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367. Change and Innovation: The Future of Finance

Lee, Jeong-hyun, Jeong, Ye-eun, Shin, Sang-yoo, Kim, Eun-yul 기자2017.09.09 12:15:10

Nowadays, our society has been heading for the fourth industrial revolution through development of the mechanical engineering of the third industrial revolution. The fourth industrial revolution is a new trend in the 21st century that aims to enhance corporate competitiveness through the convergence of industries, based on Information and Communication Technology (ICT). The financial market is not an exception in this context. With the integration of finance and data communication technology, the financial market has been rapidly undergoing virtualization. As a result, internet banking and mobile banking have become available and account for almost 90% of the total customers. Furthermore, as the boundaries of financial products such as funds, and securities are broken down, hybrid financing is also emerging. In this rapidly changing environment, we should be aware of the current status of financial changes such as changes in the form of money, and some services that are readily available to consumers and are more convenient than the existing services.

1.  A Coinless Society: Saving Instead of Coins!

Most consumers have probably been uncomfortable with the coins that make their pockets heavy and noisily bump into each other.  Consumers may also have purchased additional items or refused to receive coins as change, because of the burden of getting their coins back. Therefore, the Bank of Korea has announced that it would make a ‘coinless society’ by 2020 to prevent such inconveniences.

(1)  What Is a Coinless Society?

          A coinless society is an intermediate step toward a cashless society. It is a project by the Bank of Korea to reduce social inconvenience and social cost in distribution and management of coins. The basic procedure towards this coinless society is returning the coins to a virtual bank account, a prepaid card, or a reward point, etc. Sweden and Denmark are known as representative countries of the cashless society. Sweden and Denmark are planning to complete the transition to a cash-free society by 2030. Currently, Swedish retailers can legally refuse to receive cash and cash payments are not acceptable in public transportation. In addition, Hong Kong and Singapore have established government-led non-cash payment technology research institutes for the implementation of a cashless society.

An increase in the use of electronic payment tools, including credit cards, is the foundation of a coinless society. The percentage of credit card usage, which was 31.4% in 2014, jumped to 39.7% in 2015, while cash usage dropped from 38.9% to 36% in 2014. Furthermore, the cost of coin manufacturing and disposal is incredible; The Bank of Korea spends 50 billion won in manufacturing costs and 10 billion won in disposing broken coins, in the making of coins to the value of 130 billion won each year.

(2)  A Test Operation

          On April 20, 2017, test operation of a coinless society began in Korea. The pilot projects were held at convenience stores such as CU, Seven-Eleven, With Me, and markets such as E-Mart and Lotte Mart. The pilot project will be gradually expanded to various industries such as pharmacies after confirming its effectiveness in the test operations. In fact, even after the pilot project, it is still in its early stages. There were many cases where customers did not know what to do at a convenience store. In the case of salespeople, they received training but it took time to put this into practice, because they did not know the exact details. However, one convenience store official said that despite the fact that implementation is at its early stage, the number of coinless customers is steadily increasing.

(3)  Expectations and Drawbacks

The expected effects of the coinless society project are that, as mentioned above, the coin production cost can be reduced annually, and the social costs can be reduced in purchasing goods at stores or using public transportation. In addition, legitimate transactions will be increased, so that reduction of crime and tax evasion can be expected. However, there is also controversy over this new project. Older people who are not accustomed to using smartphones or prepaid cards can find things difficult, and even traditional markets and street vendors may have difficulty in cash transactions. Furthermore, if coins disappear, the monetary units will change, which can lead to inflation.


2.  New Form of Money- Bitcoin

(1) What is Bitcoin?

Bitcoin is a kind of virtual money that people can use online, like Naver Cash from Naver and Choso from Kakao. What makes it different from other forms of virtual money? Bitcoin is not operated by a person or a company. Anyone can issue the bitcoin just by mining. Mining is a process in which people make bitcoins by solving math problems using a highly efficient computer. Through this process miners can mine up to 2,100 thousand bitcoins. To start using a bitcoin wallet people have to install it in their computers or mobile devices and make their first bitcoin account.  When they send bitcoins to someone, this is posted on an open source that everybody can see. However, the user name is not shown, so people know that there was a deal but they do not know who made the deal. This process is called ‘mining’ and the person who makes these bitcoins is called the ‘miner’. There are both bright sides and dark sides to this new form of money.

(2) Bright and Dark Sides

There are several positive aspects of bitcoins. First, it becomes easier to pay. Consumers just show their QR code from their bitcoin wallet. In addition, it offers a high security service so that no one can impersonate or force users to pay against their will. Another positive aspect is that it offers services even on weekends. This enables users to use the service whenever they need to. However, although there are many positive aspects to using bitcoins, there are also dark sides. They are not certified by the central bank so that if problems occur, the government cannot help users. For example, if somebody hacks into your bitcoin wallet and takes all the bitcoins, there is no one who can retrieve them. In addition, some people think that bitcoin is not appropriate to use as currency because its value changes so rapidly, over a wide range. A year ago one bitcoin was worth 70 million won, but now it is up to 210 million and still rising.  Another problem is that it can be used for crimes such as selling drugs or weapons. As mentioned above, bitcoins guarantee anonymity so criminals can trade without the risk of being tracked by the police.

