South Korea’s Financial Services Commission (FSC), the government’s top financial regulator, will resume a new round of procedures for granting preliminary approval for digital banks, the FSC said on July 17.

Earlier this year, the FSC said it intended to approve one or two additional digital banks under the Special Act on Online-only Banks, which allows non-financial companies to own a 34% stake in an online-only bank.

Two companies applied, namely Kiwoom and Toss, but neither of them was granted a preliminary approval in last May as both fell short of the evaluation committee’s standards.

The regulator now said it will open a new round of procedures for companies looking to operate in the digital banking space. Applications will open on October 10, 2019 and will run until October 15, 2019, and only a maximum of two companies will be granted preliminary approval.

The FSC said that some improvements will be made to the process. In particular, the Financial Supervisory Service (FSS) will provide applicants with consultation over the whole process of application.

If necessary, the chairman of the evaluation committee will be attending the FSC meetings to explain evaluation criteria so that FSC commissioners will be able to have in-depth discussions and reviews on the committee’s evaluation results.

Applicants will also be given opportunities to express their opinions during the committee’s evaluation process.

The FSC said it will announce whether a preliminary approval has been granted within 60 days upon the data of application. In the case of an official approval, the company will be notified within one month upon the date of application for official approval.

Only two digital banks in South Korea

There are currently only two digital banks in South Korea: Kakao Bank, which is built on the back of the country’s highly popular messaging platform Kakao Talk; and K Bank, which was launched three earlier than Kakao Bank but has struggled to gain similar traction.

Kakao Bank started operations as a mobile-only bank in July 2017 and attracted two million customers in its first two weeks of life.

According to Young-Suk Kim, EY Korea’s financial services advisory partner, the appeal of Kakao Bank comes from the fact that the digital bank provides low-cost, better-quality mobile apps, products and services, and focuses on making things simple and convenient for the customer.

The digital bank’s success has pushed incumbents to renew their mobile apps and processes, as well as train their employees to provide better advice and more complex products for consumers, Kim told the Edge.

As of the end of April 2019, Kakao Bank had 9.3 million customers, 16 trillion won in deposits (US$13 billion) and 10 trillion won (US$8 billion) in loan balances.

A pro fintech government

The South Korean government has been working to create a favorable environment for fintech development.

The FSC recently selected five additional fintech solutions into its financial regulatory sandbox: a micro-investment service by Shinhan Investment; a brokerage service of foreign currency transfer service providers by E9Pay; a platform providing pet insurance policy holders with points that can be used in pet facilities by SmallTicket; a credit score rating service using non-financial and non-structured data collected from PG and VAN service providers and fintech firms by Hyundai Card; and a payment service for subcontractors using escrow accounts by ZikBank.

As of July 25, 2019, 42 services have been approved to be tested in the regulatory sandbox.

Fintech has gained notable traction over the past few years in South Korea. In 2018, more than 279.2 billion won (US$235 million) was deposited into fintech accounts, a 52% increase from a year earlier.

The FSC said this week that efforts are underway to revise a law governing online financial business operators to protect money deposited into accounts managed by fintech firms, according to a report by the Korea Times.

“Specifics will be finalized in the latter half of 2019 upon the passage of pending bills. Various measures are under consideration,” an FSC official said.

“The fintechs have grown at a rapid pace over the past few years, increasing the need for the government to implement corresponding regulations. The new measures will seek to boost consumer protection.”

The regulator recently approved Kakao’s application to become the largest shareholder of its internet-only bank subsidiary Kakao Bank.