Banks are in need of a paradigm shift. Amidst the surge of fintech giants, volatile interest rate changes by the Fed, and full-fledged digitalization of consumer banking, Korean banks cannot rely solely on interest margins to generate revenue. To maintain competitiveness in today's financial landscape, banks need to diversify their revenue streams and maximize non-interest income.
Before diving into potential business opportunities, banks must examine the existing legal hurdles. Since the 1960s, Korean Banking Acts have aimed to separate financial and industrial capital by restricting banks from owning non-financial subsidiaries. These measures had the purpose of “preventing the concentration of economic power in a single financial institution entity and potential harm to the financial soundness” of banks.
However, in July 2022, the Financial Services Commission (FSC), the nation's central financial regulator, announced the easing of such regulations to spur growth and innovation in the financial industry.
Nevertheless, the extent of the relaxation is still unclear. To date, only select financial firms are granted permission to launch non-banking services, such as Hana Bank's used car sales service and Shinhan Bank's pet supplies eCommerce platform. As unrelated as the two businesses may seem, they share an essential quality: their digitized, innovative ideas are part of FSC's regulatory sandbox, making these businesses exempt from the aforementioned legal restrictions.
For banks seeking to diversify, their business ideas must have the following features. First, they have to be original and digitized. FSC's pilot program will only approve businesses that are either introducing new technologies or innovative business opportunities to the financial sector.
Second, they need to be integrated into mobile banking. The top four Korean banks have mobile banking services with an average monthly active user rate of 60 percent, a figure that tops other banks worldwide. By promoting new businesses on mobile banking, banks can leverage their existing customers to accelerate their diversification process. The following are two business ideas that satisfy these criteria.
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The first idea is a part-time job search platform for international students in Korea. To date, the number of foreign students at domestic universities is at a record high of 166,000, and the Ministry of Education aims to increase the figure to 300,000 by 2027 to offset the ultralow national birth rate.
To this end, the government has announced the easing of the regulations on part-time jobs for foreigners by increasing the number of hours they can work and expanding work opportunities related to their specialty areas. Despite these efforts, international students often suffer the inconvenience of relying on job platforms targeted at locals and preparing hefty amounts of physical paperwork such as work-study approval forms, university transcripts and visa verifications.
The proposed platform, available in multiple languages and exclusive to foreigners, should allow foreign students to list their qualifications and the necessary legal documents online, creating an efficient recruitment process for both students and employers. This platform can be integrated into mobile banking, as most Korean banks already serve foreigner-friendly applications.
For banks, this provides an opportunity to maximize the monthly active users in their mobile banking and even increase their interest margins by offering personal savings plans to those who succeed in getting employed.
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The second idea is a crowdfunding platform for startups and small- and medium-sized enterprises with a recommendation algorithm. By combining Big Data algorithms with customer's data, such as investment history and industry of interest, banks can recommend private business ventures and startups that might interest a customer.
Today, bank customers frequently invest in a variety of public securities in the comfort of mobile banking, but privately owned companies have always had an impression of obscurity and riskiness. This idea offers the customers an opportunity to diversify their portfolio with an alternative asset class. Furthermore, by integrating this platform into mobile banking alongside publicly listed stocks, banks can promote investing in private companies to be more approachable.
A successful case study of this idea can be found in the 3.5 billion won ($2.5 million) investment by a local bank for the creation of the movie "Operation Chromite" back in 2016. The investment involved the bank raising 500 million won from 300 customers and delivering 19.3 percent after-tax returns. Despite the success, this project was only a one-time investment opportunity and no major Korean banks currently provide a platform for this type of investment.
To accommodate the fast-paced and dynamic financial world of today, banks need to revolutionize their business models while adhering to all the legal restrictions. By adopting the two proposed business ideas, banks will be able to diversify their business and maintain their competitive stance in the ever-changing industry.
Jin Sung-kyu is a student at the University of Pennsylvania.