As the Fourth Industrial Revolution continues to accelerate, big techs equipped with innovative ICT are increasingly entering the financial services industry. Amid their expansion into banking, insurance, securities and electronic finance sectors, major big techs based in Korea and overseas have been praised for their positive role in offering more convenient, affordable and universal financial services. On the other hand, there are concerns that big techs may neglect their duty of consumer protection and threaten financial stability while rapidly taking up share in the financial market. A case in point is Wirecard, a fast-growing European big tech, which went bankrupt in June 2020. Its bankruptcy caused a massive loss to Wirecard users, which was transmitted to associated financial services firms. This has raised the need to monitor financial risks from big techs’ expansion into the financial sector and to regulate relevant big techs. Korea also has experienced the suspension of Kakao financial services arising from the Pangyo data center fire in October 2022 and the Mergepoint scandal in August 2021. These cases inflicted huge damages on users, thereby leading to the need for regulating large-scale fintechs or big techs. As the market share of Korean and global big techs is growing in the financial services industry, it is likely to compromise the interests of financial consumers and impair financial stability. However, Korea has a lack of research on how to enhance financial stability in preparation for big techs’ penetration into the financial sector.
Global financial supervisory organizations including the Bank for International Settlements (BIS), the Financial Stability Board (FSB) and the International Monetary Fund (IMF) have found that big techs’ entry into finance could offer economic benefits such as improving the convenience of financial consumers, addressing information asymmetries and cutting down costs for searching and transaction. But they also argue that big techs’ data monopolies and network externalities could hurt the interests of financial consumers and pose a threat to financial stability. The organizations have presented decreased welfare of financial consumers resulting from price and product differentiation strategies, mis-selling, unfair business practices and abuse of information as side effects of data monopolies, while pointing out unnecessary concentration within the financial services industry, deteriorating financial soundness and the increase in systematic risks as risks from network externalities. Korea’s big techs could be exposed to such risks. What should be also noted is that they are subject to less strict regulations and have a wider work scope and greater market dominance based on ICT, compared to financial services firms, although they provide essential financial services. This makes Korean big techs more susceptible to financial risks than their foreign counterparts.
In this article, big techs are defined as service providers that qualify for online platform provision, undertaking of essential financial services, and scale and user requirements to analyze financial risks posed by Korea’s big techs. According to analysis results, big techs have lower core financial risks than financial services firms such as market and credit risks, while showing higher operation risks. As for concentration and reputation, big techs exhibit higher risks. But it is hard to say that their risks regarding liquidity, law and system are higher than those of their counterparts in the financial services industry. Considering that big techs see risks related to credit, operation, liquidity, concentration and system increasing at a more rapid pace, compared to financial services firms, it is necessary to thoroughly monitor relevant risks. In addition, this article explores the possibility that increased risks of big techs would endanger other financial institutions, financial markets and infrastructure. Notably, market and credit risks of big techs are less likely to spread to financial institutions, whereas operation risks of big techs could be transmitted. Furthermore, big techs could offer poor brokerage services for non-traditional assets such as real estate P2P lending, brokerage of unlisted stocks and digital assets, which potentially undermine the stability of the financial market. Also, ICT-related disruptions and hacking incidents caused by big techs could disrupt financial infrastructure.
As stated above, Korea’s big techs are experiencing rapid growth of major financial risks while increasingly providing essential financial services. Accordingly, they are likely to destabilize financial institutions, financial markets and infrastructure. To make the financial system more stable, Korea’s authorities should devise specific regulations for big techs. First, big techs offering essential financial services should be subject to regulations applicable to financial services firms in terms of market entry, financial soundness, business practices and consumer protection. For instance, as a way of resolving ambiguity between advertisement and intermediary services, advertisement regulation can apply to continuous information provision involving unidentified products and consumers while strict rules of investment solicitation can be applicable to other intermediary services. Second, major big techs engaging in essential financial services should be designated as financial conglomerates and be subject to more rigorous regulations regarding financial soundness and liquidity. Third, it is necessary to impose the internal control obligation, applicable to financial services firms, on big techs, specify supervisors’ liability according to big tech executives’ roles and liabilities, and establish the incentive system to reinforce internal control. Fourth, preliminary oversight activities should be harmonized with ex-post supervision. In this respect, stress tests should be regularly conducted for each channel disrupting financial institutions, financial markets and infrastructure, and supervisory measures for financial services firms should equally apply to financial services provided by big techs.