[Future Dialogue Between Yoon Administration and Banks]
"Banks Have No Future If They Imitate Big Tech... Must Compete Through Financial Industry Advancement"
On the 19th of last month, the "Future of Banking Roundtable" was held at Asia Economy. Donghwan Han, Director of KB Management Research Institute (left), Suhyun Ahn, Professor at Hankuk University of Foreign Studies Law School, and Byun Yoon Lee, Senior Researcher at Korea Institute of Finance, are posing for a commemorative photo.
[Society = Jeong Jae-hyung, Head of Finance Department, Edited by Shim Na-young] Banks are uneasy as the new government is about to take office. The only signal sent by the Presidential Transition Committee to the financial sector is the creation of a disclosure system for the interest rate spread between deposits and loans, claiming that "financial companies are making excessive profits." Although banks posting record profits day after day appear to be doing well on the surface, the reality is different. Big Tech is rapidly encroaching on the financial territory.
The Moon Jae-in administration, which emphasized innovative finance, opened the era of internet banks and fintech. What kind of future does the new government envision for banks? Asia Economy took a sneak peek into the next five years of financial policy through a roundtable discussion titled "The New Government and the Future of Banks."
The roundtable held on the 19th of last month at Asia Media Tower was attended by Han Dong-hwan, Director of KB Management Research Institute; Ahn Soo-hyun, Professor at Hankuk University of Foreign Studies Law School; and Lee Byung-yoon, Senior Research Fellow at Korea Institute of Finance. The first thing they unanimously pointed out as the most urgent task for the new government regarding the future of banks was to revise Article 37 of the Bank Act, which states, "Banks may not own more than 15% of the shares of other companies."
The common view among the participants was that "while maintaining the existing principle of 'prohibition of industrial capital ownership of banks and restriction on banks' entry into non-financial industries,' banks should be allowed to enter non-financial sectors exceptionally when necessary." For example, this could apply when a bank acquires an IT company to absorb technical personnel for data business or when a bank ventures into consulting to support small and medium-sized enterprises. Japan, which had also blocked banks from entering non-financial sectors like Korea, is removing such barriers.
Concerns were also raised that "banks are increasingly imitating Big Tech." The criticism was that if banks are merely chasing Big Tech's model of collecting data for marketing purposes, they cannot differentiate themselves from Big Tech. In this context, the participants emphasized that "the MyData business should develop by faithfully adhering to the bank's core function of managing customer assets." For instance, sending notifications suggesting the lowest interest rate mortgage loans when considering buying a house based on individual financial circumstances or guiding customers to refinance loans at lower interest rates than their current ones.
The following is the full transcript of the roundtable discussion.
What is the new government's philosophy on the financial industry?
▶Moderator= What philosophy should the new government adopt in promoting financial competitiveness and digital financial innovation?
▶Lee Byung-yoon, Senior Research Fellow (hereafter Lee) = I think the goals of any government or financial policy are threefold. First, the stability of the financial system; second, consumer welfare; and third, the development of the financial industry. Regarding financial system stability, household debt has surged, and loan maturities for self-employed people have been extended due to the COVID-19 crisis, leading to a significant increase in loans while interest rates are rising. There may not be an immediate problem, but risks certainly exist.
Next, regarding maximizing consumer welfare, the financial authorities have already approved three internet banks, which had a significant effect. Now, the amendment to the Electronic Financial Transactions Act (comprehensive payment license) aims to allow fintech and Big Tech companies to engage in financial business to some extent. Open banking and MyData are also intended to stimulate market competition and increase consumer welfare. Banks argue for "same function, same regulation" as new players continuously enter the market.
When asked about the new government's philosophy, it is to secure system stability and, within the scope of not infringing on consumer welfare, to promote the development of the financial industry itself?that is, to respect market autonomy and creativity and to create an environment where financial companies, as private entities, can make profits.
Senior Researcher Byungyun Lee of the Korea Institute of Finance is speaking at the "Future of Banking Roundtable" held by Asia Economy on the 19th of last month.
▶Han Dong-hwan, Director (hereafter Han) = I have been the director of the research institute for a short time and was in charge of digital finance for five years before that. I have many observations. One is that Korea, except for China, is the only country that allows Big Tech to enter finance at a very rapid pace, almost like banks or card companies.
For example, in the UK, there are innovative fintech companies like Revolut and Monzo, which are similar to internet-only banks, but in the US, none of these companies have obtained banking licenses. The US authorities prioritized systemic stability, as Dr. Lee mentioned, over consumer welfare. Despite the digital revolution in Silicon Valley, companies like Amazon or Apple have not directly entered core financial services as Big Tech has in Korea.
