The prolonged COVID-19 pandemic has taken its toll on domestic banks this year, with lower interest rate margins and enhanced loan regulations.

The key challenge, however, is not the tangible loss so far, but rather the forthcoming competition in the digital arena -- where conventional financial firms find themselves overrun by big tech rivals.

Racing against the clock, the conventional financial industry is now scrambling to grab the digital initiative, in line with the ongoing deregulatory moves of authorities to activate digital innovation for sustainable growth.

“From now on, the (financial) market will be reorganized into competition between financial and big tech firms,” said Financial Services Commission Chairman Eun Sung-soo in a recent press conference on the government’s financial policy directions in the second half of the year.

“(Conventional financial companies) should contemplate the threats and opportunities that arise from such change."

The Korea Institute of Finance also underlined in its recent report that banks are currently facing a watershed moment, pressed both by the general economic downturn and the paradigm shift in the sector.

The loan-deposit margin -- indicating the gap between the interest rates of loans and deposits -- stood at 1.60 percent as of end-April, the lowest since December 2008, when the global financial crisis broke out. The net interest margin for the first quarter this year also came to a record-low of 1.46 percent.

“Bank loans have expanded since March as companies sought to secure liquidity amid market uncertainties, but demand is expected to shrink in the second half, unless the economy has a dramatic rebound,” the report said citing the profitability challenges of banks.

Also, noting the imminent market changes such as the kick-off of the MyData business, expansion of the open banking service, and the rise of big tech players, the think tank warned banks to exert all efforts for digital transformation.

“Mega-sized platform operators such as Naver and Kakao are progressing at a face speed in the financial market, on the back of their simplified payment and remittance systems,” it said.

Big players on the move

Major banking groups here have been launching special committees and rolling out detailed plans tied to their digitalization businesses in recent weeks. 

Shinhan Financial Group said it has decided to officially pursue its digitalization project Digilog in line with the government’s “Digital New Deal” and to become a leader in adopting digital finance among its peers. 

The group held a management meeting on Wednesday to review four key businesses for the digitalization project. It has also launched a Digilog Committee -- chaired by the group’s Chairman Cho Yong-byoung and consisting of top executives of its seven subsidiaries -- to focus on its digital projects including its data and startup nurturing businesses. The committee plans to focus on materializing 35 specific plans under the project. 

To add momentum to its digitalization, four more subsidiaries were tasked with goals of coming up with new business models in different areas of new technologies, such as artificial intelligence, big data, blockchain and health care. In March, the group ordered six of its subsidiaries -- including its flagship Shinhan Bank, Shinhan Card and its insurance units -- to map out new business models in technologies they were assigned. The four new subsidiaries that joined the task included Shinhan Capital and Jeju Bank. 

The group’s research and development center, Shinhan Digital Innovation Institute, will be expanded and a digital education system will be established to hire and foster workforce centered on digital transformation, it said. 

Shinhan’s rival Woori Financial Group -- which launched a new vision for digitalization earlier in the year “digital for better life” and established a digital innovation committee in April -- has selected 15 tech startups for partnerships in technology and services, it said on June 2. Startups that provide online real estate data, wireless payment solutions and digital asset management platform were among those selected for the program dubbed Digital Innovation Lab.

Woori Financial Group Chairman Sohn Tae-seung recently labeled the current timeframe as “the golden time for digital innovation as the “untact” (non-face-to-face contact) trend has evolved into the new normal due to the COVID-19 outbreak.” 

Hana Financial Group’s flagship banking unit has also partnered with 14 firms as part of its startup partnership and fostering program, established in 2015. While the startup program itself has existed for several years, this year’s selection process was centered on finding firms that could provide untact technology in its partnership. 

KB Kookmin has been expanding its digital finance services based on its partnership with Amazon Web Services -- Amazon’s cloud computing subsidiary -- and received approval from the state-run Financial Security Institute regarding the safety of its services. The FSI is an independent agency tasked with bolstering information management and protection.

MyData test pilots

Korea’s financial groups are adding significant momentum to the growth of personal credit information management services here dubbed MyData, a new data-driven industry fostered by the government.

MyData refers to a business model that offers integrated management of personal credit information such as banking transactions or credit card records and make personalized product recommendations to customers. 

JB Financial Group said Monday it has been selected to lead a consortium of financial companies to take part in the government’s MyData project. It is a state-led pilot test of MyData services in various industry sectors, aimed to strengthen individuals’ authority to control and handle their own information. 

In March, the Ministry of Science and ICT and related ministries began to recruit local companies hoping to participate in the pilot program. A total of 31 consortiums applied for the program and the ministry selected eight consortiums out of them, respectively specialized in six different fields – health care, finance, public transportation, welfare, small enterprises and traffic, officials said. 

A consortium led by JB Financial Group -- which consists of the group’s affiliates including Jeonbuk and Kwangju banks as well as JB Woori Capital alongside SK Group’s key affiliates including SK Telecom, SK Networks and SK Energy as well as Fintech, an online-based lending solutions provider -- was chosen as the MyData operator in the finance sector.

Through the pilot project, JB Financial plans to develop personalized financial products and services by making use of vast amounts of mobility data of customers, including records of visits to gas stations, vehicle inspection or recent driving routes, the group said. 

Earlier, a consortium of NH NongHyup’s key finance units and local data firm SNP Lab was selected to develop an open platform for personal asset management.

Meanwhile, in 2018, responding to the “fourth industrial revolution” driven by digital technology, the Korean government had announced plans to foster the country’s data industry by 2022 and the on-going MyData project was one of them. 

Taking effect in August, a revised credit information act that eases regulations on the use of personal information for businesses will provide a legal framework for the country’s MyData services in Korea. 

By Bae Hyun-jung, Jung Min-kyung and Choi Jae-hee(tellme@heraldcorp.com) (mkjung@heraldcorp.com) (cjh@hearldcorp.com)