Experts at a parliamentary forum called Tuesday for the licensing criteria for a fourth internet-only bank to require that at least 50 percent of its loan portfolio go to sole proprietors and small-business owners. They also urged regulators to place alternative credit-scoring technology, rather than capital size, at the center of the approval process.
At the "Financial Innovation for Small Businesses and the Role of a Fourth Internet-Only Bank" policy forum held at the National Assembly, Lee Jong-in, a business administration professor at Caroline University in the United States, proposed that the new licensing guidelines set a minimum lending ratio for sole proprietors and small-business owners at 50 percent or more of total credit extended, and that this be written in as an explicit condition attached to any approval. He also proposed a cap on the share of household loans, arguing that the requirement would preempt a pattern in which newly licensed banks drift back toward mortgage and high-credit household lending once profitability pressures mount after launch.
Lee said the key to small-business finance lies not in the absolute size of capital but in the technology to assess a borrower's business viability, and called for the sophistication of alternative credit scoring (CSS) and the ability to integrate non-financial data to be reflected as core evaluation criteria. He also proposed simplifying the pseudonymization procedures needed to combine data from e-commerce platforms, electronic payment gateways, delivery platforms and public databases.
Lee Jong-hak, managing director of the Korea Federation of Small and Medium Business, said small-business specialization must not remain a declaration made only at the time of licensing. He called for specific targets — including the share of loans to sole proprietors and the share of credit extended to low- and mid-credit small-business owners — to be set and monitored on an ongoing basis.
Jeong Min-gye, a professor at Dongguk University's Graduate School of Law, proposed defining the fourth internet bank as a "growth finance platform for small businesses and small enterprises," linking it to a model that extends from lending through to management support, investment attraction, mergers and acquisitions, and business succession.
Proposals also targeted the capital adequacy problem that was the direct reason applications were rejected last year. In Ho, director of the Korea University Blockchain Research Institute, put forward three approaches: a public offering in which roughly 6 million small-business owners and ordinary citizens become direct shareholders; raising small-denomination capital broadly through small-business security token offerings (STO); and allowing digital-asset industry players to participate in bank capitalization. In cautioned, however, that the goal is not to lower the capital requirement but to broaden the ways in which capital can be raised, and called for the minimum capital standard to be made more concrete alongside a phased licensing and conditional compliance-management framework.
The backdrop to these demands is the heavy loan concentration at the three existing internet-only banks.
Lee Jong-in said that as of the end of last year, the combined household loan balance of Kakao Bank, K bank and Toss Bank stood at approximately 74.9 trillion won ($54.3 billion), while the sole-proprietor loan balance was about 6.8 trillion won — roughly 8 percent of total credit extended. He said the banks had failed to escape the structural constraint in which more than 90 percent of internet bank lending is concentrated in household loans, including mortgages.
In also said internet banks had met the inclusive finance benchmark of extending 30 percent of loans to low- and mid-credit borrowers, but that inclusion had not reached sole proprietors. He said credit assessment for small-office and home-office borrowers remains at an early stage because the evaluation framework is still built around collateral and guarantees.
Demand for small-business financing is being pushed toward the secondary financial sector. According to a financial stability report the Bank of Korea published in June, the outstanding balance of non-bank loans to self-employed borrowers stood at 451 trillion won in the first quarter of this year, accounting for 41.2 percent of the total of 1,095.5 trillion won. Kwon Oh-hyung, chief executive of Winkstone Partners, said collateral and guarantees account for about 90 percent of sole-proprietor loans, while the average interest rate on unsecured sole-proprietor loans at savings banks stands at 15.32 percent — a significant burden.
Kwon cited his firm's track record as evidence that alternative credit scoring has already entered a validation phase, saying Winkstone Partners has accumulated credit inquiry data on 1 million sole proprietors, loan application data from 30,000 borrowers and data from more than 20 partner platforms, with a loss rate of around 2 percent. He added that the firm offers mid-range interest rates of 8 to 12 percent per year to low- and mid-credit small-business owners through automated non-face-to-face screening.
Financial regulators expressed sympathy with the goals but maintained a cautious stance. Lee Jong-chan, head of the general affairs team at the Financial Supervisory Service's bank supervision department, said that if payment data and other information are used well to deliver tailored loans, small-business owners will benefit. He added, however, that because the business model is sensitive to economic conditions and risks can rise accordingly, regulators must comprehensively examine whether it represents a genuinely innovative model, whether it can generate sustainable profits and whether bank soundness would be compromised.
Park Seong-bin, a deputy director in the Financial Services Commission's banking division, said the authorities are focused on whether the structure can operate sustainably, and that the FSC will weigh the value of soundness against the value of innovation, assess the overall state of credit supply and related measures, and then consider whether to proceed with licensing. He acknowledged the gap in small-business finance, adding that a specialized credit-scoring model dedicated to small-business owners — involving banks, savings banks, mutual finance institutions and other sectors — is set to begin a pilot run in August.
Meanwhile, the FSC rejected preliminary licensing applications from all four applicants — Soso Bank, Soho Bank, Podo Bank and AMZ Bank — in September last year. At the time, the FSC said the applications fell short on the stability of funding arrangements and the feasibility of business plans, noting that major shareholders had submitted only conditional letters of intent rather than firm letters of commitment regarding initial capital and additional investment.
won@heraldcorp.com
