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2021 Feb/02
Financial innovation by fintech and its implications Research Papers 21-03 PDF
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.