Korea urged to adopt 'negative regulatory system'
President Moon Jae-in and Financial Services Commission Chairman Choi Jong-ku, second from right, listen to Kakao Bank's presentation on mobile banking at Seoul City Hall, Tuesday. Yonhap
Deregulation should help create disruptive services
By Park Hyong-ki
The financial regulator should speed up its move toward a “negative regulatory system” in order to create an ecosystem allowing new and more innovative services, analysts and industry sources said Wednesday.
They said that President Moon Jae-in's bid to ease rules on internet banks is a positive step but overhauling financial regulations at the same time is urgently needed to help market players develop disruptive services.
Such calls have come amid growing expectations that the National Assembly will pass a legislative revision enabling nonbanks, or technology and manufacturing companies, to increase their investment in online banks.
President Moon stressed Tuesday it was imperative to boost innovation and competition through the convergence of finance and technology, or fintech.
“Timing and speed is everything when it comes to innovation, reiterating the importance of relaxing rules restricting nonbanks from injecting capital into banks," said Moon.
To back the President, Financial Services Commission (FSC) Chairman Choi Jong-gu said the regulator will “aggressively” do so by lowering barriers.
However, easing the investment rules and adopting a regulatory “sandbox” are just the beginning in creating a market run under a negative system, which is urgently needed in the digital age, according to industry analysts and sources.
“Under the current positive regulatory system, there are too many preconditions for financial companies to launch products and services. It hinders players from embracing new technologies and trying to create something new and unique,” said Lee Tai-ki, a senior researcher at the Korea Institute of Finance (KIF).
Under the positive system, all new businesses and services must comply with regulations listed in the system. In contrast, the negative system minimizes pre-regulations but implements stringent penalties when things go wrong.
“Changing to a negative system requires a wide-scale comprehensive regulatory overhaul. This cannot happen overnight. But it is moving toward that step by step. Easing investment rules and launching the sandbox can be considered a first step.”
The concept of the sandbox comes from the U.S. startup community that enables people to play with ideas and create the next big thing as if they are children with wild imaginations. Lawmakers are currently reviewing a sandbox bill.
The relaxation of the Banking Act is expected to pave the way for Kakao and KT to further invest in Kakao Bank and K bank.
Under the current law, nonfinancial companies cannot own more than a 10 percent stake in banks. They are restricted from exercising voting rights in excess of 4 percent. Kakao Bank's biggest shareholder is Korea Investment Holdings, and that of K bank is Woori Bank.
Kakao Bank said its next immediate course could include buying some stakes owned by Korea Investment, should the revision pass this month.
“The deregulation is considered the starting point at which Kakao can increase investment and work on developing a new service using big data technology,” said Jaden Hwang, senior manager of Kakao Bank in Pangyo, Gyeonggi Province.
Analysts say it would, without doubt, generate synergy between the tech company and the online bank.
“Kakao can increase synergy by interconnecting its mobile payment and messenger services with the bank,” said Lee Dong-ryun, an analyst at KB Securities.
For instance, Tencent is doing something similar with WeBank, its online bank, using big data of the China-based global tech conglomerate's customers, Lee noted.
Deregulation is also raising hopes that it would lead to the creation of new mobile banks in the local market.
There is already speculation that other tech companies such as Naver and SK Telecom could form strategic equity ties with financial companies to launch their own mobile banks.
KIF researcher Lee, however, said, the market should put more importance and focus on developing exceptional services with the use of technologies, than forecasting how many mobile banks the revision can create.
“It should not be a matter of how much and how many, but what kind of disruptive services players can create through the small steps we are taking toward fully adopting the negative system,” he said.
“After the bill passes, the next step would be tackling sensitive issues concerning personal data, and trying to make amendments. This is because we can then move on to enhancing the ecosystem of big data, blockchain and other financial technologies.”