[The Crisis of Korean Finance] Card Companies and Savings Banks Tied Hands and Feet by Reverse Discrimination and Regulations

Fintech Same Qualification Card Companies
Excluded from Open Banking Application Targets
Requesting Same Regulations for MyData, etc.

Savings Banks Also Face 10% Rule and Other Regulations
Practically Unable to Operate Beyond Loan-Deposit Margin
Call for Regulatory Easing in the Untact Era

The financial industry in 2020 stands at a crossroads of significant change. After several years of unprecedented prosperity, it now faces a critical test directly linked to survival. The spread of the novel coronavirus infection (COVID-19) has brought a crisis not only to the domestic market but also to global finance. It is predicted that the survival of domestic financial companies will be determined by how they overcome this challenge. Additionally, with big tech companies like Naver and Kakao entering the financial industry backed by advanced technology, existing financial firms are expected to face unprecedented crises and moments of challenge. Asia Economy diagnoses the problems of the Korean financial industry as perceived by domestic financial company CEOs and explores solutions to overcome sector-specific crises over five installments.

[Asia Economy Reporters Ki Ha-young, Kim Min-young] The savings bank and card sectors, key pillars of the financial industry, are suffering under regulatory burdens. With worsening performance and rising delinquency rates due to COVID-19, combined with increasing regulatory risks, some smaller firms are feeling threatened to the point of survival. What they fear most is the entry of fintech (finance + technology) companies into the financial sector. While financial authorities tightly bind existing financial companies with regulations, fintech firms operating in regulatory blind spots are benefiting, leading to complaints of unfair discrimination.

◆Card Companies: “Let Us Compete on Equal Terms with Fintech Firms” = “The card industry faces competition from giant fintech companies. We will strive to create fair competition conditions with fintech firms.”

This statement from Kim Ju-hyun, Chairman of the Credit Finance Association, on his first anniversary in office encapsulates the current reality of the card industry. As big tech companies like Naver and Kakao steadily enter the financial market, there is controversy over ‘reverse discrimination’ due to lax regulations on fintech companies.

While fintech firms receive various benefits under the government’s innovation growth policies, card companies engaged in the same payment business are hindered by regulations. Open banking, promoted last year, is a representative example. The Korea Financial Telecommunications & Clearings Institute announced it would open the bank payment network to electronic financial operators outside banks, but card companies, which meet the same qualification criteria as fintech firms, were excluded from applying for open banking.

The card industry is also closely watching the Financial Services Commission’s plan to allow postpaid payment limits to simple payment providers like Naver Pay and Kakao Pay. The amendment to the Electronic Financial Business Act under preparation would permit postpaid payments only to companies with at least 20 billion KRW in capital, and this will be extended to fintech firms. This would enable them to provide loans like banks or card companies. An industry insider lamented, “Even when doing the same work, card companies are treated as corrupt, and while card companies have over 20 years of know-how regarding soundness, fintech firms do not.”

Facing deteriorating profitability due to reduced merchant fees, card companies are seeking new business opportunities in the rapidly changing payment environment. According to the Financial Supervisory Service, the net income of eight specialized card companies has been declining annually. Net income, which was 2.2158 trillion KRW in 2017, dropped to 1.7388 trillion KRW in 2018 and recorded 1.6463 trillion KRW last year. Ahead of the implementation of the Data 3 Act (amended Personal Information Protection Act, Information and Communications Network Act, Credit Information Act) in August, the industry wants the same regulations as fintech firms in new businesses such as MyData.

Another industry official said, “We are not objecting to supporting fintech firms; we just want an environment where card companies can also pursue business under the same conditions.”

◆Savings Banks Bruised by Regulations... “Worried About Survival” = The savings bank industry calls the Mutual Savings Bank Act, which has been layered with regulations for half a century, a ‘patchwork law.’ There is a deep sense of ‘victim mentality’ among workers. Despite leading the industry for over 40 years, financial authorities treat the sector as a ‘problem child’ and resort to regulatory measures whenever issues arise. Although the industry acknowledges the ‘original sin’ of the large-scale insolvency crisis in the early 2010s, insiders argue, “Things have changed now.”

Since 2011, the industry has undergone a ‘complete transformation.’ After turning a profit in 2014, it has maintained profitability for six consecutive years. Last year, it posted a record net income of 1.2723 trillion KRW. Delinquency rates are also stable. In the first quarter, the industry’s average delinquency rate was 3.7%, the lowest ever.

Nevertheless, regulations still tie their hands and feet, leaving them with virtually no business other than earning the interest margin (the difference between deposit and loan interest rates). Representative examples include the ‘10% rule’ and business rights regulations. The 10% rule limits savings banks to investing only 10% of their capital in unlisted stocks and unlisted corporate bonds, and holding only 10% of the shares of the same unlisted company. This was introduced to prevent domino insolvency caused by major shareholders’ discretionary investments in the past. An industry insider said, “Savings banks now operate through systems, so they cannot invest recklessly like before.”

Savings banks operate within six regions nationwide: Seoul, Gyeonggi-Incheon, Busan-Ulsan-Gyeongnam (Busan, Ulsan, Gyeongnam), Gwangju-Jeolla-Jeju, and conduct business only within their designated areas. They are criticized for lagging far behind in the non-face-to-face (untact) era, where all financial services are possible through mobile applications (apps). The industry unanimously agrees that prohibitions on mergers and acquisitions (M&A) among savings banks and regulations on joint liability of executives are ‘outdated regulations’ that strangle savings banks.

There are concerns that if these regulations remain unchanged, all 79 savings banks could collapse. A senior savings bank official emphasized, “There is a huge difference between large and small firms, and between metropolitan and regional firms, so uniform regulations cause more pain to small regional firms. Regulatory easing policies considering the size and regional characteristics of savings banks are necessary.”

This content was produced with the assistance of AI translation services.