Jun Hee Lee and Woo Young Hyun of Kim & Chang provide a comprehensive overview of Korea’s blossoming fintech market

Fintech fever, which first emerged in Korea in 2014, is booming in 2016. Driven by the Korean government's initiative to foster economic development, financial regulatory reforms have spurred the rise of fintech, as innovative business models enter the market and an increasing number of information and communications technology (ICT) companies expand into various areas within financial services.

Even for start-up fintech companies presenting innovative business models, however, many challenges await as their survival depends on developing sustainable business flows, recruiting talented workers, and raising necessary capital. Further, maintaining or redefining relationships with various key stakeholders, including the government, established financial institutions, newly emerging finance companies, such as online-only banks, and existing ICT platform companies, is imperative.

Fundraising options

In Korea, the initial round of fundraising for fintech start-up companies is similar to that of other common start-up enterprises which rely on angel investors and founders. Recently, start-ups have also been taking advantage of other methods of funding, such as crowdfunding, accelerators, and/or government funding programmes.

In the middle stage for start-up companies, which usually requires an established business system, venture capital firms (VCs, also called start-up investment companies, or Chang-up Tooja Hoesa under Korean law) can participate in fundraising. Most start-up companies commence their beta service within two years before pitching VCs for funding. While most VCs investing in Korean fintech companies are Korean, global VCs, especially those from the US, Japan and China, have been steadily increasing their investments.

VCs who invest in fintech companies have chosen redeemable convertible preferred stock as the preferred investment method as, like bonds, it can be converted into common stock or redeemed when due. This method is an investor-friendly instrument which allows for the recovery of funds if investments fail. If the investment becomes successful, they can convert their shares into common stock and generate a profit through an initial public offering (IPO).

At the stabilisation stage, VCs support fintech companies by providing additional funding for more growth, while fintech companies can plan an IPO as an exit plan. The Korea Exchange opened the KONEX market to provide small to medium-sized businesses with IPO opportunities in July 2013 as an alternative to the KOSPI or KOSDAQ market. This has opened a new route of investment for start-up fintech companies and small to medium-sized businesses, which generally find it difficult to meet the KOSPI or KOSDAQ listing requirements.

Additionally, an amendment to the Support for Small and Medium Enterprise Establishment Act (Small and Medium Enterprise Support Act) which took effect last year, allows VCs to invest in fintech companies and the financial industry. Fintech companies are now eligible to receive investments from VCs through the KONEX market, just as companies in other business areas can.

When fintech companies enter the stabilisation stage, they may also obtain funding through mergers or acquisitions, or forming joint ventures, in addition to planning an IPO.

Government assistance

In 2015, the Korean government identified fintech as one of its 24 key governmental reform areas. The Korean government established and operates the Fintech Support Centre, which provides guidance on fintech-related projects and an opportunity for prospective founders of fintech start-ups to present solutions to financial institutions. The Korean government also operates angel investment matching funds, which can connect various start-up companies to angel investors through the Angel Investment Support Centre.

Further, various Korean governmental legislative acts, such as the aforementioned Small and Medium Enterprise Support Act, promote the growth of small to medium-sized enterprises, including the allocation of government funding for fintech companies.

Although the fundraising market for Korean fintech companies has shown substantial growth due to government investments and various deregulatory measures, in general, VCs in the US and China have still been more active in their respective countries than those in Korea. Funds aiming for short-term profits in Korea, including private equity funds, may find it difficult to provide actual funding because Korea's severe regulatory environment may prevent them from having a satisfactory exit plan.

Crowdfunding and P2P lending

In Korea, crowdfunding can be classified as donation/sponsorship-based funding, loan-based funding, or securities-based funding, depending on the type of fundraising and manner of compensation. At the end of 2015, about 25 crowdfunding entities were in operation. However, these entities face various legal and institutional uncertainties as the existing regulatory regime is still determining how to support and regulate such arrangements, especially for loan-based or securities-based crowdfunders.

Donation/sponsorship-based crowdfunding

Donation/sponsorship-based crowdfunding involves granting money or non-monetary compensation. Donation-based crowdfunding entities, such as Fondue and Upstart, and sponsorship-based crowdfunding, were introduced in 2011.

Loan-based crowdfunding

The number of peer-to-peer (P2P) loan entities in Korea has skyrocketed from just four or five in 2014 to approximately 50 in 2015. While security-based crowdfunding was established under a statutory amendment (see below), P2P loans, which involve matching lenders and borrowers, do not yet have any specific governing regulatory framework. Entities providing P2P loan platforms, such as Money Auction, Pop Funding and First-hand, register as telecommunications or online merchants and operate in coordination with lending business operators or savings/local banks based on the Lending Business Registration and Consumer Protection Act. Under this arrangement, an entity can be punished under that law if it operates an unregistered loan or loan brokerage business solely on its own.

