Innovating Korea’s financial payment infrastructure with open banking
The open banking platform is a joint open infrastructure in the banking sector which provides core banking services in standardized open API to ensure fintech companies and banks offer fintech services without partnership with individual banks.
Inquiry and transfer can be processes for accounts of all 18 banks by simply accessing the standardised open API. Fees were reduced by 1/10. Open banking is expected to spur innovation with the emergence of comprehensive financial platforms and improved customer experience.
Designed to serve individual banks, Korea's financial payment system provided limited access, requiring a separate contract with each bank in order to gain full access to the system. Moreover, with high fees imposed on fintech businesses, fintechs struggled to release and run innovative services.
Based on the "essential facility doctrine", which requires the owner to allow competitors to access and use the essential facility to enhance competition among essential facility owners while maximising consumer benefits, the Financial Services Commission (FSC) sought ways to ensure fair access and use of payment network where a natural monopoly exists.
In partnership with relevant agencies, such as the Korea Financial Telecommunications and Clearings Institute (KFTC) and the Financial Security Institute (FSI), FSC unveiled a policy on innovating financial payment infrastructure on Feb 25th, 2019 to create reasonable and fair competition ground which can offer new, innovative and comprehensive financial services. An open banking platform was established as a part of the effort.
Open banking is a joint open infrastructure in the banking sector, which runs core financial services in standardized open API to seamlessly offer fintech services to customers at reasonable cost, without obligating banks and fintech companies to enter into partnerships. Core financial services such as inquiry and transfer are provided in 6 APIs.
The 6 APIs include:
ⅰ) Balance inquiry (check balance of customer’s own account);
ⅱ) Transaction history inquiry (check deposit/withdrawal history of customer’s own account);
ⅲ) Account real name inquiry(user organization* verifies validity of customer account and name of account holder);
ⅳ) Check sender’s information inquiry (verify name of sender who has deposited to an account held by the user organization and sender’s account number);
ⅴ) Debit transfer (to take funds out of user’s account and credit it into user organization’s account); and
ⅵ) Credit transfer (to take funds out of the user organization’s payment account and credits it into user’s account).
The objective of the open banking platform is opening up the entire financial payment infrastructure to create a reasonable and fair competition ground where all players can offer new, innovative and comprehensive financial services for paradigm shift and innovation across Korea’s financial industry.
Through the open banking platform, a financial company with weak customer base or fintech business can maintain potential customers by utilising data held by another financial institution and thus a new opportunity can always be discovered if innovative application is created based on accurate analysis of customer needs.
Korea’s fin-tech industry is expected to grow rapidly with many new players entering the financial market to launch innovative services and existing banks seeking to discover new business models to secure sources of future profits. Dramatic transformation in day-to-day finance is expected to take place, too, because the financial industry is likely to be restructured to be consumer-oriented by enabling consumers to independently choose their financial services and have control over their data.
When bank-centred open banking stabilises, discussions will be launched to expand the system into the secondary banking sector, such as mutual aid, savings banks, post offices, etc. within next year. Review will be conducted to expand services by increasing the number of user organisations, adding more APIs and so on.
The amendments to the Electronic Financial Transactions Act will include legal ground of open banking payment, while new services by an initiation service provider (PISP), such as My Payment, will be introduced.
In addition, open banking will be expanded, for instance by combination, or reorganization with My Data sector to promote customised, new and innovative services. In short, “open banking” will be implemented to pave the way for true financial innovation to turn itself into “open finance”.
What Makes Your Project Innovative?
First, all banks (a total of 18) in Korea have joined open banking, which has enabled customers to enjoy better customer services thanks to greater choice. The strength of Korea’s open banking lies in the fact that on top of fintech businesses, banks are taking part in the system as a user.
Second, going beyond APIs for inquiry features to allow financial consumers to enjoy a variety of services, including, but not limited to payment, has broadened consumer choices.
Third, unlike open banking in other parts of the world, which provides API based on data inquiry, Korea’s open banking offers API that can execute money transfer and payment features.
Thanks to open banking, not only will financial consumers be able to use various innovative fintech services, but enhanced financial consumer benefit and a wider variety of choices are also expected.
What is the current status of your innovation?
On February, 25th, 2019, FSC has announced its plan to introduce open banking in “measures to innovate financial payment infrastructure”. After the announcement, FSC set out detailed plans and security standards based on its consultation with banks and the fintech sector. It has taken a series of procedures such as compatibility screening, functional testing, security checks, etc. on entities that signed up to use open banking.
From October 30th, 12 banks (Shinhan Bank, Woori Bank, KEB Hana Bank, Kookmin Bank, Nonghyup Bank, Industrial Bank of Korea, Daegu Bank, Busan Bank, Kwangju Bank, Jeju Bank, Jeonbuk Bank, Kyongnam Bank) have been offering open banking services through a soft launch, while from December 18th, full-fledged open banking will be rolled out for 18 banks (12 banks, the Korea Development Bank, Suhyup Bank, Standard Chartered Bank Korea Limited, Citibank Korea Inc, K Bank, Kakao Bank) and fintech companies which completed security checks.
Collaborations & Partnerships
As a government ministry overseeing Korea’s financial policy, FSC established the open banking master plan, etc.
