1.

Background

Under the Act on Special Cases Concerning Establishment and Operation of Internet-Only Banks (the “Internet-Only Bank Act”), internet-only banks are, in principle, required to conduct banking business through electronic financial transactions.^[1] However, as an exception, they may engage in certain in-person activities upon filing an advance report with the FSC as prescribed by applicable laws and regulations under certain circumstances (e.g., for customer protection purposes). Until now, however, there has been some uncertainty regarding the scope of in-person activities internet-only banks may conduct. In particular, the recent launch of the “Youth Future Savings” product by internet-only banks has highlighted the need to allow face-to-face interaction where such communication is inevitable, such as responding to special early termination requests or assisting with debt restructuring.
 

2.

General Principles Governing In-Person Activities of Internet-Only Banks

The FSC clarified that, even after the scope of permissible in-person activities is reasonably adjusted, internet-only banks must continue, as a general rule, to conduct all banking operations on a non-face-to-face basis. In-person activities will remain an exception, permitted only where they are unavoidable due to legal or technological constraints or the need to enhance consumer convenience.
 

3.

Key Measures for Adjusting Scope of In-Person Activities

Based on the Measures, the FSC plans to: (i) clarify, through regulatory interpretation, that certain activities by internet-only banks may be conducted in person where their permissibility is currently unclear; and (ii) amend the Regulation on Supervision of Banking Business so that internet-only banks may, after filing a prior report, conduct in-person activities that are not currently permitted but are, as a practical matter, unavoidable.

An internet-only bank seeking to conduct an in-person activity permitted under (i) or (ii) above must report the nature, method and scope of the activity to the FSC at least seven days before the date on which it intends to commence the in-person activity.
 

A.

Regulatory Interpretation

The FSC plans to interpret the term “on-site inspection”^[2] under Article 102 (4) 2 of the Regulation on Supervision of Banking Business to include interviews with company representatives, officers or employees conducted as part of corporate loan review or other similar processes. Under such interpretation, internet-only banks may be permitted to hold in-person interviews with management and other personnel in connection with corporate loan reviews, including to verify the intended use of the loan and to assess the credibility of repayment plans and feasibility of business plans. 
 

B.

FSC Resolution and Proposed Amendments to Regulation on Supervision of Banking Business

The FSC plans to amend the Regulation on Supervision of Banking Business so that internet-only banks may conduct in-person activities, after filing a report, in the following circumstances where such activities are considered necessary and, as a practical matter, unavoidable.
 

a.

Where guidance, consultation or discussions with a debtor, including discussions regarding debt restructuring, are necessary for the management or collection of delinquent loans

Where a loan has become, or is at risk of becoming, non-performing, customers need to be promptly informed, and face-to-face communication is necessary to facilitate effective debt restructuring.
 

b.

Where original documents must be reviewed to verify whether documents submitted remotely have been forged or altered

As a general rule, all documents should be submitted remotely. However, where forgery or alteration is suspected—for example, where a corporate seal impression may have been forged—it may be necessary to obtain and inspect original hard-copy documents on a limited basis through in-person interactions.^[3]
 

c.

Where it is necessary to verify the appropriateness of fund usage, or the condition or value of collateral

After providing a loan to a company or sole proprietor, an in-person inspection may be necessary to determine whether the loan proceeds have been diverted to an unauthorized use, such as for purchasing a house, or whether the collateral has been destroyed or damaged.
 

d.

Where it is necessary, pursuant to a customer’s request or similar circumstances, to verify facts, communicate the outcome of processing, or issue or receive documents

Sole reliance on remote communication methods, such as mobile app push notifications, may not adequately protect consumers when handling customer complaints or responding to financial fraud.^[4]
 

e.

Where an investigation or verification of rights or possession relating to collateral, leased residential property, or similar subject matter is necessary

In-person verification may be necessary to determine the rights of tenants with priority interests and whether a borrower actually resides at the property in connection with a mortgage loan, or to confirm the existence of a lease agreement in connection with a jeonse (residential lease-deposit) loan.
 

f.

Where legal or administrative constraints prevent the establishment, amendment, or enforcement of a security interest from being completed electronically

In-person procedures may be unavoidable when establishing a security interest or when agents such as judicial scriveners conduct collateral inspections and file for registration.
 

g.

Where it is necessary to comply with other legal or regulatory obligations

For example, if a company’s registered line of business (e.g., apparel retail) is inconsistent with its transaction history (e.g., transactions involving illegal gambling funds), an on-site visit may be necessary to conduct enhanced due diligence.
 

4.

Expected Impact and Key Takeaways

By clarifying that in-person activities are permissible for internet-only banks in areas where face-to-face interaction is practically unavoidable—including debt restructuring, interviews in connection with corporate loan reviews, customer complaint handling and responding to financial fraud—the Measures are expected to: (i) promote debt restructuring; (ii) expand the availability of financing to regional small and medium-sized enterprises and sole proprietors; and (iii) enhance consumer convenience.

However, as these Measures are intended as a supplementary framework to address legal uncertainty regarding the scope of unavoidable in-person activities, internet-only banks should, as a general matter, continue to minimize in-person activities in keeping with the purpose underlying their establishment. The FSC and the Financial Supervisory Service intend to monitor internet-only banks’ compliance with the applicable restrictions through regular examinations and other means, and take strict enforcement action in the event of violations.

Accordingly, internet-only banks should review developments relating to future amendments to the Regulation on Supervision of Banking Business and accurately identify the types of in-person activities that are permitted, so as to establish internal operating standards and reporting processes that enable the filing of a prior report at least seven days before conducting such activity. They should also establish internal control standards to prevent in-person activities from exceeding the permitted scope, and periodically review their compliance status for future regulatory examinations.

In addition, as collaboration between financial companies and internet-only banks continues to expand, financial companies seeking to collaborate with internet-only banks should also familiarize themselves with the purpose of these Measures and scope of permissible in-person activities, and proactively assess their impact on relevant operations.