Fintech 'big bang' shakes up banking industry
Yim Jong-yong, Financial Services Commission chairman, delivers a speech at the second Demo Day event organized by the Fintech Center in the Gran Seoul building, on May 27. / Courtesy of Fintech Center
Korean regulators urged to remove all entry regulations
By Kim Jae-kyoung
SINGAPORE ― Last November, there was a significant development in Korea’s banking industry ― the long-awaited approval of internet-only banks ― Kakao Bank and KT Bank set to make their debuts in the first half.
Korea’s Financial Services Commission (FSC) gave two separate consortiums led by Kakao, a leading mobile messaging app operator, and KT, the nation’s No. 2 telecommunications company, preliminary approval to establish internet-only banks.
The announcement made headlines on the front page of most Korean media. Analysts and experts say that the appearance of this new breed of bank will change the landscape of the nation’s financial industry.
Ironically, from the global perspective, the new development shows how far Korea’s banking industry is lagging behind its global counterparts.
“Internet bank is already a product of the past. It should have happened already,” Choi Jung-kiu, head of Asia Pacific Financial Institutions Practice at AT Kearney told The Korea Times.
“The Korean financial industry is far behind those in China as well as advanced countries in fintech and digital banking. The problem is that Korean lenders and regulators are little aware of it,” he added.
Surprisingly, the first internet bank made its debut in 1989, with U.K.’s First Direct starting the first internet-based services in the banking industry. Since then, more internet banks, including ING Direct in Australia and Fidor Bank in Germany, have been steadily formed around the world.
The emergence of fintech, or financial technology, is changing the look of internet banks and the traditional concept of the financial industry. Fintech is a concept describing a business based on software to offer more efficient financial services.
Global trend
The transformation is taking place in two directions. First, traditional banks are behaving like technology companies by instituting digital strategies. Second, non-traditional players are entering the banking industry leveraging fintech.
Nektarios Liolios, co-founder of Startupbootcamp Fintech, wrote on the website of the Financial Brand, “We are only at the beginning of a truly transformational adventure in financial services, and the big changes will not come from the obvious players or the obvious countries.”
According to Venture Scanner, more than 1,000 fintech startups are estimated to have attracted a total of $15 billion in the U.S. as of early 2015, while similar firms are springing up like mushrooms in the U.K. and Israel as well.
In the U.K., retailers Tesco and Sainsbury are leveraging technology to run Tesco Bank and Sainsbury’s Bank, which are examples of large retailers making entry into banking. They sell most of their financial products online or through call centers, not at retail outlets.
China is no exception. Chinese firms have introduced new financial services online.
China’s Yuebao, a financial unit of Alibaba, is leading the trend, selling its money market mutual fund only online. It is the largest mutual fund in China and the fourth-largest in the world. Also in China, private bank Noah Private Wealth and P2P loan services provider CreditEase have established strong online businesses.
“The reason why fintech services are gaining popularity is that they are meeting the shifting demands of younger customers by providing simpler, faster, more convenient, and membership-based services,” Choi said.
Development Bank of Singapore (DBS) is another global bank combining its services with new technologies. The bank introduced a mobile wallet app in May, which allows customers to pay for purchases and transfer funds with their smartphones.
In an interview with Forbes in 2015, DBS CEO Piyush Gupta said the bank’s digital strategy “is actually going to make the difference between the banks that will survive and the banks that will not survive.”
In order to keep abreast of this trend, financial regulators across the world are loosening rules to help their banks and other financial services firms boost fintech investment to compete with startups equipped with innovations in digital payments and data security.
Even Japan, considered conservative in financial deregulations, is changing. Japan’s Financial Services Agency, has vowed to prepare legislation for the government in 2016 to remove red tape and help their traditional banks capitalize on the fintech boom.
Lack of sense of urgency
Despite its reputation as an IT powerhouse, Korea is yet to catch up with the global trend. Korean banks are lagging behind for two reasons ― bankers’ mindset and regulations.
First, banks and financial companies in Korea are not fully realizing the increasing threats triggered by fintech.
“They have to realize that technologies alone won’t solve their problems. They should build a new platform from scratch by breaking away from traditional practices,” Choi of AT Kearney said.
Second, financial regulations controlling new entries have prevented Korean financial players from pursuing innovative approaches.
“In order to create a new fintech industry or ecosystem, the regulator should remove all unnecessary entry regulations and suspend all penalties in the initial phases of development,” Choi said.
“Penalties should be considered after the businesses have started and if there are issues for macro economic stability, customer protection or fair competition, in order to shape the industry more progressively rather than stop growing the businesses,” he said.
He also calls for the regulators to reform its regulatory scheme toward a “negative” system from a “positive” one.
“Positive system regulations fundamentally undermine the creation of fintech. When all new businesses and services should be developed to meet the requirements of regulations listed in a positive system, then it is difficult to create innovative and disruptive new services,” he said, adding that the government should play the role of judge, not a player.