[Weekender] Fintech: Boon or bane?

For Korea’s financial industry, which has largely been stagnant since the global economic crisis, the fast rise of financial technology is both a challenge and an opportunity to regain momentum.

Fintech ― the use of information technology in financial services ― is a key word in the industry as well as a touchstone for determining financial companies’ potential for market survival.

The term no longer pertains only to online banking services operated by banks and securities firms but also refers to a wider spectrum of new businesses, such as mobile payments and crowd-funding.

The mobile payment industry is expected to be one of the fastest-growing sectors this year ― the global market is forecast to grow from 2.5 trillion won to 5 trillion won ($2.3 billion to $4.6 billion) by 2017, according to a report by LG Economic Research Institute.

With the introduction of Kakao Pay and Bank Wallet Kakao last year, customers are now able to do banking transactions through their mobile phones. The nation’s mobile carriers ― SK Telecom, KT and LG Uplus ― also joined the race recently with their own payment systems.

This may be a golden opportunity for South Korean companies, which have already taken the initiative in information technology.

But experts point out that Korea’s fintech industry needs to play catch up and that this year will be a crucial period.


Deregulation takes priority

The biggest obstacle to the development of fintech businesses here is the nation’s financial regulations.

“The top three tasks for this year are to solve the household debt issue, to promote the high-value-added fintech sector and to restructure marginal firms,” Financial Services Commission Chairman Shin Je-yoon said in his New Year’s speech.

The FSC also held its regular financial innovation committee last week and pledged to abolish 95 percent of the current administrative guidance processes, in an aim to minimize the government’s interference and to boost financial companies’ autonomy.

“Financial innovation will only be effective once the conservative practices disappear,” Shin said.

But financial authorities also have a reason to hesitate on deregulation.

“(When it comes to fintech,) financial security will be the top priority and we will make sure that no (fintech) transaction goes unsupervised,” Shin said.

His words were aimed particularly at nonfinancial IT companies which have recently stepped in the fintech market and thus remain in a regulatory blind spot.

In order to solve this twofold dilemma ― to reduce regulations for fintech operators but to reinforce financial security at the same time ― financial authorities have decided to consolidate their supervisory sectors and establish a centralized system.

“If one single supervisory sector were in charge, it would be able to keep an effective watch on the market, without interfering too much in the operating process,” an FSC official said.

For instance, Daum Kakao’s mobile banking system Bank Wallet Kakao is currently subject to multiple supervisors.

The 16 banks which are part of the payment system are subordinate to the Financial Supervisory Service, whereas the Korea Financial Telecommunications and Clearings Institute, which represents the banks, is affiliated with the FSC. The Korea Communications Commission and the Bank of Korea are also involved in regulating the service.


Korea’s fintech at a crossroads

The financial industry is banking on the success of the fintech sector this year because of the fast-evolving nature of the business and the rapid growth of competitors in the global market.

“We had suggested our vision for fintech five years ago but there was much resistance from the industry back then,” said Choi Gong-pil, a senior adviser at the Korea Institute of Finance, during a KIF-hosted seminar in December.

He also warned that the Korean financial industry should look back on the case of the mobile phone market.

“Despite their advanced technology, Korean companies were passive in the face of change and let Apple take the initiative in the blue ocean market,” he said.

“The same thing may happen again, should financial companies fail to respond actively to this new trend.”

The aggressive expansion of global players, including PayPal and Alibaba, is another threat to Korea’s nascent fintech sector.

Over 10 million financial transactions currently take place through PayPal but the financial accident rate stood at a mere 0.33 percent last year.

Alibaba recently revealed a new mobile security system, Ali Money Shield, to protect mobile purchasers and track down hackers.

Korea, however, is still tense when it comes to financial security after a series of financial mishaps last year, including massive customer information leaks and loan fraud cases.

The Bank of Korea, too, forecast through its report that the rise of nonfinancial companies would lead to a decrease in the number of conventional customers and profits for banks over the long term.

But as Industrial Bank of Korea CEO Kwon Seon-joo said, while the rise of IT firms in the fintech market is certainly a challenge to banks, it may also push the industry to adapt to the new trend.

By Bae Hyun-jung (tellme@heraldcorp.com)