The US and Europe are moving toward regulating Big Tech platform companies, with regulatory bills passed. Even before Korea follows suit, fintech and Big Tech should be separated: fintech and startups should be boldly supported to foster a second Toss, while Big Tech should be restricted. We need to closely examine what consumer welfare and innovation benefits Big Tech's entry into finance brings, as well as its drawbacks.
▶Ahn Soo-hyun, Professor (hereafter Ahn) = In Korea, financial policy has centered on banks, which have been allowed to conduct a wide range of businesses under strict entry regulations. Similarly in Europe, banks had little incentive to innovate because they enjoyed stable revenue from deposit accounts. Thus, fintech innovation has only recently emerged, not only in Korea but also elsewhere.
Competition will continue to drive change in previously stagnant industries. However, there is a strong demand for fair competition, and innovation should be responsible and qualitative rather than just change for the sake of change. The distinction between fintech and Big Tech will also come up later in relation to the Electronic Financial Transactions Act. Emphasizing innovation was unavoidable initially to build the industry, but now a philosophy emphasizing responsible innovation should take root.
How to resolve the 'tilted playing field' issue between banks and Big Tech
▶Moderator= There is controversy over the 'tilted playing field' between Big Tech and financial companies.
▶Han= Looking at the MyData consent procedures, customers often agree without fully understanding the information, raising concerns about customer information protection and privacy.
Previously, we thought Big Tech services like Naver were almost angelic because they were free?free email, free messenger?but Big Tech collected highly valuable customer data.
With MyData, data that belongs to the information sovereignty of our citizens is given to the data subjects without asking, "Should we delete this data or give it to the customer?" Instead, Big Tech easily takes financial data.
▶Lee= The MyData business currently shares only credit information. This issue may have arisen because the Credit Information Act governs it. Customers agree to share data among financial companies, Big Tech, and fintech. This leads to the logic that "all financial information is credit information and must be open."
However, data such as shopping or transaction information held by Big Tech is ambiguous as to whether it qualifies as credit information. For example, is a supermarket purchase a person's credit information? Initially, it was considered not credit information and thus not allowed, but then it seemed unfair, so more data was gradually released. Currently, such transaction information is categorized and shared accordingly.
The business is currently limited to opening credit information, but as this expands to public information, these issues may gradually diminish. Discussions between financial companies and Big Tech will find an appropriate balance.
Another point is that finance is essentially a data business. Banks and financial companies have had deposit, loan, and credit data, but whether they recognized the importance of this data and invested heavily in collecting and analyzing it for risk management and product development is questionable. However, progress is being made, and the importance is increasingly recognized.
Professor An Suhyeon of Hankuk University of Foreign Studies Law School is speaking at the "Future of Banking Roundtable" held by Asia Economy on the 19th of last month.
▶Ahn= Regarding data, having a large quantity is not as important as securing high-quality data. Then, only the function of collecting data and providing financial products and services tailored to customer preferences will survive, whether by financial companies or Big Tech. Indiscriminately increasing data types, quantities, or scopes is not effective.
Secondly, financial institutions have accumulated data over decades but have somewhat neglected converting it into qualitative data. Customers had no information on how their data was used. Big Tech used customer data for marketing as if it were free, but banks have rarely provided such services.
Banks focused on money because they hold deposit accounts, but now data is more important than money. Banks need business strategies that make customers willing to provide their data. Simply acquiring Big Tech's data does not automatically create such strategies. If banks identify and solve customers' pain points, consumers may willingly entrust their data to financial companies.
Nonetheless, Big Tech has been quicker to find these pain points. However, while Big Tech has succeeded in entry, it lacks in governance and behavioral regulation. Financial institutions are accustomed to such regulations and thus have some competitive advantage. If Big Tech catches up or legislation is improved, real competition between Big Tech and banks will emerge, and we should consider who will survive.
Ultimately, competitiveness depends on focusing on financial consumers. Only those functions survive, whether banking or investment. Banks need to be more alert in this regard. Currently, banks have regulatory advantages, and Big Tech should be more cautious.
▶Han= Professor Ahn's point that not all data is necessary is very true. Meaningful proposals to customers come from appropriate data, which I consider trust. Financial companies can do this well, making it a game.
▶Lee= Big Tech tends toward natural monopoly, so the US and Europe regulate them, and Korea should too.
Big Tech's entry into finance may cause problems, so financial and supervisory authorities must monitor carefully. Systemic stability issues and consumer welfare erosion may occur. If Big Tech causes problems, sanctions should be imposed under the principle of "same function, same regulation."
