Korea’s Financial Services Commission has recently abolished the Security Review System that has curbed the growth of the domestic fin-tech industry. Now local experts are heralding the start of a Golden Age of development in the industry.
We met ‘Hankook NFC’s’ president, Seung-Ik Hwang, to hear what he had to say about the relaxing of government regulations and to discuss the potential of Korea’s fin-tech industry in 2015.
What has changed since the changes to the security review system?
“There was a ‘censorship’ craze in Korea in 2014. There were a number of high profile litigations related to press censorship. And there was the phenomenon of ‘cyber exile’ which surrounded the government’s security wrangling with KakaoTalk and other messaging apps.”
“The security review system acted like a form of pre-censorship by the Financial Services Commission in the fin-tech industry, evaluating its legitimacy. The problem was that start-ups couldn’t even apply for licenses to operate financial products. This was because only existing financial institutions and electronic financial business operators qualified.”
“NFC Korea, a simple payments system, completed development of our technology last April. However, we’ve had to delay launching our services to 2015 due to regulatory road-blocks.”
“Now the Financial Services Commission has announced that there will be a shift from pre-regulation to follow-up management. This will enable institutions such as banks and credit card companies to begin new fin-tech businesses, once they pass security tests. Now there is scope to adopt ‘lean’ development for the creation of new fin-tech products. This is great new also for startups working in the space”
“Another drastic change is that the center of online financial transactions has moved from businesses to users. In an era when prioritizing user experience can trump service providers’, domestic financial institutions are finding they will need to cater more closely to customer demands, and innovate to stay ahead of the curve.”
Currently customers have to perform an average 13 steps to utilize existing ‘simple payment’ services. There is clearly room for improvement here, and with it an opportunity for startups to move in and make an impact.”
“Mistakes in finance do occur, but now the government plans to focus more on management, rather than barring startups to enter the market at all. This is a positive step forward.”
“Startups are also keen to develop new security protocols that protect their customers, and of course their reputation. This is often by developing security layers within financial products, at the root, in an attempt to prevent loopholes at later stages in the critical transaction phase.”
“In the past responsibility mishaps was blamed on customers. Since financial institutions had passed the government’s vetting processes they could claim they’d done enough. Now financial service providers will have to be more accountable for their actions and to their customers. A subsequent increase in service level is expected, again with an opportunity for startups to fill niche markets where they have expertise.”
Korea NFC, playing with Giants
“Huang believes that 2015 will see the development and roll-out of a number of new payment services. Already ApplePay and GooglePay have launched, demonstrating commitment from large global corporations, beyond traditional finance-centric businesses.”
“3 years ago NFC payment systems failed in Korea because it they were too complicated. The essential value of this services was that users enter their credit card information in their cell phones and use their phones instead of their cards. But users were still required to certify their identity prior to any purchase – this was not simple enough. Apple Pay simplified this process by fingerprint recognition and usability has increased drastically. Other solutions are likely to enter the market this year.”
“Infrastructure was also an issue. Reading equipment would have needed to be installed in shops all over the country. The cost of this was prohibitive. While carriers could have stumped up, VAN operators were uncooperative as their business model relies on credit card companies, which have a rivalry with carriers. Eventually, credit card companies and carriers came up with an agreement to install equipment together and share revenues. However, the plan wasn’t executed. I believe that NFC usage will spread once the infrastructure is in place.”
“As a result of carriers taking a leading role in NFC roll-out, now almost all smartphones have NFC antennas installed. The strength of NFC Korea compared to other payment systems, such as Apple Pay, is this universality. The market just needs a trigger, which will likely come as NFC payments become an option for consumers.”
“Consumers using NFC Korea are able to take advantage of the service, without additional investment in infrastructure. All consumers who own a credit or debit card that has a transportation card function can start to use the service now. Currently there are around 57 million eligible cards in use, with around 20 million being frequently used. All adults in Korea have credit cards which are used at least once or twice a day for commuting as well as for other purchases. Will it normally takes a long time to change spending habits, Korean NFC can be used without a change in user behavior. This fact gives Korea NFC a big advantage.”
[Korean NFC demo video of actual payment]
Aside from its universality, another strength of Korean NFC is the protection of personal information. While existing payment systems ‘pull’ users’ personal information (such as credit card numbers) to sellers, personal information from NFC Korea isn’t passed on to sellers by using ‘Push payment’. Instead, sellers produce an invoice and push it to users. Then users process the payment and provide a digital receipt to sellers. This way user information isn’t actually stored by retailers.”
“There is a currently global trend towards switching from pull payment to push payment systems. The web payment association that Google, Apple, and PayPal are members of has shared its philosophy that users should be the center of web payment. In that sense, NFC Korea is a user-centered service, aligning with the new payment paradigm.”
Banks and fin-tech start-ups must unite to survive
To react to the expansion of smart finance, we have to keep on developing Omni channels and digital-based future-store-models that embrace new trends in financial transactions. Banks should focus their workforces on innovating a channel to provide the most optimized financial solutions.
Jin Won Seo (President, Shinhan Bank), January 2015
New fin-tech trends will introduce a huge change. If both Account Transfer system and Individual Savings system are implemented and Internet Only Banks enter in the market, barriers to enter this industry will be lowered. Customers will continuously move to banks they trust, and that provide better, more flexible and cheaper service.
Seon Ju Kwon (President, Industrial Bank of Korea), January 2015
Reacting to the rapid change in the finance environment, we have to build up more stability of a financial system by shortening the period of checking system risk of new services. We also need to create a fin-tech monitoring system. The changes could have a huge impact on Payment systems.
Juyeol Lee, (President, Bank of Korea), January 2015
Fin-tech is clearly on the minds of many of Korea’s top national banks and most now have fin-tech departments. While this is a promising step, none of the banks have yet released and specific plans for releasing new fin-tech solutions. I believe collaboration between Fin-tech start-ups and banks is crucial to solving this dilemma. If banks want to see results within reasonable time frames, they must actively engage with fin-tech start-ups. Existing financial institutions’ are extremely conservative, especially since the 2009 financial crisis. It is now time for banks to leverage a shift in the availability of tech designed to improve financial services.
“The reality is that fin-tech start-ups cannot start new businesses without joining forces with financial institutions. That’s why fin-tech start-ups and financial institutions, and government officials came together and launched ‘Fin-tech Forum’ last November. Other fin-tech startups such as Korbit and Viva Republic are also forum members.”
“The government announced that this year, with the abolishment of the security review system, they are going to support fin-tech companies financially - up to 200 million won (around $2 million USD) each. This is a welcome announcement that demonstrates a commitment to change.”
“While Korean fin-tech start-ups do not lag behind in terms of technical ability, they have been at the mercy of an uncooperative government and archaic financial institutions. This gave the likes of China’s Alipay a two year head-start. Now with regulatory changes 2015 looks likely to be the first year that Korean fin-tech start-ups finally move towards progress.”