[Column] Towards 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 several attempts since December 2003 when the government first announced an initiative to make that dream a reality, there has been little progress over the past two decades. In the latest Global Financial Centers Index (GFCI) ranking from September 2022, Seoul came in 11th and Busan 29th, far behind Singapore in third and Hong Kong in fourth.

There are several prerequisites for becoming 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 acceptable English communication.

But Korea falls short in many of these categories. Besides the relatively small size of the financial market currently valued at $2.002 trillion – about a third of China’s and Japan’s – Korea’s maximum corporate tax rate of 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 in 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 rather than 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 toward a global fintech hub given the country’s apparent limitations in to qualify as a global or Asian hub for conventional finance. I fully support the new idea, as the strategy to turn the country into a fintech hub is more compelling – and achievable – than the traditional financial hub.

Today, digitization – at the heart of the fourth industrial revolution – defines the present and future of finance. Fintech’s influence is sure to grow as financial hubs rapidly shift their focus from analog to digital.

Korea has a good chance to become a global fintech hub, most of all thanks to its superiority in IT competitiveness. For example, the global recognition of Korea as an IT powerhouse makes it easier for fintech to advance into Southeast Asia for international partnerships and collaborations given the region’s rapid economic growth and its strong interest in rapid digitization 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 tech giants 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 was ranked 11th in the GFCI ranking last year, was ranked 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 Bloomberg Innovation Index for 2021. The number of Korean fintech players has also increased from 131 in 2014 to more than 600. Mobile platforms such as KakaoBank and Toss can create international success stories wherever they go.

Third, digitized finance can help the country overcome language barriers. Mobile screens can largely compensate 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 poorer English skills than Singapore and Hong Kong.

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

If so, what kind of synergy effect can we expect from a fintech hub? First, using cyberspace without limitations in time and space can save a lot of time and money to increase efficiency. Some may worry about a relatively weak “cluster effect”, especially 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 exploit fintech – can certainly help to diversify the structure of the hub.

A fintech hub can also maximize the impact of leveraging artificial intelligence, blockchain, cloud and big data (ABCD). From the perspective of a business model, a fintech hub can function as an attractive cluster of digital financial platforms at home and abroad. The key is big data. If Korea can collect a lot of data from domestic and foreign players, it can maximize the effect of using ABCD. For example, 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 financial platforms. The country has methodically built the infrastructure of an ecosystem for the MyData industry – such as an open banking system and financial data exchange – that can serve as a strong influence over Hong Kong and Singapore.

Another expected synergy effect is the merger of the financial sector and other services. When digital platforms integrate financial services with other services – such as medical and healthcare, cultural and entertainment activities, education and real estate solutions – Korea can have a striking advantage over financial services-focused Hong Kong and Singapore. For example, financial services that offer incentives on plastic surgery or K-pop may appeal strongly to Southeast Asians.

Also, if Korea connects blockchain technology with fintech, the country could emerge as a hub for digital assets. Many Korean players are already active in trading crypto and virtual assets abroad. (Korea’s cryptocurrency trade is among the world’s largest.) Since the government has begun working to secure digital tokens, synergy with fintech is also possible. If an elaborate plan to build a fintech hub comes to fruition, local fintech companies will find it easier than before to expand abroad and may grow into unicorns to expand the cyber territory of digital asset management.

For Korea to become a global fintech hub, financial authorities and industry must work hard together. Bringing in foreign players is just as important as helping local players to invest abroad. The authorities may 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 support the growth stages of fintech ventures is also important. Policy support should go towards promoting investment for start-ups in the new trial phase and others capable of scaling up to unicorns. Public investment must act as ground water, while private institutional players are encouraged to participate through incentives.

At the same time, government efforts to encourage green and ESG (environmental, social, governance) commitments must also follow to provide financial support to ESG-focused companies and technologies. It will help to develop ESG fintech and also help to increase the synergy between IT and digital-based finance and the market for carbon allowance trading.

All this is only possible after administrative obstacles have been 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. It requires government offices to eliminate administrative hurdles first for the sake of policy convergence. The fintech hub can only be built through a proactive strategy towards the goal of becoming a first mover, not a fast follower like Korea was in the past. Translation by Korea JoongAng Daily staff.