Future direction of MyData under the new government
▶Moderator= MyData has been around for a few years, but as Professor Ahn mentioned, it seems not to have effectively addressed customers' pain points.
Handong Hwan, head of KB Management Research Institute, is speaking at the "Future of Banking Roundtable" held by Asia Economy on the 19th of last month.
▶Han= Let me start with a somewhat sad story. Banks should not imitate Big Tech, but they do. Banks should economically support customers, which is the sustainable relationship and their fundamental mission. Data companies collect data for marketing, like advertising revenue models. They collect data superficially, e.g., "This person is traveling abroad, so let's sell this," focusing on marketing. They think of consumers but only as marketing platforms.
MyData should economically empower customers. We think about solving customers' concerns before they ask. I considered this qualitatively from an asset management perspective, but currently, MyData is treated only as a marketing platform pushing short-term products. Good consultation is necessary, but marketing is fast, while consultation is continuous and long-term, including both non-face-to-face and face-to-face.
For example, Toss grew by marketing tactics like "Free stocks" or "2% interest." Since MyData is used mainly for marketing, customers receive push notifications but wonder about its true meaning. Banks need to mature in consultation and asset management. MyData companies are not fundamentally financial institutions, so they gather data but are not prepared to provide in-depth services.
Banks are still learning since this is new. I expect an S-curve learning process. Currently, banks cannot provide meaningful consultation experiences, and Big Tech only sees this as a marketing platform. This is the problem exposed now.
▶Lee= MyData started recently, so initially, marketing focus is understandable. However, the market will quickly shift toward services that satisfy customers most. Customers are not fools.
▶Ahn= I also expected MyData to provide affordable financial doctor-like asset management services to consumers, which were previously only for VIPs. With MyData as an industry, fintechs could offer asset management services at low cost for small amounts. Some fintechs have started this, but it is not yet widespread. I thought large financial companies, especially banks, could provide such services via MyData, but it is disappointing that this is not yet tangible.
▶Lee= I agree. I wonder why banks capable of this are not delivering.
▶Moderator= Regarding general asset management, Koreans tend to choose the highest returns and are not satisfied with 5-6% annual returns. Higher returns mean higher risks, making it difficult for financial companies to recommend.
▶Han= Our Kookmin Bank's Star Banking mobile app has a separate notification service. It notifies customers, "You can lower your loan interest now; would you like to?" When discussing MyData's core, it's not about vaguely asking "Do you need a loan?" but sending push notifications to those browsing our real estate platform, e.g., "Here's how to connect you to a mortgage." The push notifications are flexible and enable conversational progress.
Then, customers might experience, "I agreed to data use for MyData, and now they suggest switching my fixed deposit to a savings bank fixed deposit." For example, if a bank's fixed deposit pays 1.5% and a savings bank pays 2%, the 0.5% difference benefits the customer.
How far should 'separation of banking and commerce' be relaxed?
▶Moderator= Dr. Lee, could you start? The new government seems inclined to allow it.
▶Lee= This is a very sensitive issue. Fundamentally, the recent issue arises because banks and tech companies compete, and banks want to enter platform businesses, but the separation of banking and commerce (separation of finance and industry) acts as an obstacle. Due to these issues, gradual relaxation is expected. However, we must consider why this principle has been maintained so far. It was established by law because financial supervision alone cannot address the significant risks involved.
From the consumer welfare perspective, consumers want comprehensive, integrated services from multiple sources, so barriers can be inconvenient. Gradual relaxation will occur, but we must prepare mechanisms to prevent risks and side effects.
▶Han= I joined as a teller and have worked nearly 30 years in banking. When I first joined, I wondered why banks strictly blocked ownership by conglomerates like Samsung, who could pay higher salaries and innovate. Back then, it was as if chaos would ensue if Samsung entered finance.
Now I think banking and finance should be separated. Banks basically provide the platform: if a bank holds 8% capital, it can leverage 12 times that amount in customer deposits to conduct finance. If it channels funds to affiliated companies, it becomes unfair and inefficient.
Korea's economy is centered on conglomerates, so I believe separation of banking and commerce should be maintained. However, for overseas expansion, where the market is not domestic, banks should be more aggressive in partnering with tech companies or others, considering local regulations.
Also, banks want to secure tech and data personnel, and the best way is to acquire tech companies. But the Bank Act limits ownership to 15%, making this impossible. It would be good to relax this for acquisitions related to financial services.
▶Moderator= So you both think the fundamental separation should be maintained but relaxed for acquiring technical personnel.
