The number of Fintech services and electronic payments are rising fast in South Korea. But complicated regulations and what Koreans perceive to be a small domestic market, are considered obstacles to its further development.
Mainly responsible for fintech policy is the Financial Services Commission (FSC). The FSC draft legislation to put to the national assembly and oversee its implementation. It is a government agency with statutory authority over financial policy and regulatory supervision with the chair and vice chair appointed by the President.
Korea’s regulatory sandbox scheme was launched 2019 following the passage of the Special Act on Financial Innovation Support. It aims to support commercialization of innovative fintech solutions and ideas in order to bring more convenience for consumers and promote competition and growth in the fintech sectors. Fintech firms and financial service providers can apply for the designation of ‘innovative financial services’ by the FSC provided that their service is clearly distinct from other available services and has a potential to contribute to consumer convenience. The designation criteria include the innovativeness, consumer convenience, consumer protection and impact on financial stability. Once designated as an ‘innovative financial service,’ regulatory exemptions apply for a 2-year period which is renewable once thereafter.
Korea’s two major internet-only banks launched in 2017 have attracted millions of customers seeking more convenience in their banking experience.
Korea’s open banking system was fully launched in December 2019. Through open API initiatives, fintech firms can access banks’ payment network and pay lower transaction fees. The banking sector can take advantage of the increased competition for innovation. From a consumer perspective it allows bank users to pick a (one) mobile banking application of their own choosing to manage all their bank accounts in a single platform without having to use separate applications for different banks.
By June 2020, six months after the service opened, more than 20 million subscriptions to Open Banking was registered which is more than 70 percent of the economically active population.
The revision bill to the Credit Information Use and Protection Act passed the National Assembly from 2019 provides a legal basis for the commercialization of MyData businesses through which individuals can access their integrated personal information and receive financial advising and asset management services. MyData businesses can analyze financial status and spending patterns of individuals to provide financial advising services and offer a comparison of financial products.
An international comparison by EY find Korea to have 2 leading fintech firms and a Fintech adoption index of 67 percent. The Korea FSC consider this performance insufficient compared to “peers like China and the UK”. It is, however, the same level as Singapore and Hong Kong and slightly ahead of Sweden and Germany.
The FSC is committed to scale up the fintech industry in Korea in 2020 and announced early in the year 8 policies for continued work:
- Support fintech firms to be self-sustained, in addition to regulatory easing, by providing comprehensive consulting.
- The regulatory framework does not fit well with the de-centralized and non-physical fintech industry logic. Short term a government led ex-ante revision model is sought. Rarely mentioned by anyone is that the sandbox exceptions are temporary and will eventually need to be established in new law, if not only forever extended exceptions. This is likely to lead to a growing backlog of frameworks to modernize in law to put to the national assembly.
- New players are hindered to enter the market by regulatory uncertainty. Small or temporal licenses can improve.
- Promoting new services cannot undermine consumer rights. Responsibility should be put to the firms in case of an accident and security should be based on principles rather than rules to allow greater autonomy and responsibility. There also need to be frameworks for supervising e.g. 3rd party cloud service providers and financial platforms, and introduction of regtech & suptech (regulation and supervision technology) to enhance supervisory capabilities.
- Develop Open Banking to Open Finance by including more participants in a Open Banking 2.0. Launch a Bigdata Initiative by upgrading a Financial Bigdata Open System and establish a data open market.
- Investors lack confidence in profitability of investments in the fintech industry basically due to lack of trust. Opportunities to build trust and confidence is needed.
- Fintech firms should be encouraged to go abroad to seek larger markets. Support in New Southern Policy, promote to fintech lbs in ASEAN, and support networking in annual Korea Fintech Week (was originally planned for 28-30 May in Seoul).
- Find out where the market does not work and provide preferential treatment through taxes (e.g. reduce corporate tax for a few years, lower tax on P2P investments), and offer an education programs through the Fintech Center to supply more specialists to the market.
Fintech is a New Growth Engine in Korea
Korea shares fundamental economic challenges with other innovative countries: Economic stagnation from low growth, low interest rates and low prices; An aging population and the world’s lowest birth rate with less than 1 birth per woman (Sweden 1.8); Digitization that fragments established markets while creating new opportunities not least in banking and finance.
After a long success with the strategy of being an input-driven fast-follower, productivity growth is slowing and the public strategy need to focus on productivity-driven innovation. South Korea has identified potential in 8 New Growth Engines. Fintech is one of them. (The other New Growth Engines are, New energy sources, Smart agriculture, Smart cities, Hyper connectivity, Future mobility/ vehicles, Drones, and Smart manufacturing.)