Riding the Korea FinTech Wave

In stark comparison to how technologically advanced South Korea is (say for instance, introducing the world’s first 5G internet for smartphones) and being recognized as the most innovative country in the world according to Bloomberg’s annual Innovation Index, the Korean financial system is astoundingly outdated because of bank incumbents that are fixed in old ways and conservative government regulations that have prevented progression.

This is all about to change.

There are sweeping regulatory changes happening in Korea this year for the FinTech industry which the government has designated as the next driver for economic growth. South Korean Financial Services Commission (FSC) has identified three sectors -- payments, data, and lending -- to protect consumers, foster fintech innovation, and ultimately remove uncertainties that may restrict investments into Korea.

Transformation in Payments & Open Banking Infrastructure

Mobile payment service, Venmo, is so prevalent in the U.S. that it has practically become a verb used by millennials.

“Want to split the bill? I’ll ‘Venmo’ you.”

Just like that, done.

Compare that with Korea, where despite the fact that the country has one of the highest smartphone penetration rates in the world and is a top user of credit cards, basic money transfer processes have required more than a dozen steps with numerous limitations.

This onerous process was fixed when mobile payments players came along in 2015. With government support, smartphone manufacturers like Samsung Electronics, internet platform providers like Naver and Kakao, and FinTech startups like Toss were able to open services for Koreans to make easy mobile money transfers. Previous stale regulations would have prevented this kind of progress, but with government driving FinTech innovation, there has been quick progress in the Payments space.

We can expect more advancement in this sector. The Korean FSC now aims to establish an open interbank payment network (i.e. Open Banking) by the end of this year which will be accessible by both traditional banks and FinTech companies in order to support the growth of the financial system in Korea.

Reform in Data Ownership

The second sector that the government is eyeing to reform is data sharing laws. South Korea is considered to have one of the world’s strictest privacy laws around personal data usage. Currently individuals do not have ownership of their own data, meaning they must either agree to a long list of terms otherwise their information cannot be shared with a third party. Korea’s financial regulators are considering amendments to the Personal Information Protection Act so that ultimately it is easier for FinTech startups and firms to collect and use personal information to provide better services. Under the current set up, regulators feel that data sharing laws undermine the development of new technologies.

Legal Framework Around Marketplace Lending

Four years since the Korean marketplace lending sector formed, the government is finally creating a legal framework around P2P lending, the third financial sector that has been identified for reform. The move aims to not only protect borrowers and lenders, but to create more credibility for the industry since it will be considered an official sector of the financial industry.

South Korea is a country that has gone through two economic crises which has made banks extremely conservative especially in terms of lending. As such, 40% of the population cannot receive loans from tier one banks and must resort to secondary markets such as savings banks with extremely high interest rates above 20% and shady underground loan sharks.

Marketplace lenders entered the scene back in 2015 to address this social problem and use technology to more accurately evaluate credit scores and maximum loan amounts for near-prime borrowers. PeopleFund, a leading Korean marketplace lender, built a credit rating system that evaluates borrowers based on more criteria that fully considers repayment capabilities and also eliminates a complicated loan application process by moving it all online.

Conversely, the loan products by these P2P players have become alternative investment options for lenders in a market where attractive investment opportunities have been limited to professional investors and institutions. Last year, PeopleFund strategically partnered with Korea’s dominant messaging platform to offer users the opportunity to invest with as little as $10. The userbase for PeopleFund has grown nearly six-fold since this partnership came into fruition.

Positive Outlook for 2019

The Korean FSC has already met multiple times this year and is working closely with various stakeholders and CEOs of Korean FinTech companies to put in place laws that will protect consumers, while not prohibiting growth. Companies with exceptional product, funding, and smart partnerships stand to most likely benefit from regulation changes so they can ride the Korea FinTech wave.

With regulatory changes supporting a more business-friendly environment, global investors will likely see investment in Korea more favorably which will help accelerate FinTech growth and allow FinTech businesses to scale up this year.