"The Strength of Big Tech Lies in Credit Evaluation... Financial Authorities Must Prepare for Big Tech Monopolies"

Financial Research Institute: Big Tech's Entry into Finance Emerges as a Strong Competitor to Financial Institutions
Especially Banks Overwhelmed by Credit Evaluation Using Big Data

[Asia Economy Reporter Park Sun-mi] As big tech companies expand their entry into the financial sector to include loan and fund intermediation services, there is a growing call for financial authorities to prepare for the possibility of big tech monopolies and systemic risks.

On the 5th, the Korea Institute of Finance stated that big tech companies could become strong competitors to existing financial institutions by leveraging ▲customer trust based on brand recognition, ▲low-cost capital procurement through financial soundness, and ▲providing customized financial services through extensive customer data analysis. In fact, big tech company Kakao established the internet-only bank Kakao Bank, and recently Naver’s subsidiary Naver Financial launched a small business loan service in partnership with Woori Bank.

In particular, credit evaluation using big tech’s big data is considered a strength that surpasses banks’ analytical capabilities. Senior Research Fellow Lee Byung-yoon said, “Banks decide on loan approvals and calculate loan interest rates based on default risk through credit evaluations using hard information (financial statements, accounting and tax-related information) and soft information (information obtained through close relationships with borrowers) during fund intermediation.” He added, “However, there are limitations in the amount, accuracy, and analytical capabilities of information for credit evaluation.”

He further explained, “Due to these limitations in bank credit evaluations, small and medium-sized enterprises (SMEs) with high information opacity believe that bank loan interest rates are higher and loan limits are lower than their creditworthiness. As a result, SMEs lacking sufficient bank loans turn to secondary financial institutions such as savings banks, which have much higher interest rates, to secure funds.”

This analysis suggests that big tech companies entering the financial industry can exploit banks’ credit evaluation weaknesses as a niche strategy. It is expected that big tech will likely expand financial inclusion through credit evaluations using big data.

Research Fellow Lee diagnosed, “While big tech cannot obtain soft information about companies through branch networks like relationship banking, they collect vast amounts of data from their own platforms, including customers’ online searches, SNS activities, and companies’ e-commerce activities, and analyze this data using artificial intelligence and machine learning techniques, giving them an advantage in credit evaluation compared to traditional banks that mainly rely on human judgment.”

He added, “Big tech companies are likely to monopolize the market in the future due to network effects and economies of scale, which will increase systemic risks. Financial authorities need to prepare for this in advance.” He also noted, “Credit evaluations by big tech using big data, artificial intelligence, and machine learning are areas where traditional banks find it difficult to compete, so existing banks need to consider cooperating with big tech in credit evaluation going forward.”

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