- South Korea’s financial regulator has decided to permit new players to enter the banking industry, ending a 30-year-long monopoly by major lenders.
- The move introduces competition, potentially lowering consumer interest rates and stopping banks from keeping profits.
South Korea has allowed new banks to enter the industry for the first time in 30 years. Financial firms can now apply for nationwide commercial bank licenses, which could lead to lower consumer costs.
Let’s examine the reasons behind it and its influence on South Korean banking.
South Korea’s Banking Industry Landscape
The FSC’s decision to expand the banking industry marks a significant departure from the long-standing dominance of five major lenders in South Korea.
The main players who have dominated South Korea’s banking scene for the last 30 years include Kookmin Bank, Shinhan Bank, KEB Hana Bank, Woori Bank, and NongHyup Bank. The five major lenders currently control about 63% of the country’s total bank assets and a lion’s share of deposits.
During the COVID-19 pandemic, these major banks achieved record profits. Still, they were criticized for distributing their interest income as bonuses and dividends to employees and shareholders instead of returning it to the citizens. The President of South Korea was displeased with the banks’ unfair practices.
The entry of new players into the banking industry is expected to create a more competitive environment. By granting nationwide commercial bank licenses, the FSC aims to enable smaller financial firms to challenge the dominance of the major lenders. The financial regulators also plan to facilitate the entry of more online-only banks and ease the loan-to-deposit rules for foreign banks’ local branches.
Daegu Bank, a regional banking unit of DGB Financial Group Inc., is likely to be the first institution to take advantage of this opportunity, with the intention of transforming it into a nationwide bank. FSC’s Vice Chairman Kim So-young stated that if Daegu Bank submits its application soon, it could receive a license within a year after a review. With the license, Daegu Bank would have the opportunity to expand its operations nationwide and provide loans to larger corporations.
Despite this positive development, industry analysts emphasise smaller firms’ challenges in competing against established giants. Banking and investment analysts doubt the development and are sceptical about whether regional banks can attract nationwide clients even with a commercial banking license.
Worldwide Concerns on Banking Monopolies
Similar concerns about excessive profits and limited competition have also been raised in other countries. The Commerce Commission of New Zealand is researching competition in personal banking services for 14 months. Moreover, lawmakers in the United Kingdom have criticized large banks for offering low savings rates, while the US President, Joe Biden, has called out banks for charging excessive fees.
By opening up nationwide commercial bank licenses, South Korea seeks to dismantle the long-standing stronghold of major lenders and tackle criticisms surrounding disproportionate profits and bonuses. While smaller firms may encounter obstacles in their journey to compete against industry giants, these development signals are transformative shifts toward a more dynamic and diverse banking landscape in the country. Watching how the industry adjusts to this change and if the new entrants can alter the status quo will be fascinating.
