Much more than K-culture Export: Korean FinTech Sector is Running Fast
All eyes on South Korea. The first thing that comes to mind when speaking about this country are K-pop bands, such as BTS, and K-dramas like Squid Game. The country is also well known as hi-tech giant. Samsung and LG are household names in many markets. But the country’s tech scene goes much deeper than that.
In the last decade, South Korea’s fintech sector has been booming. Kakao Pay, just giving an example, the digital wallet of texting app Kakao, last year was valued at about 10 billion US$. Thus, let’s have a look at how the FinTech industry flourished in Korea.
FinTech in numbers
Korea leads the Asia-Pacific region in terms of experience with digital finance as of April 2021. In the last 2 years, especially after the pandemic outbreak, there has been a massive adoption of digital payment systems in South Korea, making it a lot more convenient to go about with basic financial services.
Growth is strongest in digital payments, P2P loans and investments as well as blockchain technology, while the current Korean government is committed to driving deregulation in the FinTech sector.
This growth and expansion of the digital finance ecosystem in the country have been aided by a number of factors like strong IT and financial information infrastructure. In addition, the size of investment is also steadily increasing, while in 2019, South Korea's fintech adoption rate reached 67% of the digitally active adult population.
Koreans love credit cards, but phones too!
Card penetration in South Korea equates to a massive held 3.9 credit cards in 2019, making up 70% of all payments. Combined with T-Money for public transportation, Koreans can pay almost all daily transactions, even their taxes, with credit cards. The cards are connected to the users’ commercial bank accounts and include added benefits such as cashback services or automatic loyalty point collection for most locally available membership point programmes. This has reduced the need for other payment methods.
Nevertheless, the digital payment sector, led by Kakao Pay, Toss, and Naver Pay, has continued to grow since 2016. Everything started from social media and e-commerce channels. It is important to say that Korea is one of the world’s largest e-commerce markets where mobile purchases amounted to 60.2% of the total online shopping transaction value and 34% of users completed their mobile purchases via social media payment gateways while 29% of users chose bank transfers.
It means that the sector is dominated by mobile payment platforms launched by established online service giants (KakaoPay, NaverPay, Payco); Korea’s global conglomerates (SamsungPay, Shinsegae’s SSG Pay, and Lotte Group’s L Pay) as well as startups (Toss from Korea’s first fintech unicorn, Viva Republica).
Plus, in November 2021, Korea became the first country in the world to legally allow app developers to offer third-party payment services at Google Play or Apple Store. It was a remarkable victory for third-party payment systems, as it opened the door for many innovative solutions.
From tradition to innovation. In Korea, banks are going online
Like in Japan, the Korean banking system is traditionally a conservative sector. But even the country's top banks are investing in FinTech. All biggest institutes are concentrating heavily on digital banking, mobile payments, security as well as blockchain solutions for both customer-facing interactions and internal procedures.
Back to the topic, Korea’s first online-only bank, K Bank, was launched in April 2017, followed by Kakao Bank in July of the same year. Kakao Bank managed to reach 187,000 customers on its launch date, 3.3 million in the first month and 6.3millions in the first year. This is not surprising, as one of Kakao Bank’s shareholders is Kakao Corp (10%) – operator of the most popular social messenger in Korea, with more than 43 million users in a country with a population of 51 million people.
The country is also investing in blockchain
With an impressive number of cryptocurrency exchanges, Korea has long been at the forefront of blockchain technology. Since 2017, all major financial institutions have established research bodies to launch and develop applications based on blockchain. In 2018, Hana Financial set up the Digital Transformation Lab to develop AI and blockchain solutions to provide customers with a new digital finance experience.
Shinhan Bank has also initiated a plan to implement a blockchain-based work process to expand the use of the new technology to full extent its financial services and internal protocol. Once again, those investments were also welcomed and promoted by the government.
What about Open Banking?
South Korea's financial authority said last year that it is “ready to expand the ecosystem of the so-called open banking platform by inviting users of fintech services, allowing more people to enjoy simpler financial transactions”. South Korea launched its first open banking service in 2019, which centres on allowing customers to use any mobile banking application of their choice to access their accounts in different banks.
Major South Korean banks have already joined the platform. After a few weeks, the number of Open Banking net users reached 30 million, Financial Reporter Services (FSC) reported.
Last year in December, the FSC decided to expand Open Banking services to a total of 120 financial institutions and FinTechs including financial investment firms, card companies, and small and medium-sized FinTechs. Since its launch, the number of accounts registered with the open banking system came to 166.8 million, the FSC data showed.
The two years of operating Open Banking services contributed to the opening up of the financial market infrastructure that has been known for its exclusiveness traditionally. In the meantime, the authorities have worked to improve the system to boost its expandability, fairness, and stability. With Open Banking, financial consumers have been able to enjoy various types of financial services much more conveniently while financial companies and FinTechs firms have been able to develop and launch more innovative services through platforms, local media said.
As with most industries, the Covid-19 pandemic has sped up the growth of the South Korean fintech ecosystem. Experts think that the change will continue to accelerate, and sectors such as digital banking, digital loans, stock-trading platforms, and payments will rapidly develop. And now the country is becoming much more open to foreign experts. “Overseas FinTechs companies can bring value to the Korean market by contributing to the digital payment segment – it is still a hot topic and there is much to be done as Korea is pursuing openness in the banking industry, especially in promoting account-to-account payment”, said Jaeseo Min, CFA, Senior Manager of the Future Visioning Team at K Bank.
Additional opportunities lie in foreign remittance, as local mobile platforms are now able to partner with overseas companies for such services. The reason it's easy. Japan is already a mature fintech market with its fintech giants, China is in the middle of a perfect storm where Xi Jinping’s policies (both internal and foreign) are having a profound impact on markets with foreign investors fleeing China. In this framework, is the right time to invest and approach South Korea’s rocketing FinTech market.