Fintech incorporation essential for banks' growth
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By Lim Jee-soo
With technology progressing far beyond what could have ever been imagined in the past, traditional industries have to reevaluate the way they conduct business in order to survive in an ever-changing landscape. The banking industry is no exception; with digitalization changing the way people handle their monetary assets, payments, transfers and loan issuances are now only a smartphone application away.
Korean banks have already taken major steps to integrate technological advances into their operations. Updating their services to include online and mobile banking is no longer an option for banks, but a necessity if they wish to maximize their reach to potential clients. This can be attributed to the high proliferation rate of smartphone usage in Korea. KB Research reported that roughly 80 percent of all Korean phone users possess smartphones, of which more than half – approximately 25 million people – utilize applications that provide smart banking services.
The opening of Bank Woori Saudara, a 74:26 joint venture set up between Korea’s Woori Bank and Indonesian financial institution Saudara, is celebrated with a visit to Indonesia by Woori Bank President and CEO Lee Kwang-goo, center, who is joined by executives from the two banks. / Courtesy of Woori Bank
This shift has been backed by the decreasing importance of face-to-face interactions in the industry, which is a trend found across most developed nations within the OECD. Whereas retail banking services used to mainly operate on a product-based sales approach that required the customer to go to a physical location to carry out transactions, more and more people are turning to none face-to-face interactions for their monetary requirements. These now make up 80 percent of all transactions, and provide a more personalized one-person, multichannel (OPMC) system with customizable banking services to best fit each person’s needs.
Aside from the preexisting channels in which the banking industry has expanded to incorporate technology into its repertoire, banks should also consider collaborating with start-ups to strengthen their presence in the burgeoning financial-technology (fintech) business. Fintech is a rapidly growing market, as evidenced by Accenture’s findings that the industry boasted a 300 percent growth in global venture capital investments in 2014. The common misconception is that fintech and retail banks are on opposite ends of a spectrum in a zero-sum game. However, a marriage between the two could potentially create a stronger financial system that is able to keep up with the fast rate of technological advances and create stronger security measures against hackers and data leaks. Banks around the world have already begun to adopt strategies to integrate these start-ups into their businesses, through methods such as acquisition, incubation and partnerships.
Such collaborations between financial services and technological industries are beneficial for both parties to create a digitally reimagined landscape. Banks can provide funding, an established customer base and mentoring for start-ups, which in turn contribute technological solutions and direct financial service applications. Start-ups, due to their small size and focus on integrating emerging information communication technologies, are better able to accommodate to the fast-paced advancements in the digital world while many banks are tied down by legacy IT systems. Outdated technology could prove fatal to the credibility of banks as it leaves them to be more vulnerable to system failures and information leaks. By working with fintech start-ups, banks could constantly upgrade their security measures and programming in a timely manner, without having to shoulder the additional opportunity cost of training employees to learn new high-level skill sets.
Despite the benefits that could come from such a partnership, the fintech industry in Korea is still in its early stages and highly underdeveloped. A study published this year by the KT Economics & Management Research Center attributes this to an unfavorable market environment, due to a lack of fintech-focused venture capital funds and tight regulations on the financial industry in general. A symbiotic relationship with credit card companies and banks is also necessary for start-ups to succeed. However, they are hindered by a feeling of hesitancy from banks, as they fear such changes may lead to closing branches and laying off staff.
This has unfortunately led to Korea falling behind in the fintech market, instead becoming the target of foreign firms such as Japanese financial group SBI and Chinese e-commerce giant Alibaba, both of which are planning to launch online services in the country. If Korean banks wish to stay competitive in a market that requires a deep understanding and utilization of new technologies, fostering a better environment for local fintech start-ups would be recommended for long-term sustainability.
Although Korean banks have integrated mobile and online transaction technology into their repertoires, they face a bigger challenge of staying competitive within a rapidly changing market where a growing number of global financial institutions are incorporating fintech into their business strategies. It is time for Korean banks to do the same if they wish to not only survive, but thrive in the new age. If integrated effectively, fintech will not be a digital disruption for banks, but the gateway to a re-imagination of the financial industry.
Lim Jee-soo is senior majoring in International Studies at Yonsei University’s Underwood International College.