[Free Speech Forum] Regulating Fintech Firms Is a Step Backward

Fintech is one of the most closely watched technologies in the financial sector. Around the world, efforts are actively underway to foster the fintech industry. South Korea has also responded by improving its financial system, such as through the enactment of the Special Act on Support for Financial Innovation (2018) and the implementation of the financial regulatory sandbox (2019). Based on these changes, internet-only banks such as KakaoBank and Toss Bank were launched, and simple payment platforms such as Naver Pay and Kakao Pay also saw significant growth. However, the growth gap between domestic and overseas fintech companies is widening.

The Financial Services Commission, while calling for financial innovation and greater consumer convenience, initially encouraged the growth of the fintech industry and eased regulations, only to abruptly change course. Companies have had to suspend operations under regulatory pressure, or have suffered negative impacts on earnings and stock prices, making survival rather than growth their primary goal. This financial turmoil ultimately has negative consequences for consumers who use these services and investors who hold shares in these companies.

The Financial Consumer Protection Act (hereafter, the Financial Consumer Protection Act), which took effect last September, has become a major controversy, even causing fintech firms to suspend operations. The regulation was also one of the reasons Kakao Pay—long described as having made three attempts to go public—failed to list.

Under the Financial Consumer Protection Act, services provided by fintech platform companies such as Kakao Pay—including comparison, recommendation, and advertising of financial products—are classified not as advertising but as “brokerage.” Platforms without the necessary brokerage license or registration cannot handle such services. Kakao Pay’s IPO fell through due to concerns that its comparison and quotation services for financial products such as funds and insurance could violate the Financial Consumer Protection Act. In the end, Kakao Pay scaled back and reorganized those services in order to go public. Other companies likewise faced the prospect of operational suspension, but were able to continue their loan comparison businesses after obtaining licenses to act as loan sales and brokerage agents.

Because of the absence of clear standards and the difficulty of uniformly applying the rules to services that differ from company to company, the regulation has in fact only added to the confusion, with even essentially identical services being judged differently as to whether they are in violation.

The financial authorities’ total household lending regulation, implemented after the Financial Consumer Protection Act, has worsened the earnings of fintech firms. Fintech loan comparison platforms operate by providing loan comparison services and then earning revenue when a loan is actually issued. But with the enforcement of this regulation, financial institutions raised the bar for lending, making business difficulties unavoidable. This has not had a major impact on companies such as Toss and Kakao Pay, which provide a wide range of financial services, but it has dealt a heavy blow to smaller fintech firms for which such services are their core business.

The confusion in the fintech industry, hit in succession by the Financial Consumer Protection Act and total household lending regulation, is still ongoing. According to a report released by the global research firm Findexable, Korea’s fintech ecosystem ranking fell eight places, from 18th last year to 26th this year. At present, the digitalization of finance is accelerating worldwide due to COVID-19. While other countries are growing rapidly, Korea appears to be falling relatively behind.

The number and level of development of domestic fintech firms remain relatively low compared with those overseas. No global fintech company has yet emerged from Korea. This is still a period in which qualitative growth must take place. Rather than stronger regulation, what is needed is support for mergers and acquisitions (M&A) and large-scale investment. But because of tightening regulations, domestic fintech firms are preoccupied not with growth but with resolving regulatory problems. Even so, there are currently as many as seven bills related to online platform regulation pending in the National Assembly.

To respond to the global trend of financial innovation, regulations are needed that accommodate the growth of fintech companies. Improvements must also be made to the existing regulatory environment, including the adoption of a “negative regulatory approach,” under which everything is permitted unless explicitly prohibited by law or policy. We must recognize that strengthening regulations at a time when corporate autonomy and freedom of business activity should be encouraged is nothing short of moving in reverse.

Kang Eun Koh, Intern Researcher, Center for Free Enterprise (CFE)

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Original title: [자유발언대] 핀테크 기업의 규제, 역주행과 다름없다

Author: Gang-eun Go

Date: 2021-11-26

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&pn=10&idx=24344