The Korea Herald


Calls grow to deregulate market for online-only banks

By Son Ji-hyoung

Published : July 16, 2018 - 16:25

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Panelists from academic circles at a roundtable discussion Monday called on financial authorities to lower the regulatory bar for South Korea’s digital banks, which face difficulties in launching new financial services due to failures in raising capital.

Among issues at debate were calls to ease regulation on nonfinancial firms’ maximum ownership of banking firms, with some panelists saying such a regulation is outmoded. The ban was put in place to prevent companies from using banks as private “vaults.”

(K bank) (K bank)
Such discussion came as K bank, the first in Korea to launch a banking service without brick-and-mortar branches, failed to raise 120 billion won ($106.3 million) in capital by a deadline Thursday.

Korea is home to two online-only banks -- K bank and Kakao Bank -- both launched last year. Citing their low level of capital compared to conventional players in the banking industry, the two have focused on retail banking products such as loans and deposits offered at midrange interest rates.

During the panel discussion, Kim Do-hyung, an attorney at Barun Law and member of the Korea Securities Law Association, said K bank is facing “a grave crisis” in the wake of a failure to increase capital due to a regulation.

“The existing Korean commercial banks do not consider online-only banks a challenger any longer,” he said.

“To maintain the capital availability beyond a certain level, K bank is unlikely to continue to extend new loans to borrowers,” Kim said.

Under Korea’s Banking Act, a nonfinancial company affiliated to a business group with over 2 trillion won in capital is prohibited from holding more than either 10 percent of shares with or without voting rights or 4 percent of common shares with voting rights of a banking firm.

K bank’s de facto major shareholder, telecom KT currently owns 10 percent of shares. To increase the bank’s capital as a whole, the purchase of newly issued common shares by other shareholders must be involved to maintain KT’s 10 percent ceiling.

But this was met with disagreement among 20 shareholders of K bank in both of two batches of capital increase. In the first attempt to raise capital in September, shares worth some 20 billion won unclaimed from seven shareholders then were sold to real estate developer Moon Development Marketing. The failure to raise capital Thursday also stemmed from shareholders’ decision not to buy common shares newly issued in May.

The regulation hampers K bank’s development and the logic behind it comes from an outmoded idea, Kim said.

“Thirty years ago, corporations had little choice other than banks to have their capital procured,” he said. “Companies in contemporary days do not rely on banks for financing and have way more choices for direct finance.”

Panelists pose after a debate session on deregulation for online-only banks took place Monday at Korea Press Center in Seoul. (Son Ji-hyoung/The Korea Herald) Panelists pose after a debate session on deregulation for online-only banks took place Monday at Korea Press Center in Seoul. (Son Ji-hyoung/The Korea Herald)
Kim also pointed to the financial regulator’s stance as in a December 2017 report that Korean online-only banks should come up with new products or financial services “within a regulatory boundary,” saying capital expenditure in developing and promoting new products is inevitable to the bank increasingly becoming cash-strapped.

The panel session was presided over by Oh Jung-gun, a financial technology pundit and head of the Financial ICT Convergence Society, an academic association.

By Son Ji-hyoung