"The number of P2P loan entities in Korea has skyrocketed from just four or five in 2014 to around 50 in 2015"

Although considerable controversy exists surrounding the legality of such P2P loans, the Korean government has been reluctant to put formal regulations in place because the market size is still relatively small and time is needed for the industry to develop. Accordingly, statutory amendments and new regulations will be necessary in the future.

Securities-based crowdfunding

Securities-based crowdfunding involves funding provided by an investment in equity or securities and was introduced through an amendment to the Financial Investment Services and Capital Markets Act which came into effect on January 25 2016. Specifically, the law established the online small investment broker system which allows businesses to operate online security-based crowdfunding as long as they are registered with KRW 500 million ($436,500) in capital. These entities are exempt from certain regulations because they merely perform an online brokerage function and do not directly manage any client capital.

Further, Korea's top financial regulators, the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS), have implemented effective regulatory measures for securities-based crowdfunding in order to facilitate regulatory approvals.

Effective ways to penetrate the market quickly

The financial regulatory system in Korea, where all entities must gain approval to operate in the financial business, has been an obstacle to new fintech entities. Thus, one new government initiative for expedited market entry has been the introduction of new online-only banks to the fintech market. Two internet-based banks, KaKao Bank and KBank, have received preliminary regulatory approvals, and their final approvals are pending. Through such newly formed banks, the government is promoting innovation in the credit rating field by focusing on big data, cost savings through online operations, and mass investment counselling through robo-advisors.

Start-up companies that wish to operate in Korea should also pursue business models based on new technology, such as biometric or user authentification, in coordination with existing giants in the financial market, or seek to provide online to offline (O2O) services using easy-pay services that financial firms and large-scale ICT entities already provide. Direct expansion into foreign markets is another possibility, and the government's Fintech Support Centre is planning to assist such expansion in coordination with the Korea Trade-Investment Promotion Agency.

The partnership model – banks and start-ups working together

According to a March 30 2016 NY Times article, 'Fintech Start-up Boom Said to Threaten Bank Jobs', Citibank, and various other American and European banks will lay off approximately 1.7 million employees (about 30% of their workforce) over the next decade due to the rise of fintech entities. Korean banks are confronting similar challenges by acting as accelerators for fintech entities. More specifically, Korean banks may provide assistance to entities that possess technologies in various areas, such as user authentification, fund transfers, and blockchain technology. Major commercial banks, such as Shinhan Bank, KEB Hana Bank, and NH Nonghyup Bank, have also formed their own accelerator programmes and coordinated with financial firms in the banking, securities, insurance, and asset management industries. NH Nonghyup Bank in particular has released its banking system, API, in order to help fintech start-up companies pursue front-end services based on the API.


Banks will continue to expand their assistance to fintech start-up companies in 2016 and onwards. Much is still expected from the combined synergy of developments within the fintech industry and innovation in the banks' existing financial services market. Future trends will be worth noting.


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Jun Hee Lee
Kim & Chang

About the author
Jun Hee Lee is an attorney-at-law at Kim & Chang, licensed both in Korea and New York, who specialises in finance. He primarily provides legal advice on banking regulations, finance IT, electronic banking and personal/financial information protection. Lee's clients include Korean and global financial companies, Korean and global portal/platform service providers, online/mobile e-commerce and payment service providers, and IT service providers.

Since joining Kim & Chang in 2003, Lee has been providing advice on financial regulations, the issuance of securities, tender offers, and so on, for major Korean and international financial companies and corporations, and particularly for Japanese companies. Since 2011, Lee has advised on civil/criminal matters, financial supervisory audit and sanction procedures concerning customer information leakage accidents which occurred in Korea (including financial companies and IT-related companies). As an expert on the Electronic Financial Transactions Act, Lee has extensive experience in advising clients on various legal, administrative, and technical regulations related to electronic banking and on the management and protection of financial transaction information. Lee has taken a leading role in consulting projects regarding personal information protection and finance IT regulations for Korean financial companies, solely or jointly with consulting firms.

Woo Young Hyun
Kim & Chang

About the author
Woo Young Hyun is a foreign attorney in the firm’s finance/banking group. Hyun represents banks and other financial institutions in various regulatory and compliance matters, in-bound and out-bound cross-border financing transactions, including project financing and corporate credit facilities, corporate restructuring, mergers and acquisitions, private equity and other proprietary investments, and joint venture formations. Hyun also has extensive experience in assisting financial institutions in the defence of various stages of white-collar crimes, including insider trading, breach of fiduciary duty, and stock market manipulation, as well as major civil litigation cases and regulatory audits.