A payment and settlement organization, KFTC, is now supervising the open banking hub system.
FSI is supporting security aspects of open banking by undertaking security inspections of open banking user organizations.
Banks are service providers of account information and users of open banking through their banking apps.
Fintech companies have also joined as users of open banking.
Users, Stakeholders & Beneficiaries
Banks have paved a way for a comprehensive financial platform by acquiring and attracting new customers through multiple channels.
Fintech businesses can focus on service innovation partly thanks to reduced costs; it has become easier to develop customised financial services that meet customer needs.
Consumers now have more choices over financial services, increased control over their financial data on top of financial experiences that have greatly been improved with one-stop services.
Results, Outcomes & Impacts
First, a high participation rate from banks and fintech businesses which were initially reluctant to join.
Second, the system fee was set at a reasonable level to ensure fair competition. Open banking fees are set to one-tenth (1/10) of firms' banking charges, which cost KRW 400~500 per transaction, greatly reducing burden on fintech companies. In particular, by further reducing fees imposed to small and mid-sized fintechs to one twentieth (1/20), fintech firms are finding themselves with lower entry.
Third, consumers showed keen interest in soft launch of open banking. More than 3 million users signed up for the service while an average of 2.4 accounts per person are registered for open banking.
Banks are releasing a wide range of products and services, leading to more consumer benefits. Banks are offering consolidated asset management services and they have introduced currency exchange and bill splitting services by collecting funds scattered across multiple banks.
Challenges and Failures
To open up the financial payments network and encourage fintech companies to join, it was necessary to adjust fees imposed on them by banks; but banks were reluctant, believing that this would inevitably reduce their profits from fees. Through continuous meetings in the banking industry, however, the applicability of open banking was expanded to enable banks to join the open banking platform. Moreover, they persuaded banks to see open banking as an opportunity to acquire more customers from competition rather than a threat of reduced fee profits. In the end, banks reduced fees. At the request of the banks, open banking was pilot launched (on October 30th) prior to the full implementation.
Also, in order to ease concerns about security issue, KFTC and FSI cooperated to conduct stringent security checks on fintech businesses to make sure they meet security requirements while subsidizing 75% of funds needed for conducting security checks for small and medium sized fintechs.
Conditions for Success
The major success behind open banking in Korea was listening from voices on the scene through regular discussions between the banking sector and the fintech industry, which ultimately enabled responsive administration for the spread of open banking. Since the announcement of measures on innovating financial payment infrastructure at the Financial Holding Companies Meeting on February, 25th, 2019, a working level council on open banking, which comprised of KFTC staff and working level employees from participating banks was held every week to reduce differences. In addition, to gather feedback in the field, the open banking joint task seminar (June, 20th) was held, alongside the user organizations Meet up day (September, 3rd) and other smaller meetings.
The feedback was quickly forwarded to the financial authorities and, when necessary, authentic interpretation was provided swiftly to help participating organisations resolve the issues they faced.
Open banking, which offers data and services held by multiple organizations through open API can be benchmarked to other industries or government ministries. Enormous benefits in terms of cost, computer program, convenience, etc. are present.
First, access to a single hub only enables an organization to be connected to all participating organizations. This can greatly reduce costs compared to connecting to individual entities. As the number of participating entities increases, the benefits can be doubled.
When organisations are connected by their own system standards, complexity of system development inevitably grows. However, when organisations are connected via single standardized hub, the level of system development and barriers will greatly be reduced.
Amid rising innovation and competition in the global financial payment sector, financial payment innovation is becoming a “game changer” for the overall financial industry by seeking to become a comprehensive financial platform. Not only is an open financial payment platform required for innovative financial services to blossom, but banks also need to open it up to survive.
An increasing number of global fintechs have already entered the financial payment and are quickly increasing their market share. Big tech companies, too, have made inroads into the financial industry based on financial payment and are expanding their businesses into the global financial platform. Recognizing the importance of the financial payment sector, major economies such as the EU, UK and Japan have already been pushing for infrastructure innovation to raise openness and access to payment systems. Indeed, they have built legal and institutional framework to ensure that fintech companies can easily access banks’ payment system before other nations. In contrast, Korean fintechs were not able to offer services without help from banks due to individual bank-based closed system. Banks, too, were unable to provide financial payment services for customers of other banks. Sticking to closed system would naturally cause a country to fall behind in global race for financial innovation. The open banking system, which opens up the entire financial payment system, was implemented against this backdrop. Many stakeholder institutions came together to build an innovative financial payment infrastructure which could offer easier financial services at reduced cost. As a result, Korea now has a financial payment infrastructure that is capable of handling many types of fund transfers, from deposit, withdrawal, to payment by allowing all banks and payment service providers to instantly access bank accounts held by every citizen at the moment when people want to use the service.
FSC will continue to think about ways to improve the system in terms of operating process, member organisations, service scope, etc. since it can be applied to a wider range of financial services rather than confined to present day payment and transfer. Financial innovation at the individual level can fall short of driving fundamental innovation in financial payments and across the industry without a complete transformation of the overall financial infrastructure. In this regard, the Financial Services Commission will take measures to increase the synergy effects of open banking including setting up legal framework for open banking, overhauling the financial payment system and promoting big data.