[Reporter’s Notebook] The Real Reason Behind the Slow Pace of Financial Innovation

by Choi Donghyeon

Published 04 Mar.2025 10:10(KST)

Updated 04 Mar.2025 13:15(KST)

[Reporter’s Notebook] The Real Reason Behind the Slow Pace of Financial Innovation

Recently, a financial industry insider I met asked why innovation in South Korea's financial sector is slow. When I pointed to the financial industry's characteristic closed nature and regulatory constraints from financial authorities, he shared a different perspective. Even when financial companies propose innovative services to the financial authorities, there is a severe shortage of personnel to review them. He lamented, "In extreme cases, the review process can take more than three years," adding, "Even if you develop something like China's generative AI DeepSeek, you have to wait for years."

When companies want to launch financial services utilizing new technologies, they turn to the Financial Regulatory Sandbox (Innovative Financial Services) of the Financial Services Commission. This system allows companies to launch services to the market first by exempting some or all regulations if certain conditions are met. Companies apply for innovative financial services quarterly, and the Innovative Financial Services Review Committee decides whether to approve the launch after review.

The problem is that while applications for innovative financial services are surging, the personnel are severely lacking. Currently, the Innovative Financial Services Review Committee consists of 24 experts from government, academia, and the legal sector, led by the chairman of the Financial Services Commission. This number has remained the same since its inception in 2019. The number of applications for innovative financial services surged from 84 in 2019 to 436 last year. In 2019, each committee member handled 3.5 cases, but last year, they handled 18.2 cases each. From 2019 to 2023, the designation rate of innovative services relative to applications was over 90%. However, last year, it dropped to 47.5%.

The surge in applications last year was partly due to changes in the application process. Previously, companies submitted demand surveys to the Financial Services Commission, received consulting, and applied on an ad hoc basis. Since the second quarter of last year, companies have been allowed to apply freely during regular application periods. Although applications soared afterward, the number of personnel did not increase. The collection of applications is handled by only two people in the Financial Services Commission’s Digital Finance Division and Financial Regulatory Sandbox Team. Afterward, before the review, the respective departments in charge of banking, insurance, fintech (finance + technology), and other fields conduct their own reviews, which imposes a significant workload. A Financial Services Commission official admitted, "There are many new businesses that did not exist before, and the legal and technical content is difficult, so it is indeed hard to review everything one by one."

Because the workload is unmanageable, side effects have appeared. According to the Special Act on Financial Innovation Support, when a company applies for an innovative financial service, the review must be completed within 120 days. A financial company official said, "If the 120-day deadline is exceeded, it violates the law, so the authorities sometimes demand that the application be withdrawn just before the deadline," hinting that this is why service launches have been delayed for years.

Encouraging many companies to apply for innovative financial services is a positive direction. However, if there is no capacity to handle this, it is necessary to resolve it even through private outsourcing. Services like DeepSeek might be buried somewhere in the Financial Services Commission’s cabinet, existing only as paperwork.