Nipped in the budLately, the old joke, “Who would raise the cow?” has made a comeback. Even when the world is chaotic, someone has to raise the cow, and it doesn’t have to be anyone else but me. As a business news reporter, the cow I am raising, and should raise, is checking on how the economy is doing. I pay attention to not just fiscal policy, the currency and growth rates but also debts, loans, interest rates and prices. The idea of a creative economy hasn’t gone anywhere, but how about creative finance? The “cow” I want to talk about today is creative finance.
Creative finance is not going smoothly either. The financial authorities exhort creativity but are geared towards self-protection and taking credit. The best indicator of creative finance would be fin-tech. The administration highlighted fintech as a future industry that combines Korea’s ICT technological capabilities with finance. Notable fintech ideas include person-to-person transactions and internet banks. While they both target the middle interest loan market at about a 10 percent rate, the financial authorities have very different attitudes towards them.
Let’s look at the P2P industry. P2P is a business model of raising money from individuals and lending to individuals and small and medium-businesses, taking a fee. They don’t need physical branches, and online transactions can be a win-win for both investors and borrowers. Investors can expect 4 to 5 percent profit annually, and borrowers can get loans at 8 to 10 percent interest rates. The mortgage rate at a bank is 3 percent, but other types of lenders charge 30 percent. So they can be a middle ground between banks and lenders.
P2P could become a way to make money for retirees. So you may think that the financial authorities would encourage the P2P business as they aim to boost the mid-level interest rate loan market. But in reality, they are not welcome.
Since July, the Financial Services Commission began preparing guidelines to vitalize the P2P industry. Last year, about 200 P2P businesses were set up, and the sector grew exponentially. Problems could arise as the industry expands, and proper controls and supervision are needed. But they must not be excessive. The guidelines announced last month state that the investment should be limited to 10 million won ($8,300) and advancing loans with their own funds is prohibited.
The industry considers these two clauses the most toxic. Companies cannot bring investors and borrowers together. When the guidelines take effect next spring, all existing companies may have to shut down. An industry insider said that the authorities intend to nip the business in the bud with the justification of protecting investors. “The guidelines are killing the industry, not vitalizing it,” he said.
First, P2P companies are small, with only several billion won in capital at most. Young entrepreneurs have started businesses, but they have little influence. They don’t know how to appeal to bureaucrats or lobby for laws. The best option for the financial authorities is to prevent unfortunate accidents with tight regulation.
But internet banks are different. Major companies like KT and Kakao and commercial banks are to invest trillions of won. The financial authorities are eager to manage and take credit. So the Financial Services Commission is enthusiastic. The chairman personally convinced the National Assembly and the section chief met with advisors to the lawmakers to give thorough explanations. They want to resolve the “separation of banking and industrial funds” issue with legal revisions as the longstanding regulation is the biggest obstacle to internet banks. Five ruling and opposition lawmakers are working to revise the related law.
The world is competing over fintech. Last year, 22 trillion won was invested in 4,800 companies. The United States and China are leading. China’s market grew by more than 20 times in the past two years. They don’t have regulations like investment limits or bans on advance loans. Startups and grassroots companies are freely competing. Some of them turn out to be a whale or an elephant. Tight regulations could be effective at preventing an accident. But the slogan of creative finance shouldn’t become an empty promise. Not just anyone can raise a cow.
JoongAng Ilbo, Dec. 22, Page 30
*The author is an editorial writer of the JoongAng Ilbo.
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