▶Lee= The principle should be maintained, but relaxation can be discussed for necessary technical areas. When risks or side effects arise, supervision should be ready to intervene. Gradual change is expected.
▶Ahn= Regarding separation of banking and commerce, there are two issues: industrial companies entering banks and banks investing in general industries. The latter is actively considered by the Transition Committee and Financial Services Commission.
Separation of banking and commerce has traditionally been regulated bluntly by restricting ownership to prevent private vaults and protect the financial system. However, times and economic structures have changed, so adjustments are needed. The first change was internet-only banks, where industrial companies became shareholders.
New forms of separation are emerging because platform companies perform bank-like functions, raising concerns similar to traditional separation. New risks from Big Tech require new regulatory approaches akin to separation of banking and commerce.
Banks can actively invest in IT-related subsidiaries to enhance data capabilities and respond to technological developments. Understanding technology helps mutual checks and balances.
Japan has a similar stance. Although Japan does not have strict separation of banking and commerce, it limits banks' investments in general industries but recently relaxed this. Japan also allows banks to invest in IT subsidiaries and businesses that help regional economic development. Each country manages bank investments in subsidiaries by balancing problem-solving and preventing side effects. Japan's approach can be seen as modern separation of banking and commerce.
▶Moderator= All three of you seem negative about banks entering non-financial sectors.
▶Ahn= I am conservative on this. Banks need to adapt and compete by entering non-financial sectors, but industrial companies entering banks is more sensitive. The UK allows this with strict conflict-of-interest regulations and sanctions. Korea lacks the culture and experience to recognize conflicts unless explicitly listed. Therefore, I remain conservative about industrial companies entering banks.
▶Lee= I agree. Banks entering general industries can be viewed positively, but the reverse side requires more scrutiny.
▶Moderator= Director Han, you seem to have much to say about comprehensive payment licenses (Comprehensive Payment Business License allows issuing accounts to customers and providing digital payment services including deposits, withdrawals, simple payments, remittances, salary transfers, card payments, and insurance premium payments, excluding deposits and loans, enabling many bank functions).
▶Han= The Electronic Financial Transactions Act traditionally mediates convenient payments between bank or card accounts. However, it is difficult to cover the entire banking ecosystem, especially comprehensive payment licenses, under this law. I think it is better to separate comprehensive payment licenses into a digital finance law.
Comprehensive payment licenses should be included in a digital finance law, allowing social consensus on how much financial services Big Tech can provide, how much supervision is needed, and how much is permitted. Current discussions in the National Assembly focus on passing the Electronic Financial Transactions Act quickly to help small fintechs struggling, but I see this as Big Tech's strategy.
Therefore, fintech and Big Tech should be separated quickly. Issues related to comprehensive payment licenses should be separated into a digital finance law. The remaining issues, such as how banks and card companies harmonize payment ecosystems, should be addressed by promptly revising the Electronic Financial Transactions Act, which is outdated. Comprehensive payment licenses seem like an add-on.
▶Ahn= When we first learned commercial law, payment and remittance were considered banks' exclusive business because they are bills of exchange. However, with fintech, payment-related functions can be performed by anyone.
This is called unbundling, where functions are divided. Payment is infrastructure, and considering its importance in the financial system, approaching it as a business requires careful thought. I think a payment law, though not a digital finance law, is necessary.
▶Lee= This is a contentious issue. Financial authorities aim to increase competition in this sector and are currently discussing it.
▶Han= The ruling party has stepped back due to strong opposition, proposing that Big Tech can only engage in payment services if agreed upon by the Digital Finance Council. However, I have attended the council, and it is just a forum where decisions cannot be made. Given the fierce stakeholder opinions on comprehensive payment licenses, separating this issue is better. Fintechs face difficulties, as seen in the Merge Point incident, so separating and quickly passing the Electronic Financial Transactions Act is my suggestion.
The financial labor union calls this the "Naver Law." Korea is somewhat an overbanked country, where anyone can easily open a bank account. In countries like the UK, it is difficult for foreigners or non-citizens to open accounts.
Fintechs like Revolut have been given payment-like accounts in the UK. Applying this to Korea, where opening bank accounts is easy, and giving such licenses to powerful Big Tech companies is something the public does not fully understand.
▶Moderator= Director Han, do you agree with limiting Big Tech to payment instruction transmission services (MyPayment)?
▶Han= Absolutely. This is already widely done through open banking and MyData. Korean customers already believe they can send and pay everything via Naver or KakaoTalk, but banks handle the backend. This experience means there is no significant problem with this.
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