[Column] Toward a global fintech hub

Jung Yoo-shin

The author is the dean of Sogang University’s Graduate School of Management of Technology.

Many financiers have dreamed of Korea as a financial hub in Northeast Asia. Despite multiple attempts since December 2003 when the government first announced an initiative to make that dream a reality, little progress has been made over the last two decades. In the latest Global Financial Centers Index (GFCI) ranking as of September 2022, Seoul came in 11th and Busan 29th, far behind Singapore at third and Hong Kong at fourth.

There are several prerequisites to become an international financial hub. Above all, the environment must be business-friendly towards foreign financial institutions, equipped with regulatory systems that meet global standards, and of course, capitalist systems, while offering comfortable living conditions for foreigners, including passable English communication.

But Korea falls short in many of these categories. Besides the relatively small size of its financial market currently valued at $2.002 trillion — about one third of China’s and Japan’s — Korea’s maximum corporate income tax rate at 25 percent is far higher than Singapore’s 17 percent and Hong Kong’s 16.5 percent. Korea also scores poorly against Singapore and Hong Kong in terms of rigidity in regulatory systems, flexibility of labor markets and communication in foreign languages.

In an encouraging — and timely — development, Korea’s financial authorities and experts are discussing the transformation of the country into a fintech, or financial technology, hub instead of a traditional financial hub. In a report titled “The Concept and Blueprint for a Global Digital Finance Hub in Korea,” published last December, the Korea Institute of Finance (KIF) proposed a policy to pivot towards a global fintech hub given the country’s apparent limitations in qualifying for a global or Asian hub for conventional finance. I wholly support the novel idea, as the strategy to turn the country into a fintech hub is more convincing — and achievable — than the traditional financial hub.

Today, digitalization — the core of the fourth industrial revolution —defines the present and future of finance. The influence of fintech will certainly grow as financial hubs rapidly shift their focus from analogue to digital.

Korea’s has a good chance to become a global fintech hub thanks, most of all, to its supremacy in IT competitiveness. For instance, the global recognition of Korea as an IT powerhouse makes it easier for its fintech to advance into Southeast Asia for international partnerships and cooperation given the region’s brisk economic growth and its strong interest in the rapid digitalization of the financial sector. China’s fintech advance into the Southeast Asian market through Alipay has hit a snag due to tough regulations on Chinese big techs such as Baidu, Alibaba and Tencent. As a result, the timing couldn’t be better for Korean players.

Second, Korea has already accumulated innovative capabilities in the fintech sector. Seoul, which ranked 11th in the GFCI ranking last year, was fourth in the fintech category. In the ICT Development Index (IDI), Korea was No. 2 in the 2017 ranking. That’s not all. The country topped the 2021 Bloomberg Innovation Index. The number of Korean fintech players also has surged from 131 in 2014 to more than 600. Mobile platforms such as KakaoBank and Toss can create international success stories wherever they go.

Third, digitalized finance can help the country overcome language barriers. Mobile screens can largely cover for language deficiencies. Korea’s strong competitiveness in designing and composing user interface (UI) and user experience (UX) on mobile screens can successfully compensate for its poorer English skills than Singapore and Hong Kong.

Fourth, Korea can offer wider choices on financial platforms through attractive convergence with healthcare and cultural and entertainment activities based on its richer services sector than Singapore and Hong Kong, which are specifically oriented toward finance.

If so, what kind of synergy effect can we expect from a fintech hub? First of all, the use of cyberspace without restraints in time and space can save much time and money to raise efficiency. Some could worry about a relatively weak “cluster effect,” particularly given the nature of virtuality in digital finance. However, the concentration of fintech players — and the participation of a number of financial institutions trying to leverage fintech — could surely help diversify the structure of the hub.

A fintech hub can also maximize the effect of utilizing artificial intelligence, blockchain, cloud and big data (ABCD). From the perspective of a business model, a fintech hub can serve as an attractive cluster of digital financial platforms at home and abroad. The key is big data. If Korea can collect lots of data from domestic and foreign players, it can maximize the effect from using ABCD. For instance, the accumulated data will enable financial and other companies to measure consumer satisfaction and develop customized services and products by country or country portfolio.

The takeaway is that Korea was the first country to launch the MyData business to effectively feed digital finance platforms. The country has been methodically building the infrastructure of an ecosystem for the MyData industry — such as an open banking system and financial data exchange — which can serve as strong leverage over Hong Kong and Singapore.

Another expected synergy effect is the fusion of the financial sector and other services. When digital platforms integrate financial services with other services — such as medical and health care, cultural and entertainment activities, education and real estate solutions — Korea can have a conspicuous edge over financial service-focused Hong Kong and Singapore. For example, financial services offering incentives on plastic surgery or K-pop can strongly appeal to Southeast Asians.

Moreover, if Korea links blockchain technology to fintech, the country can emerge as a digital asset hub. Many Korean players are already active in trading crypto and virtual assets overseas. (Korea’s cryptocurrency trade is among the world’s largest.) Since authorities have begun to work on securitizing digital tokens, synergy with fintech is also possible. If an elaborate plan to build a fintech hub gains traction, local fintech companies will find it easier to expand overseas than before and can grow into unicorns to widen the cyber territory for digital asset management.

For Korea to become a global fintech hub, financial authorities and industry must work hard together. Bringing foreign players in is as important as helping local players to venture abroad. The authorities can consider the idea of establishing a cluster of fintech companies and relevant government agencies and designating foreign fintech companies as “innovative financial service providers” to offer them incentives.

An investment ecosystem to back the growth stages of fintech ventures is also important. Policy support should go to promoting investment for start-ups in the fledgling trial stage and others capable of scaling up to unicorns. Public-sector investment must serve as priming water while private institutional players are encouraged to join in through incentives.

At the same time, government efforts to encourage eco-friendly and ESG (environmental, social, governance) commitments also must follow to give financial support to ESG-focused companies and technologies. That will help develop ESG fintech and also contribute to spiking synergy between IT- and digital-based finance and the carbon emissions trading market.

All these are possible only after administrative barriers are removed. The synergy between fintech and other services requires not only internal innovation in the fintech industry but also a creative combination of fintech and other industries. That demands government offices eliminate administrative obstacles first for the sake of policy fusion. The fintech hub can be built only through a proactive strategy toward the goal of becoming a first mover, not a fast follower as Korea was in the past. Translation by the Korea JoongAng Daily staff.