Moon admits need to deregulate internet banks

President Moon Jae-in learns how to open a bank account at K bank via smartphone at Seoul City Hall, central Seoul, on Tuesday. [YONHAP]

Controversial regulations limiting nonfinancial companies from owning large stakes in Korean banks could soon be changed.

“While keeping the separation of nonfinancial companies with banks as the fundamental principle of our finance [policies], we need to make a new approach if the existing regulations limit the growth of new industries,” President Moon Jae-in said on Tuesday while attending an event discussing Korea’s internet banks held at Seoul City Hall in central Seoul. “Of course there should also be studies on complimentary measures that could limit the influence of a largest stakeholder or a deal [between banks] and their largest stakeholders so that it can’t be used as a personal piggy bank.”

Moon, in particular, stressed the importance of swift action and timing, adding that only when the proper innovative regulation changes are made will the country be at the center of the fourth industrial revolution era.

The internet bank event was the second regulation innovation event that Moon has attended. The first was last month when he visited a hospital in Bundang District, Gyeonggi, to discuss lifting regulations that were preventing the convergence of IT with medical services.

These events have been held since the Blue House abruptly canceled a major regulation innovation meeting just hours before Moon was supposed to attend. Prime Minister Lee Nak-yon said at the time that the government preparation on regulation issues was disappointing.

One of the first agenda items that was supposed to be discussed during the meeting was internet banks.

The Moon government in the second half of this year appears to have shifted its economic direction away from income-led growth toward innovative growth after the original initiative came under intense public criticism as it centered on the controversial minimum wage hike.

With the country’s domestic economy failing to meet expectations from the income-led growth changes and worries over exports due to intensifying trade conflicts in the world market deepening, the government is now emphasizing innovative growth.

Internet banks are considered a cornerstone of innovative growth, but despite the potential, the industry is held back by regulations.

The top financial policymaker also raised the need to change the regulation, pointing out that Korea’s internet banks are behind that of China.

“There has been a good response with internet banks securing 7 million customers and total loans amounting to 8 trillion won in the year since the services were first launched,” Financial Services Commission Chairman Choi Jong-ku said at the same event at Seoul City Hall. “However, we are 20 years behind advanced economies such as EU and Japan and even falling behind China.”

The FSC chairman said internet banks are not only pioneers of fintech innovation, but also act as catalysts of financial innovation.

Chinese internet banks first launched in 2014 and have been expanding aggressively, led by major IT companies including Alibaba, Tencent, Xiaomi and Baidu.

K bank, Korea’s first internet bank, launched in April last year. Kakao Bank followed three months later.

The introduction of the first online banks have been seen as a new business opportunity that would not only diversify the choices that consumers face - especially better access to loans with interest rates that are higher than banks but less than those provided by nonbanking financial institutions - but also improve the overall banking industry by intensifying competition among existing commercial banks.

However, despite the initial success, the banks haven’t been performing well recently, with K bank reporting a net loss of 18.8 billion won in the first quarter and Kakao Bank suffering a net loss of 5.3 billion won in the first three months.

The regulation that limits nonfinancial stakeholders from increasing their stake in these internet banks has been considered one of the biggest obstacles, as the regulation prevents investors from expanding their investments and thus limits the banks’ businesses from expanding.

Under the law, nonfinancial companies are limited from owning a stake of more than 10 percent in the banks and their voting rights are limited to 4 percent. This was designed to prevent conglomerates from using banks for personal purposes, such as borrowing large unsecured loans for relatively low interest rates or using it for unrelated businesses including embezzlement and bribery.

At the National Assembly, a reform bill has been proposed by lawmakers to raise the existing voting rights from 4 percent to either 34 percent or 50 percent for internet banks. The 34-percent bill also proposes excluding conglomerates from owning stakes in online banks.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]