A setting sun or new dawn?

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A setting sun or new dawn?

In the year following the global financial crisis of 2008-09, the Korean financial industry began a tremendous shake-up as several high-profile foreign firms exited the local market. Goldman Sachs Asset Management, ING Life Insurance, Alibaba Group, State Street and HSBC were among the major firms that either left the market or significantly downsized operations in Korea.

At the time, pessimists cited a saturated financial services market and high levels of corporate and household indebtedness as significant sources of drag on profitability, and questioned whether the Korean finance industry’s best days might be behind it. They pointed out that the departures came despite the Korean government’s highly touted effort to woo financial investors and turn Seoul into an Asian financial hub, and were tantamount to a repudiation of the Lee Myung-bak administration’s carefully woven welcome mat for global finance. Many called the 2012-13 period the Korean financial industry’s toughest challenge since the fabled Asian financial crisis of the late 1990s, better known here as the IMF crisis.

Optimists, though, felt that the apocalyptic predictions of these critics were dramatically overblown. These contrarians claimed that changes to the Korean market landscape were not atypical of those observed in other mid-sized markets globally, as the world underwent a cyclical and temporary recession. Global firms simply reduced their global footprints following a period of extreme volatility in the global markets; in discussions with Korea’s Financial Supervisory Service (FSS), foreign financial companies’ CEOs cited headquarters restructuring, rather than adverse circumstances unique to Korea, as the main reason for a Korean exodus.

But the greater success enjoyed by many of their domestic rivals in Korea suggested that it was the foreign firms’ strategy and execution, rather than the market itself, bearing responsibility. Many of the departing firms were peddling overseas investment products during a time of global market upheaval, and reportedly lacked the domestic retail distribution networks required to address the needs of Korean consumers. Some felt that the departing firms, and the foreign financial community in general, had not done enough to make credit available to small and medium-size enterprises so vital to Korea’s future growth, and that opportunity abounded for entrepreneurs available to fill the gaps.

A new growth engine for Korean financial services is now poised to break through the recent gloom, lending credence to the optimists’ views. Fintech, defined as “using IT to provide daily financial services,” is generating a lot of attention in Korea as a potential game-changer for capital allocation efficiency and employment growth. While Korea lagged behind the United States and Hong Kong in fintech development, its entrepreneurs and capital providers have dramatically closed the gap in the last three years.

The success of leading fintech firms in overseas markets, coupled with the boost provided by a tech-savvy and hyperconnected Korean public, is giving many observers reason to believe in the future again. Rather than impede the development of fintech start-ups, many traditional providers of financial services in Korea are rushing to join them, either through direct co-investment or growth equity firms increasingly focused on the fintech vertical.

The results thus far have been notable, and thanks to an increasingly friendly regulatory environment, even more dramatic expansion of a consumer-focused fintech market is expected in Korea this year. The FSS approved petitions by mobile behemoth Kakao (already disrupting social media, e-commerce and transportation) and national telecom company KT to launch cyber-only banks and abolished over 300 direct or indirect regulations on financial institutions, according to The Korea Herald, to foster tech innovation in the industry.

Kakao Bank and K-Bank are expected to debut in the first half of 2016. With a smaller asset base and reduced costs, these banks will offer mobile-friendly, efficient products and services, thereby hoping to dislodge long-established competitors that are still struggling to shed the costly overhead accompanying their brick-and-mortar infrastructure.

Mobile payment providers, whose growth was at first slow due to the existing availability of credit card payment terminals, are also expanding their foothold. Samsung Pay entered the fray in August, competing against the Apple Pay platform available on late-model Apple smartphones and tablets. Overall, the potential applications for fintech are virtually limitless, with blockchain technology expected to expand peer-to-peer lending in the market.

It is increasingly apparent that the death of financial services in Korea was greatly exaggerated. On the contrary, the convergence of finance and technology promises to exponentially expand the quality, reliability and efficiency of consumer finance, corporate lending and asset management for the foreseeable future.

*The author is a principal investor, foreign attorney and partner at Accelerate Korea, Korea’s first transnational accelerator. He can be reached at patrick@acceleratekorea.com. Any opinions expressed herein are his own.

By Patrick Monaghan

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