To Move Beyond Banks' "Interest Business," Outdated Regulations Must Go First [Financial Innovation: Designing Growth] ②

Enhancing Financial Industry Competitiveness Through Regulatory Reforms in the US and Japan
Korea's Banks Seek to Move Beyond Interest-Based Business, but Face Regulatory Barriers
Leveling the Playing Field Between Big Tech and Banks Is Key to Global Competitiveness

Editor's Note
Recently, financial reform has emerged as a major political agenda item in the United States and Europe. The main issues include adjusting regulations that were strengthened after the 2008 global financial crisis, easing bank soundness regulations, and shifting toward a capital market-centered financial structure. These reforms stem from the awareness that the financial sector is failing to serve as an effective catalyst for economic growth. In Korea as well, the need to redesign financial policy is growing. The core is to achieve a balanced redesign between capital and lending, consumer protection and innovation, control and autonomy, and discipline and growth. The next administration must pursue "balanced reform" that fosters autonomy and innovation, so that finance can once again act as a driving force for economic growth by supporting strategic industries and innovative growth. In this context of rapidly changing domestic and international circumstances, Asia Economy has examined the direction and challenges of financial regulation. This series focuses on shifting from "deregulatory reform" to "regulation that enables growth." Going beyond simple deregulation, we aim to present policy alternatives for designing a balanced financial ecosystem where autonomy and innovation can coexist.

#1. JP Morgan Chase, the largest financial institution in the United States by market capitalization, launched the travel platform "Chase Travel" through its subsidiary Chase Bank in the second half of 2022. Within just one year, by 2023, it had grown to become the fifth-largest travel agency in the United States. The company has not stopped there, expanding into closely related services by acquiring restaurant recommendation and review sites, as well as shopping portals.

#2. Since 2019, Morgan Stanley, a global investment bank based in the United States, has directly acquired or invested in a total of seven healthcare companies. The healthcare industry not only offers high growth potential but also has a defensive nature, which serves to strengthen Morgan Stanley's portfolio. Furthermore, Morgan Stanley is leading mergers and acquisitions (M&A) and advisory services in the healthcare sector.

Global financial companies are evolving into everyday financial platforms by entering non-financial industries. This shift away from the traditional interest income model of banks has been made possible by efforts to improve regulations. As the spread of ICT devices such as smartphones has shifted the point of contact for financial services from traditional branches to online platforms, the boundaries between industries have blurred in what is called the "Big Blur" era. However, Korea's current system remains stuck in regulations based on face-to-face operations, which is said to be undermining the competitiveness of its financial industry.

Leveling the Playing Field Between Traditional Financial Institutions and Big Tech

Under the current legal framework, the Korean financial industry wants to move away from an interest-based business structure, but regulations make it difficult to expand into non-financial industries. The Act on the Structural Improvement of the Financial Industry (the so-called "Gold-San Law") restricts industrial capital (non-financial major shareholders) from holding more than 4% of a bank's shares. Although this law was originally enacted to prevent large conglomerates and chaebols from using financial institutions as private coffers and to stop unfair support among affiliates, critics argue that it is no longer adequately responding to changes in the financial environment. The fairness of these regulations has also been questioned, as exceptions have been made through the Special Act on Internet-Only Banks, allowing certain industrial capital to enter the banking sector in cases such as KT (K Bank) and Daum Kakao (Kakao Bank).

In particular, due to Korea's "separation of banking and commerce" regulation, traditional financial institutions are restricted from entering non-financial businesses, while big tech companies can more freely enter the financial sector through laws such as the Electronic Financial Transactions Act and the Internet-Only Bank Act. Banks' ancillary businesses are limited to areas related to core banking functions such as lending and deposit-taking, and only a few cases?such as MVNO businesses (KB Kookmin, Woori) and food delivery platforms (Shinhan-Ttaenggyeoyo)?are permitted through the regulatory sandbox under the Special Act on Financial Innovation Support. In contrast, platform-based companies like Naver, Kakao, and Toss are expanding their businesses across all areas of finance, including banking, securities, insurance, and prepaid services. As a result, there is a growing call to level the playing field between traditional financial institutions and big tech companies.

The current system, which applies different regulations to companies engaged in the same banking business, is further cited as a factor undermining the global competitiveness of Korea's financial industry. In fact, a survey by the Korea Chamber of Commerce and Industry of 210 financial companies on "the status of non-financial business operations and improvement tasks" found that 88.1% of respondents said that domestic silo regulations restricting entry into non-financial businesses put them at a disadvantage in competing with overseas financial institutions and big tech companies. Additionally, 71.5% of respondent financial companies said they felt the need to operate non-financial businesses as well.

According to the Centre for Finance, Technology and Entrepreneurship (CFTE) in the United Kingdom, as of 2020, five out of the top ten global financial groups?including the top three?were platform-based big tech financial companies, rather than traditional financial institutions. When comparing revenue per employee, the gap between platform-based financial groups and other financial groups ranges from at least two times to as much as six times.

Lee Hyoseop, Senior Research Fellow at the Korea Capital Market Institute, said, "Under the current system, major financial companies face many restrictions on both vertical and horizontal ownership structures, whereas big tech companies, unlike financial holding companies, do not face such restrictions and can conduct a wide range of businesses. Therefore, major financial companies also need to pursue regulatory easing to the same extent as big tech companies."

There are also calls to introduce a comprehensive monitoring system for financial platform operators through amendments to the Financial Conglomerates Act, even when platform groups provide financial services without being part of a financial group.

Lee Jeongdu, Research Fellow at the Korea Institute of Finance, suggested, "With the 'Big Blur' phenomenon blurring the boundaries between financial and non-financial industries, there is a need to revise laws to bring non-financial companies under the regulatory framework. Just as financial groups are managed under the Financial Holding Companies Act, it would be desirable to establish a system that allows for supervisory measures on governance, internal controls, and soundness for platforms whose services are similar to those of financial companies."

Moves Toward Deregulation Continue in Advanced Financial Markets

In contrast to Korea, major advanced financial markets such as the United States and Japan have consistently moved to deregulate in order to enhance the global competitiveness of their financial industries. The United States also had a principle of separating banking and commerce, but with the enactment of the Financial Modernization Act in 1999, financial holding companies with adequate capital adequacy were allowed to directly engage in non-financial businesses that complement financial services.

Japan also expanded the scope of ancillary businesses through amendments to the Banking Act in 2016, enabling banks to enter a variety of industries such as regional trading companies, advertising, and job placement services. For example, Hiroshima Bank and Akita Bank in Japan operate job placement businesses as ancillary services, helping to address labor shortages at local companies caused by aging populations and regional depopulation. In addition, regional banks such as Fukusho Bank and Awa Bank have established regional trading companies as subsidiaries to distribute local specialty products, contributing to the revitalization of local economies.

Meanwhile, as the virtual asset market expands and virtual assets emerge as a new growth engine for the financial sector, there are growing calls to revise the "one exchange-one bank" system. The "one exchange-one bank" regulation exists because anti-money laundering systems could become more complicated if multiple banks are involved in transactions. Currently, Korea's five major exchanges have partnered banks as follows: Upbit-K Bank, Bithumb-KB Kookmin, Coinone-Kakao, Korbit-Shinhan, and Gopax-Jeonbuk. Under the current system, only one bank is designated for deposits and withdrawals per exchange, which inevitably reduces convenience for investors.