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Financial Services Industry
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보고서 1
Financial Services Industry Strategy in the Ear of Ultra-Low Interst Rates [21-04]
Senior Research Fellow Choi, Soon Young and others / Apr. 28, 2021
Financial Services Industry Strategy in the Era of Ultra-low Interest Rates

The major economies of the world have entered a stage of ultra-low interest rates. Since the 2008 Global Financial Crisis(GFC), long-term yields on government bonds of have fallen below 2%, with some European countries experiencing negative interest rates since the Eurozone Crisis. The same is true of major emerging countries as well, including Korea, whose 10 year government bond yields are at below 2%, and call rates at 0.5% in 2021.
For developed economies, the trend of falling interest rates began in the 1980s, as the decade of high inflation came to an end with stricter monetary policy. For major emerging economies, interest rates began to fall with the onset of the 1997 Asian Financial Crisis. That fact that the phenomenon of “lower for longer” interest rates is global in nature and expands a period of decades indicates that its root causes are also common globally and systematic in nature. The main culprits of low interest rates are falling potential growth rates, demographic changes, and expansionary monetary policy following major economic and financial crises. 
The implication of a prolonged low interest rate environment is significant both for the economies undergoing such changes as it is for the financial services sector. Lower yields on safe assets makes asset building more difficult, such as for retirement planning, which implies a greater burden on government to expand social safety nets. Also, without a means to increase yields on household portfolios, current and future consumption will necessarily decline, leading to lower household welfare. As such, the role of the financial services sector is critical in effectively providing financial products and services that can aid in the portfolio re-balancing of households as well as institutional investors such as pension funds.
This research aims to examine the impact of a prolonged low interest environment, particularly from the perspective of the financial services industry. From a theoretical view point, low interest rates lead to increasing value of risky assets, such as stocks. Also, levels of yields below a threshold can lead to behavioral changes by households toward higher risk taking. However, actual changes in asset prices, as well as investor behavior, need to take into account concurrent changes alongside interest rates. In addition, the realization of a “money move” requires the supply of appropriate financial products and services that are aligned with the risk-return appetite of investors. Also, trust in the financial services industry is an important factor in whether and to what degree “money moves” take place.
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보고서 1
Financial innovation by fintech and its implications [21-03]
Research Fellow Lee, Sungbok / Feb. 02, 2021
This report analyzes the aspects of FinTech leading the digitalization of finance by focusing on financial innovation and draw implications for the domestic financial industries and authorities by comparing the overseas and domestic aspects, in order to objectively evaluate financial innovation driven by FinTech. The results of the analysis confirms that FinTech innovation shows a very different aspects from the past financial innovation by technological progress as the literature of FinTech innovation asserts. For example, financial innovation by FinTech is appearing and spreading all over the world, showing an aspect of combination or convergence of heterogeneous industries, and appearing all-round and simultaneously in almost all financial sectors. In addition, an aspect of combination and convergence between financial services is also observed, along with the emergence of a new type of financial service that has not been present.
 
However, it can also be found that the effects of financial innovation by FinTech are somewhat overestimated. For example, the unbundling of existing financial services provided by incumbent financial companies has less impact than originally expected, disintermediation by P2P financial services is very limited, and the effect of increasing financial inclusion by FinTech also shows a gap depending on the financial service sectors. In addition, although the adoption rate of FinTech continues to increase, it is evaluated that the higher the proportion of the population aging in countries, the higher the possibility that the elderly would be excluded from financial services through FinTech.

The aspect of financial innovation by FinTech on reshaping the financial industries is also expected to unfold differently than originally expected. This is because even FinTech companies that choose to compete with incumbent financial companies show a aspect of enhancing collaboration with the incumbents financial companies and other FinTech companies to expand their customer base and generate more profits. On the contrary, the entry of big tech companies with a strong customer base and significant capital into the financial industries is expected to intensify competition between incumbent financial companies and BigTech companies, and significantly weaken the influence of incumbent financial companies as well. Meanwhile, active overseas expansion of FinTech companies is promoting competition for financial services across borders.

