Road ahead for fintech and banking supervision

We usually use the word “platform” to refer to an elevated level surface that enables passengers to easily get on and off a train. So we can imagine it as an intermediary physical space between a passenger and a train or a point of contact between a passenger and the tracks on a railway.

Nowadays, the term “platform” is frequently used as a means to connect customers to a service, especially in the world of business and technology where rapid advances in technology have transformed mobile devices into platforms for wide-ranging services. 

Thus, for social networking service providers, we can think of their member accounts as a platform. For financial services providers, one platform for a bank is its customer accounts, through which the bank can offer a wide array of credit and deposit services to its customers.

Today, the rapid convergence of technology and financial services is blurring the familiar boundaries between different platforms and triggering transformative changes to financial services platforms. For example, as social networking service providers and financial services providers come to compete on each other’s turf, they are also forming business tie-ups and strategic alliances to compete more effectively.

According to the payment settlement data for the month of June this year, 40 percent of fund transfers between bank accounts were executed through internet and mobile banking platforms. In addition, financial technology companies such as PayPal and Toss are taking a growing share of money transfer services, and fund transfer services in foreign currencies are also opening up to fintech companies.

One likely consequence of what some refer to as the fintech revolution is the accelerating drop in the number of customers who visit a bank branch for banking services. Even deposit-taking and lending services, the core banking services, now have to compete with the likes of peer-to-peer, or P2P, lending and crowdfunding.

In his 1999 book titled “Business @ the Speed of Thought,” Bill Gates famously observed that “banking is necessary, but banks are not.” It was a bold prediction of the many transformations to come to banking as a result of relentless advances in technology.

In many respects, banking used to be a sheltered business with high entry barriers and protective regulations.

This is, however, no longer the case. Moreover, as the boundary between financial services and technology increasingly becomes less distinct and more irrelevant, and disruptive innovations become the new normal, we will need to rethink what banking is or should be and reassess what the implications of banking-technology convergence may be.

There is no question that the emerging “digital” environment poses a new set of challenges to Korea’s banking industry. Let me elaborate on a few.

First, I see a need for an overhaul of the banking industry’s “offline” business structures and service channels.

As platforms for banking services continue to improve and evolve, the “long-tail phenomenon” among bank customers will most likely intensify and force banks to invest in new digital service channels while simultaneously maintaining the existing branch operations. Such prospect points to the need for some fresh outside-the-box thinking on an array of issues ranging from flexible work hours to performance-based pay to specialized branch services to improve the productivity of offline banking services.

Another challenge I would note is encouraging new online service channels to help spur innovation and convergence with wide-ranging fintech platforms. Developing innovative financial products and services by joining hands with technology providers is no longer an option but a necessity for most banks. So banks will need to continually refine their business models and seek opportunities that make sense in today’s hyperconnected world.

I would also posit that banking services will need to incorporate more customer-centered approaches that better connect with customers and engage them “emotionally” because customers in the new digital world can easily switch to another service provider offering cheaper, more convenient services. So, going forward, one key challenge for banks will be to effectively incorporate differentiated strategies that cultivate sustained customer loyalty.

Bank supervisors are also taking keen interest in emerging banking service platforms and their implications for the industry as a whole. As bank supervisors work to foster a propitious and dynamic regulatory climate that encourages and supports innovation, they will continue to focus on mitigating risks embedded in fintech services and make sure fintech platform and services offered through them are safe as well as secure for bank customers.

To start with, Korea’s bank supervisors are looking to revamp and upgrade the existing offline regulatory frameworks in a manner that is consistent and compatible with technological advances in banking service platforms and fintech services. Bank supervisors also intend to issue strong internal control guidelines for individual online banking service channels and call for designated internal control officers for the service channels. A new “digital risk index” is also in the works for use in identifying new risks and preventing breach of customer information. Additional measures such as consumer-friendly guide to mobile banking service channels are planned so that useful financial product information is made readily available to all consumers.

It is said that a “digital revolution” -- also dubbed “the fourth industrial revolution” -- driven by rapidly advancing technology is upon us. The time has come then for Korea’s banking institutions to innovate and move forward with earnest judgments about changes that are likely to come from advances in technology for banking and other financial service platforms. Korea’s bank supervisors are certainly eager to do their part in helping to create a safe and sound climate for innovative technology platforms for banking and further raise the banking industry’s global competitiveness.

By Yang Hyun-keun, Deputy governor, Financial Supervisory Service