Korean Act on Special Cases Concerning the Establishment and Operation of Internet Banks

In September 2018 the Korean National Assembly passed the Korean Act on Special Cases Concerning the Establishment and Operation of Internet Banks (hereinafter as “Act on Internet-Only Banks”), which is in force since January 2019. The major facial intent of the Act on Internet-Only Banks is to “…encourage innovative enterprises to enter the financial market while laying the legal framework for the convergence of information and communications technologies (ICT) with financial services, and the creation of new economic growth drivers.”

One of the main impetus for the Moon Administration related to this Act was to allow individuals and companies that may have a more difficult opportunity to obtain credit to obtain credit. The foregoing is, only, intended as a brief teaser and not anything more than to provide a basic understanding of this Act.

Korean Act on Special Cases Concerning the Establishment and Operation of Internet Banks 2018

“Internet Banks” is defined under the Korean Act on Internet-Only Banks as “…banks engaged in the banking business by means of ‘electronic financial transactions’ as prescribed in Subparagraph 1 of Article 2 of the Electronic Financial Transactions Act.” ( Act on Internet-Only Bank, Art 2.) and requires a minimum registered capital of KRW 25,000,000,000 for the establishment of the bank (Act on Internet-Only Banks, Art. 4).
‘Non-financial business operators’ (compare to Art 2 (1) 9 Banking Act of Korea, e.g. a private equity fund or an investment company under the Korean Financial Investment Services and Korean Capital Markets Act) may, in general, only own up to 34% of the “…total number of outstanding voting shares of an internet bank….”
Only corporations such as small- and medium-sized companies shall receive a loan from internet-only banks (Act on Internet-Only Banks, Article 6), besides ‘non-financial business operators’.
Korean Act on Internet-Only Banks provides in Art 7 of the Act that an internet-only bank shall not loan more than “…15 percent of its equity capital to the same individual or corporation, nor […] 20 percent of its equity capital to any persons or companies with whom the individual or corporation shares credit risk…”. Exemptions are provided for a change in the bank’s equity capital or the borrower’s composition.
Special provisions are established for “large” stockholders (compare to Art 8-10 Act on Internet-Only Banks): An extension of a credit shall not be granted to large stockholders. However, this does not apply, if a person did not have the position as a “large” stockholder when it received the loan and became a large stockholder due to a merger or acquisition. Internet-only banks shall in general not obtain securities provided by its large stockholders. Furthermore, large stockholders shall not act against the internet bank’s own interests.

The obligatory Korean Act on Internet-Only Banks is a good opportunity for new internet-only banks to participate in the Korean financial market and ‘non-financial business operators’ to take part in the optimized internet-only processes.

by Barbara Goiser