On September 20, 2018, during the Plenary Session of the National Assembly, the Act on Special Cases concerning the Incorporation and Management of Internet-only Banks (“Internet-only Bank Act”) was passed and is expected to take effect on January 17, 2019. 

Also, on October 17, 2018, the Financial Services Commission (“FSC”) issued a pre-announcement of the proposed Enforcement Decree of the Internet-only Bank Act (the “Proposed Enforcement Decree”), which details specific regulations on matters concerning internet-only banks, such as their incorporation, shareholder composition, operation method, and other important issues.

Background:

Although K-Bank¹ and Kakao Bank of Korea (“Kakao Bank”)² are currently operating as Korea’s first internet-only banks, many have raised concerns that applying the Banking Act as it currently stands may impose fundamental barriers in building a foundation for the operation of internet-only banks, citing, among others, restrictions on innovative ICT companies from becoming major shareholders of internet-only banks. 

To resolve such systemic issues, a number of amendments to the Banking Act and new Special Acts were proposed, and as a result of such legislative efforts, the Internet-only Bank Act was enacted.

Internet-only Bank Act:

First, the Internet-only Bank Act has special provisions setting forth the maximum number of voting shares that a so-called “non-financial business operator” may hold.  

The Banking Act allowed non-financial business operators to only hold up to 4% of voting shares and up to 10% if approved by the FSC; in the latter case, such a shareholder was required to waive the right to exercise voting rights for any amount of shares owned in excess of 4%.  However, upon the enactment of the Internet-only Bank Act, a non-financial business operator may hold up to a maximum of 34% of the voting shares in an internet-only bank, provided, that the approval of the FSC is obtained at each point in time when the non-financial business operator holds such voting shares in excess of 10%, 25%, and 33%.  

It should also be noted that the Internet-only Bank Act limits the scope of non-financial business operators eligible for the above special provisions.  Under the Proposed Enforcement Decree, a non-financial business operator is eligible to acquire more than 10% of the voting shares in an internet-only bank if the non-financial business operator is: (i) not a part of an enterprise group subject to limitations on mutual investment under the Monopoly Regulation and Fair Trade Act; or (ii) if it is a part of an enterprise group, the sum of the total assets of telecommunications business operators within such enterprise group accounts for 50% or more than that of the non-financial business operators of the enterprise group. 

In connection with legislative discussions on whether internet-only banks must conduct all of their businesses via electronic financial transactions (i.e., an automated means of operation that wholly excludes any face-to-face interaction or communication with bank users), the Internet-only Bank Act stipulates that internet-only banks should, in principle, operate banking businesses via electronic financial transactions.  The exceptions are those cases set forth in the Proposed Enforcement Decree as unavoidable circumstances for the protection and improved convenience of internet-only bank users (e.g., when it is unavoidable for the protection and convenience of disabled users and the elderly over the age of 65, or when it is difficult to complete the financial transaction due to technical reasons, such as loss or malfunction of information communication devices).

Finally, to prevent side effects, such as collusion with large conglomerates, the Internet-only Bank Act lowers the barrier for non-financial business operators to participate in internet-only banking, while at the same time, establishing stricter restrictions on transactions with large shareholders than those with commercial banks, such as by: (i) prohibiting enterprises other than those small and middle-sized enterprises from taking out loans; or (ii) in principle, prohibiting credit extension to large shareholders or the acquisition of equity securities issued by large shareholders.

Significance:

Given that the enforcement of the Internet-only Bank Act would make it easier for innovative business entities to take a leading role in the operation of internet-only banks, we expect the proposed legislation to not only boost the growth engines of existing internet-only banks, but also facilitate the entry of new internet-only banks.  

However, given that the review on acquisition of shares in excess of the 10% shareholding limit was previously based on the presumption that the shareholders are financial business operators, it would be necessary to monitor how financial regulators will take into account the unique features of non-financial business operators and prescribe the requirements to expand their review to also encompass non-financial business operators.