By Yoon Ja-young
The financial regulator is considering allowing online banks, but the plan is facing an obstacle ― the country’s regulation that bans industrial capital from owning a bank. Analysts criticize that the government regulation is making Korea fall behind in the global competition to lead in the “FinTech” sector.
FinTech, or financial technology, is expected to change the landscape of the financial industry by transferring the power to IT companies. They are providing diverse financial services based on the Internet and mobile devices.
China’s IT giant Alibaba, for instance, set up a financial company to provide small-sum loans to online shopping businesses. It acquired an Internet bank license from the Chinese government last year.
The Internet-only banks took 3.1 percent of total assets of commercial banks in the United States as of 2014 March, and Japan is seeing the assets of such banks grow by an average 32 percent annually. As Internet-only banks can lower costs, they can attract customers with better interest rates and lower fees.
Korea, an IT powerhouse, however, is lagging behind in this game. Experts say regulation, especially the strict separation between financial and industrial capital, is hindering setting up these innovative banks.
Currently, industrial capital is banned from owning more than 4 percent of a stake with voting rights in banks. As major Internet companies such as NHN and Daum Kakao are all industrial capital, they can’t set up an Internet-only bank under the current law. Only financial companies can do this.
Analysts point out that the Internet-only banks set up by banks will be little different from Internet banking service they currently offer. Jeon Yong-sik, a research fellow at Korea Insurance Research Institute, said it would be nothing more than the expansion of banks’ Internet channels. He added that it would “aggravate the household debt problem amid worsening household capability to pay back loans,” as the new banks are likely to provide loans to customers with poor credit ratings.
Oh Jung-geun, president of Asia Finance Society, said no companies would want to jump into the Internet-only bank business as they won’t have the managerial control due to the separation act.
Pointing out that the restriction is especially strict in Korea, he said it is time to give it second thoughts. “The separation principle was adopted on concern that chaebol would misuse the bank deposits of customers. Now, conglomerates have more than enough cash piled up with which they have nowhere to invest. They have no reason to borrow money from banks.”
He pointed out that no Korean commercial banks have an owner due to the separation act. “The problem is that they are de facto controlled by the government.”
He said that as lawmakers aren’t accepting the changes and the government officials are enjoying their control over the banks, Korea’s financial industry is lagging far behind its global competitors.
Kim Dong-hwan, a senior research fellow at the Korea Institute of Finance, however, said it is still early to talk about easing of the separation act.
“The previous Lee Myung-bak administration had eased the regulation, allowing industrial capital to own up to 9 percent of the bank, but the current administration strengthened it again to 4 percent.”
He said the separation principle, which was first adopted in the United States, exists globally, though it is somewhat stricter in Korea.
“Korean chaebol are still not free from moral hazard issues and thus no consensus has been reached over whether the restriction should be eased. Moreover, they may be tempted to use the banks as their private coffers, as seen in the savings banks scandal, as the business environment is worsening for conglomerates.” He said that many other countries, including the United States, are strengthening the separation after the global financial crisis.
While Internet-only banks may avoid the separation issue by establishing themselves based on the e-Financial Transaction Act instead of the Banking Act, he said they will still need supervision on payment and settlement like offline banks anyway. “There should be more thorough discussion on this,” he said.
Kim Sang-jo, a professor at Hansung University, said the government should start with defining what an Internet-only bank does.
“If it does all the bank businesses defined in the Banking Act, then it can’t be exempt from separation rules.”
If the online bank is allowed to do only payment and settlement, not deposits and loans, then it could free itself from concern that its major shareholder may be borrowing the money for itself.
“Then, the industrial capital, which has strength in IT, will be providing the payment and settlement service more effectively than the old banks, through the Internet.”
He stressed the separation regulation shouldn’t be the main issue of Internet-only banks.