ⓒ YONHAP News

It’s been a year since the launch of Internet-only banks in Korea, and there are signs of easing regulations governing the online banks. On August 7, President Moon Jae-in called for reforming regulations on Internet banks as a key measure to promote innovative growth, which is the government’s new economic policy goal. Internet-only banks have brought a new sensation to the financial sector by making transactions quick and easy, drawing a positive response from users. Held back by regulations, however, they have yet to take firm root in the market. Attention turns to whether the deregulatory action will help spur growth. Here is economic commentator Chung Chul-jin. 

To vitalize Internet banks and the nation’s fintech industry overall, Financial Services Commission Chairman Choi Jong-ku has raised the need to ease the current regulations that restrict industrial capital from owning bank shares. Even Financial Supervisory Service Governor Yoon Suk-heun, a strong advocate of the principle of separating industrial capital and financial capital, has recently hinted at the need to reexamine the regulations as far as Internet-only banks are concerned. To top it off, President Moon said that the regulations are needed and should be maintained but it is also necessary to think about other options for the sake of the development of Internet-only banks, adding that internet banks should be given room to grow. Following the president’s remarks, I think the parliament will move fast to pass special laws concerning reforms in the separation of banking and commerce, especially in the case of Internet banks. 

One of the basic principles of the Korean financial industry is to limit nonfinancial companies from owning large stakes in Korean banks. The separation of banking and commerce is aimed at preventing large companies from taking advantage of their control to use money in the banks. As of late, however, the government and the political community are strongly calling for easing the regulations on Internet-only banks. They explain that loosening the bank ownership rules will lead to more investment in information technology firms, the development of relevant industries, including fintech, and job creation to form a virtuous circle structure. The government is so optimistic about the future of Internet banks because of their initial success. 

I think “sensation” is the right word for the success of internet banks, which appeal to users for their easy and simple services. As of the end of March this year, K-Bank drew 700-thousand customers. Another Internet bank Kakao Bank is even more impressive. It has secured as many as 5.67 million customers, thanks to Kakao Talk, the most popular smartphone messenger app in South Korea. It’s definitely worth mentioning that the banks attracted such a large number of accounts within a year. Also, K-Bank and Kakao Bank attracted deposits worth over 1 trillion won and nearly 5 trillion won, respectively, and extended loans worth 850 billion won and over 4.6 trillion won, respectively. As of the end of June, the total amount of deposits and loans attracted by Kakao Bank alone exceeded 10 trillion won, which is about 9 billion US dollars. Judging only from figures, the two banks have fared pretty well in the past year. 

Users of the two Internet-only banks, K-Bank and Kakao Bank, can log in without uploading financial authentication certificates, take out loans without having to visit brick-and-mortar banks and enjoy lower bank charges and interest rates than those of other commercial banks. And they can handle these things simply with their smartphones. It comes as no surprise that the online banks have drawn a lot of customers quickly since their establishment last year. They have challenged traditional banks, which have introduced a simple log-in system and lowered their charges. The internet banks have contributed to improving mobile banking and igniting the price cut competition to bring the so-called “catfish effect” in the local banking industry. However, their success is becoming a storm in a tea cup. 

Internet banks need a lot of capital to expand their business, for example, by offering mid-or low-range interest rate loans. So they need to raise capital. But the current regulations, namely, the separation of non-financial companies with banks, block that. Under the Banking Act, non-financial firms cannot hold a stake of more than 10 percent in the banks, with voting rights limited to 4 percent. 

Internet banks are saying that they are unable to increase capital even though they hope to expand their business. K-Bank, which is Korea’s first Internet bank, actually had to stop selling loans because it failed to shore up capital at the proper time. KT and Kakao, the two biggest shareholders of K-Bank and Kakao Bank, respectively, find it difficult to issue shares for the banks’ capital increase since their stake ownership is limited to 10 percent. For that reason, financial authorities have submitted a bill on the deregulation of Internet banks to the National Assembly. But there are many who hold differing views. 

Proponents of deregulation are citing the examples of China and the U.S., while opponents, including civic groups and labor unions in the financial sector, say that the financial environment in Korea is different from that of those countries. They point out that the structure of family-run conglomerates in Korea still remains unchanged and claim that easing the separation of banking and commerce may prompt industrial capitals, mainly conglomerates, to exploit bank reserves as their private safe. They argue that large companies’ culture and structure should change first before the regulations are eased. They also suggest that the Internet banks receive investment from other companies, not just from their major shareholders. What they’re saying is that it is necessary to continue to ban non-financial firms from owning a controlling stake in banks. 

The opponents are concerned that large companies might use banks as their own private funding source when the regulations are eased. They also point out that the Internet banks, given their industrial nature, have not helped to generate jobs and that they failed to introduce innovative fintech services, like artificial intelligence or AI-based credit evaluations. That is, the principle of separating banking and commerce, which comprises the basis of the nation’s financial policy, should not be ruined just to make up for the possible mismanagement of Internet banks. To minimize potential side effects while still easing regulations, Internet banks are being urged to reform themselves. 

Internet banks claim that they are different from traditional banks, citing conveniences like creating an account with just a smartphone and non-face-to-face contact. But they are, in fact, almost similar to other commercial banks in terms of business practices. Therefore, many people may question the usefulness of easing the regulations for Internet banks. The banks first need to sharpen their competitiveness. For example, they could analyze their customers and offer relatively low interest rate loans to those who have a poor credit rating but are still capable of paying back interest. This is an example of fintech. They may extend more credit loans to promising small companies and venture firms. The public will then agree on the need to ease the regulations for Internet banks, though in a limited way. After all, the ball is now back in the Internet banks’ court. 

The government’ drive to deregulate the financial sector led the National Assembly to discuss the legislation of a special law. The parliament is expected to speed up the process of easing regulations on Internet banks. The virtual banks, on their part, should continue to devise ways to enhance the benefits of customers and actually provide innovative services. They will then be able to grow further, making the most of the deregulation.