The neutral status quo
The current situation in South Korea is what you might call “meh” for FinTech start-ups. It is not the worst place to set up when looking to offer financial services to a more tech-aware audience; but neither is it on par with the region’s high-performers Singapore and Hong Kong.
This is something the South Korean government is looking to change; over the past couple of months there has been a series of announcements by the South Korean Financial Services Commission (FSC) illustrating its plans for revamping regulation and rejuvenating its FinTech sector.
But before we begin with the changes and what this might mean for the sector, let us highlight two key factors currently holding FinTech innovation back:
- Current regulation is unclear regarding what types of FinTech start-ups banks are allowed to invest in.
- “Open” banking APIs jointly launched by banks in 2016 charge relatively high transaction fees, requiring non-banks offering payments or transfer-related services to partner with banks on an individual basis and pay high transaction fees, which may be passed on to consumers.
The new, pro-FinTech approach
The FSC began its announcements in mid-January stating that it would be amending the regulatory framework to boost the country’s FinTech sector. Headline changes included new rules on bank investments and launching a regulatory sandbox for start-ups.
FSC Chairman, Choi Jongku, promised to remove regulatory uncertainty that has been restricting investments in FinTech through introducing a broadened definition of the scope of business activity that banks can invest in. The policy reform will also review 200+ edicts that the regulator believes hinders FinTech innovation, especially as existing regulations are struggling to keep up with the current pace of technological development.
More recently, the FSC announced plans to launch an open interbank payments network that will be accessible to FinTech providers that meet the regulator’s requirements. The new open banking-esque system is hoped to reduce transaction fees imposed on FinTech providers by incumbents. In the medium to long term, the FSC says it will consider allowing qualified FinTech payment service providers direct access to the payment system without having to rely on a bank. Under this new system, electronic financial licenses will be granted on business function, as opposed to a business sector basis, which is intended to better reflect the diversification of payments services.
The new sandbox, which has accepted applications since late January, is also expected to boost FinTech development as it enables start-ups to trial their applications with regulatory exemption for a set, but currently unspecified, time. The first group of accepted applicants is expected to enter the program this month, aided by a US$3.5M investment by the FSC.
The introduction of the regulatory sandbox and revision of existing regulation go hand in hand with the efforts of the Seoul Metropolitan Government’s efforts to turn the capital into a Blockchain hub through investing in Blockchain start-ups and promoting the technology.
The changes may already have had their first positive effects on South Korea, with Visa announcing its plans to open an innovation centre in the country by the end of the year. Additionally, local discussions imply that financial institutions are now looking to make active investments into FinTech as a result of the regulatory changes.
Overall, the changes proposed by the FSC showcase a desire from the regulatory authorities to make the country a better place for non-bank financial services start-ups. Still, FinTech start-ups with global aspirations are likely to prefer Hong Kong and Singapore as they are more internationally connected (demonstrated by their global network of FinTech bridges). However, improving South Korea’s international connections may turn the country into a leading global FinTech hub.