"Naver to Encroach on Loan Market Including Small Businesses...Concerns Over Threat to Financial Stability"

Hana Financial Research Institute Report: "Why Are E-commerce Companies Entering the Financial Industry?"

[Image source=Yonhap News]

[Asia Economy Reporter Yu Je-hoon] Recently, e-commerce companies that are actively entering the financial industry are expected to significantly encroach on the loan market for small business owners and others by leveraging their own platforms and data. However, concerns have also been raised that excessive loan expansion could undermine financial stability due to a lack of know-how in the financial sector.

According to the financial sector on the 6th, Hana Financial Management Research Institute stated in its recently published report titled "Why Are E-commerce Companies Entering the Financial Industry?" that "the influence of e-commerce companies entering the financial industry is limited at the initial stage but is expected to gradually encroach on the existing loan market."

The entry of e-commerce companies into the financial industry is a current global trend. The Bank for International Settlements (BIS) forecasts that the credit supply scale of global big tech and fintech companies will reach $1.23 trillion (approximately 1,687 trillion KRW) by 2023. This represents an increase of about 54% compared to 2019 ($795 billion).

The typical example of e-commerce companies entering the financial industry is Amazon. In 2011, Amazon launched "Amazon Lending," which provides short-term working capital loans to sellers on its platform. Loan conditions are determined based on Amazon's vast data, including sales history, product categories, consumer responses, and delivery conditions.

Amazon Lending charges no separate fees, with loan limits ranging from $1,000 to $75,000 (approximately 1.37 million to 100 million KRW), interest rates from 3% to 16.9% per annum, and loan terms of one year. Through this, Amazon gains interest income as a new revenue source and also increases transaction fees by fostering seller growth, achieving a dual benefit.

In South Korea, leading e-commerce companies Naver and Coupang are actively entering the financial industry. Naver, through Naver Financial, has introduced a "brokerage" type business loan service. In 2020, it launched the "Smart Store Business Loan," an unsecured credit loan product for online business owners who were rejected loans or had to accept high interest rates due to lack of financial history. In June, it expanded its scope by launching the "Smart Place Business Loan," exclusively for offline small business owners. Naver plans to increase the number of individual business owners using its financial services from the current 100,000 to 500,000 within three years.

Following Naver, Coupang entered the financial industry last month as the first in the e-commerce sector to obtain a specialized credit finance business license (Coupang Financial). Unlike Naver, which intermediates loans, Coupang Financial directly lends to business owners, similar to Amazon. It is expected to start providing loan services to platform tenants in the second half of the year.

The reasons e-commerce companies are entering the financial industry include business expansion, profitability improvement, and customer lock-in effects. Not only do they earn interest income from loans, but as tenant businesses grow through loans, related revenues inevitably increase.

Another strength is the ability to discover new customer segments based on vast and diverse data. According to the Naver Techfin report, as of the first half of last year, the size of the domestic thin-file population (people without financial history) reached about 12.8 million. Big tech companies attract customers by building alternative credit scoring systems (ACSS) based on their own data. They possess various data such as tenant sales performance, inventory status, and return rates, which are more detailed than typical credit finance companies.

Hana Financial Management Research Institute expects that, based on these strengths, e-commerce companies could encroach on the small business loan market. Although they currently handle loans mainly for low-credit and small enterprises that do not overlap with existing financial companies, since small and medium enterprises account for 99.9% of all companies, it is highly likely that they will dominate the loan market for these businesses through platforms and data.

Especially, just as Amazon expanded its influence in financial services such as payment and loans based on vast customer information and big data, domestic e-commerce companies are expected to expand their business into various areas such as finance and insurance beyond loan brokerage and direct lending, according to Hana Financial Management Research Institute. For example, Coupang, having obtained a specialized credit finance license, could expand into long-term rental (installment or lease) services for electronic devices and other products.

However, concerns have been raised that excessive loan expansion could harm financial stability due to e-commerce companies' lack of know-how in the financial industry. Hana Financial Management Research Institute stated, "Given the increasing possibility of economic slowdown due to recent impacts such as COVID-19, if risk management capabilities are insufficient, the risk of defaults could increase."

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