Looking at the aspects of financial innovation by FinTech in Korea, it can be found that there are many similarities with foreign countries but also there are significant differences. For example, though there are FinTech companies that discover new types of financial services, more FinTech companies seem to imitate financial services that have already been introduced. As a result, it is observed an aspect that FinTech companies are excessively focused on specific fields. Also, the unbundling of existing financial services, the new introduction of bank-like financial services, and the rebundling of financial service using open banking are not also observed in detail. The effect of increasing financial inclusion through simple transfer and P2P lending services is also very limited.

It is also characteristic that Korean FinTech companies expand their customer base through competition for price or benefits and generate revenue by recommending or advertising financial products of incumbent financial companies. This may be due to the fact that the domestic market size of each financial sector is not large enough for FinTech companies to generate revenue independently. This may be the reason that domestic FinTech companies are more active in overseas expansion than is known. Meanwhile, the impact of BigTech companies' entry into the financial industry on the competitive landscape in financial industries is likely to be greater than in the US or China. For example, the customer contact points of incumbent financial companies can be drastically reduced, and the survival of FinTech companies can be greatly threatened.

Financial innovation by FinTech is leading to changes in the landscape of the financial industries and financial markets in a different way than before, but like the previous financial innovation, it can cause negative effects as well as positive effects. With this in mind, it is necessary to create an environment for fair competition between incumbent financial companies, FinTech companies, and BigTech companies, and to minimize regulatory arbitrage and regulatory gray zone under the principle of the same activity, the same regulation. In addition, if Korea's FinTech has succeeded in quantitative growth over the past five years, it is now necessary to focus on promoting qualitative growth so that financial innovation by FinTech can substantially improve the efficiency of the financial industry and improve international competitiveness.
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보고서 1
Guidelines for Managing Outsourcing Risk of Financial Services Firms: Overseas Cases [20-01]
Senior Research Fellow Cho, Sung Hoon / Dec. 07, 2020
Outsourcing, which means allowing a third party outside the company to perform activities or functions that the company has performed internally, is a strategic decision-making aimed at reducing costs, enhancing management efficiency, and strengthening core competencies, and this importance is the same in the financial services industry. In particular, outsourcing is becoming more important as the value chain of the financial services industry changes according to the recent rapid technological development called the ‘4th industrial revolution.’ However, in Korea, there have been opinions that the statutory regulations on outsourcing are rigidly operated, limiting financial services firms’ use of outsourcing, and thus failing to respond to rapidly changing environments, and outsourcing regulations are on the trend of easing.

Major foreign countries, such as the United States, European Union, United Kingdom, and Singapore do not regulate outsourcing of financial services firms by law. Instead, regulatory or supervisory agencies have created and provided guidelines or guidances for outsourcing management of financial services firms. The guidelines of these agencies commonly emphasize the roles and responsibilities of the board of directors and top management in making and managing outsourcing decisions. In addition, the management process leading to outsourcing risk management, due diligence and selection of outsourcing suppliers, design and conclusion of outsourcing contracts, and supplier monitoring is presented in a similar manner.

All global financial services firms have developed a ‘Code of Conduct’ to manage their outsourcing and apply them to their suppliers. The Code of Conduct commonly contains matters concerning business ethics and integrity, labor and human rights, environment and sustainability, diversity and inclusion. This report also introduces the contents of JP Morgan’s ‘Minimum Control Requirements’ as a specific internal guideline for outsourcing management, which are very specific and detailed as defining minimum control requirements to effectively control IT outsourcing and manage related risks.

If Korea’s outsourcing regulations are continuously eased and ultimately shifted to principle-based, guidelines as soft norms will be needed, and these guidelines should be specific and specialized to provide practical assistance to financial services firms. Financial services firms’ internal outsourcing management guidelines should also be specialized, detailed and technical, and efforts should be made to secure the technical capabilities of their own personnel to create and implement these internal guidelines. With the increase of IT outsourcing, the importance of risk management related to data and information of customers and firms is growing, and firms need to raise awareness of the responsibilities of the board and top management for outsourcing management.
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