of the company's huge number of registered members.

The company charges both task requesters and takers only a service fee of 1 percent for each successful match made on the platform. In merely two years, the fintech startup handled an impressive NT$1.1 billion in transactions.

Cherry Pay was once celebrated as the pride of Taiwan, the country's potential fintech unicorn, and one of the hottest fintech startups in the country. Its founder, Tom Tang (湯化德), was even invited to deliver a speech sharing his story about founding the business and how the platform works, at the country's top financial regulator, the Financial Supervisory Commission (FSC).

The service is not the first of its kind in the world. The most prominent operator is London-based TransferWise, which launched the money transfer service in early 2011.

This August, however, the company was investigated for suspected violations of Article 29 of the Banking Act that stipulates only bank institutions are allowed to conduct international remittance services, following complaints about a Facebook scam in which a fraudulent seller took advantage of the platform to have over 30 buyers transfer money overseas, and then vanished with the funds.

Reports said that Tang could face up to 10 years in prison.

The development has had a chilling effect on fintech investments in the country.

In a recent interview with CommonWealth Magazine, Tang spoke in frustration about having been initially met with applause for creating an innovative P2P platform that solves problems for many people, without any knowledge that he was walking on a legal tightrope, and is today being investigated by prosecutors, with not one (official) capable of offering legal assistance.

Tang initially registered his company in Singapore, but was later invited to join the government-funded FinTechBase in Taipei, which is under FSC's supervision. Tang said he was therefore misled to think that the regulatory hurdle in the country had been cleared.

A lawyer, preferring to remain anonymous, told the media that the financial authorities did not tell Tang what he has been doing is not allowed, yet afterwards, prosecutors went to him based upon suspected violations. It shows the glitch between Taiwan's financial innovation and its legal system, he said.

FSC is said to be reviewing another round of applications for entering the financial regulatory sandbox in November, which would exempt Cherry Pay from the existing banking law, but Tang might not be able to escape prosecution, as the investigation started prior to the company entering the sandbox.

Cherry Pay has also been questioned for its poor job in money laundering prevention, when other local banking institutions are investing big money on it. Tang explained that the platform has conducted a background check for each user, but the company is hoping they can be allowed to access the country's Joint Credit Information Center to improve the job, which is not yet to open to organizations outside financial institutions.

Tang told the media that he did not regret the registration of his business in Taiwan, even though he hopes the lesson can be learned by other fintech startups, and the issue can be addressed by financial regulators to help Taiwan's fintech innovations thrive.