[The Crisis of Korean Finance] "Digital Transformation and Expansion of Non-Interest Income Are Essential for Survival"

Ultra-Low Interest Rates Slash Loan-Deposit Margins, COVID-19 Financial Support
Triggers Crisis for Banks... Focus Needed on Asset Management Services
IT Giants Enter Financial Market... Card Companies Must Specialize Platforms
Regulatory Leadership Risks Side Effects
Focus on Market Stability and Consumer Protection Roles

The financial industry in 2020 stands at a crossroads of significant change. After several years of unprecedented prosperity, it now faces a critical test directly linked to survival. The spread of the novel coronavirus disease (COVID-19) has brought a crisis not only to the domestic market but also to global finance. It is predicted that the survival of domestic financial companies will depend on how they overcome this challenge. Additionally, with big tech companies such as Naver and Kakao entering the financial industry backed by advanced technology, existing financial firms are expected to face unprecedented crises and challenges. Asia Economy diagnoses the problems of the Korean financial industry as perceived by domestic financial company CEOs and explores solutions to overcome sector-specific crises in a five-part series.

[Asia Economy Reporter Kangwook Cho] The survival competition in the financial sector, which must pursue digital innovation and global expansion amid an unstable market environment made unpredictable by the COVID-19 pandemic, is becoming increasingly fierce. Experts unanimously agree that the industry must respond to the new paradigms of 'zero interest rates' and 'digitalization.' They also emphasize the need to prepare for the aftershocks of the expected real economy shock following the COVID-19 situation.

◆ Preparing for a Surge in Credit Risk... The Era of Earning Money from Interest Income Is Over = Due to the impact of ultra-low interest rates, the net interest margin (NIM), a core profitability indicator for domestic banks, recorded an all-time low in the first quarter of this year. As the financial business model shifts to untact (non-face-to-face) operations, banks are now in a management situation where they must focus on expanding non-interest income linked to digital transformation. In particular, concerns about credit risk in the banking sector are growing due to comprehensive financial support related to the COVID-19 crisis.

Professor Sangbong Kim of Hansung University’s Department of Economics pointed out, "The delinquency rates and other soundness indicators up to the first quarter are not bad, but this is because various repayment deferral measures have been implemented mainly in the banking sector until September." He added, "In other words, the likely visible credit risks have been postponed until September and are not yet apparent, but the signs of credit deterioration are accumulating."

Professor Kim expects signs of credit deterioration to appear as early as October or at the latest November. He emphasized, "Credit risk in finance, once it occurs, comes like a tidal wave in an instant," and added, "Banks need to consider all financial support executed related to COVID-19 as the root of the crisis and manage it accordingly." He also suggested that adopting a conservative lending approach could be one method.

Jaeyeon Lee, Vice President of the Korea Institute of Finance, stated, "The era of making money from interest income is over," and pointed to asset management services as a new business for profitability expansion. Lee said, "Asset management-related services will become important," and added, "We need to find new ways to expand non-interest income by diversifying customer services related to asset management." He also mentioned, "In an ultra-low interest rate environment, services related to trusts should be improved to generate profits," and stressed, "We need to change the perception that advisory fees are free through service sophistication."

◆ The Role of Financial Authorities Is 'Market Stability' and 'Consumer Protection' = There are also claims that differentiated management strategies are necessary for survival in crisis situations. Senior Research Fellow Seonghoon Yoon of the Korea Insurance Research Institute cited Japan’s case, saying, "Small and medium-sized life insurers that survived the wave of bankruptcies in Japan did so by adopting their own differentiated management strategies, not following the general industry sales and asset management trends before and after the asset bubble burst," and added, "Investment and asset management should be able to pursue independent strategies rather than being auxiliary tools for insurance sales."

Card companies, threatened by the entry of IT giants like Naver and Kakao into the financial market, also emphasized platform specialization strategies. Research Fellow Jongmoon Yoon of the Credit Finance Research Institute advised, "Card companies should specialize with creative platforms unique to them, such as automobile brokerage platforms and installment/lease platforms," and added, "It is also necessary to expand payment platforms by linking mobile and digital technologies beyond plastic cards."

As the pace of change in the financial industry accelerates, there are also calls for financial authorities to focus on their fundamental missions of 'market stability' and 'consumer protection.'

Shinhwan Shin, President of the Korean Finance Association and Professor of Business Administration at Hongik University, said, "Financial authorities have historically set agendas to develop the financial industry, such as creative finance in the past and innovative finance currently, and have communicated these to financial companies," but emphasized, "Recently, the speed of environmental changes surrounding the financial industry has become incomparable to the past, so authorities should focus on supporting the industry to respond well."

President Shin criticized, "If government policies try to lead the financial industry, side effects occur." He pointed out that trying to introduce new agendas into the financial market, which is changing into an untact industry unlike before, could rather increase confusion. Therefore, he stressed, "The original reason for the existence of financial authorities is market stability and financial consumer protection," and added, "All efforts should be concentrated on appropriately regulating with this focus."