3.  New  Payment Methods

Thanks to the development of technology, our payment methods in various fields have gradually become more convenient. Most of the payment methods have become digitized; thus, physically reducing the necessity for us to carry cash. While enjoying such benefits, however, it seems we are a bit ignorant about what these methods are.

(1) Various forms of payment

          Usually when we talk about the digitized payment methods, we are thinking of credit cards, digitized money, and digitized checks. These may all seem quite the same for the people who use them because they serve their purpose as a method of payment. However, these are very different in terms of how they function. Credit cards are usually issued by major banks which have already been authenticated by government cooperates or well-known private cooperates. On the other hand, digitized money is issued by firms which hope to promote their products. Digitized money does not have any firm laws regulating its issue and management at the current moment . Thus, from certain aspects, it is often said that investing in digitized money could be dangerous. Lastly, digitized checks are very rarely used because they are usually used by firms rather than individuals.

(2) Credit cards and their evolution

Credit cards have become the most common means of payment over the past several decades. First, they were a tool for big firms for whom it was hard to pay all the costs by cash. However, they started to spread as their convenience became apparent. Along with their increase in use by normal citizens, various types of appeared. Credit cards, in contrast to their original purpose, started to also accumulate cash by gathering so-called points. One of the newest versions has been an invention called the smart credit card. Another is called the clip card and was invented by KT. This clip card can be used only when charged. It is the same size as a normal credit card, and contains all the cards belonging to an individual. By selecting from the screen of the clip card, one can choose which card to use. Moreover, its security is strong, as it requires a password before use

(3) Digitized money

          Most people are using digitized money even though they are not aware of it, so we looked for more information regarding digitized money, which comes in various forms. The most well-known form is the bitcoin, as explained above. However, Koreans are more familiar with Kakao Talk Choco or Samsung Pay. As mentioned above, these forms of digitized money are issued by major firms. They aim to promote their main products by linking them with digitized money. Thus, it can be said that digitized money is usually issued by firms which already have a platform market. The fact that digitized money can be easily exchanged for real money is welcome. However, there are two major issues that have still not been solved: the encryption method and the security issue. 

4.  Changing Forms of Banks

The history of banks goes back to the Code of Hammurabi, written in 17 B.C. In this code, records of deposits and regulations about interest can be found. In the Middle Ages, trades took place on the coasts of the Mediterranean Sea. However, various types and values of currency were used, so trading was difficult. In order to solve this problem, money changers appeared and set up places for exchanging money. These were called deposit banks. Money that was deposited could be exchanged between merchants using a simple substitution method. Let’s find out how these banks have changed into their present forms.

(1) Internet Banking and Mobile Banking

Internet banking and mobile banking both involve carrying out financial transactions through the internet. Both offer a more developed service than PC banking, which requires a personal computer or an exclusive item of equipment. Banks that offer internet banking and mobile banking are able to benefits because they can target people all around the world. In addition, most internet users are young and middle class, so market potentials are large. Mobile banking has its own advantage; people can use it regardless of place and time, even when they are on foot. The world’s first internet bank was started by Security First Network Bank(SFNB) on October, 1995. In Korea, the Woori Bank started a form of mobile banking that used VM(Virtual Machine). Since then, smartphones have become available for most people and the number of users of mobile banking has increased as shown on the chart below. According to figures for the 2017 first quarter, internet banking user statistics show that about one billion, 253 million people were registered for internet banking and among these people, 61.7% use mobile banking.

(2) K bank

K bank is the first Internet Bank in Korea. It does not have any offline branches and it only runs through online networks. Since its foundation in April 3, 2017 it has been running all the time. It offers deposit, installment savings and debit card services. There is a high expectation that this new form of internet-only bank will cause some changes in the financial world. However, according to statistics, only 42% of the people know about it.   Only 35.5% have heard the name. However, 53.9% of people said that they want to use internet-only bank, which gives hope for it.  There are some worries that if many internet-only banks appear, people working at existing offline banks will lose their jobs. On the other hand, some people think that it will create new jobs in the IT/FinTech field.


5. Pros and Cons of Virtual Money and Online Financial Services

:  Interview with Professor Kim, Sang-hyun

What are the pros and cons of online financial services, including virtual money? If they have any shortcomings, what can be done? The KNU Times had an interview with professor Kim, Sang-hyun (department of business administration), to discuss these issues.

As for the advantages of virtual money, professor Kim, Sang-hyun said that one of the most common strengths is it can cut costs. For example, the cost for striking coins, which is more than 100 billion won per year, can be greatly reduced. In addition, transaction cost like the expense for transferring money can also be decreased. Lastly, virtual money cuts the cost for storage and reduces the possibilities of robbery or loss, since it is stored in virtual worlds such as computer hard disks. Regarding drawbacks however, legal devices for virtual money have not been prepared sufficiently. Therefore, illegal use of virtual money, such as committing fraud or pyramid selling under the guise of investment, is a possibility

In the case of online financial services, the investment value has been rapidly increasing worldwide in the form of FinTech, the combination of finance and technology. For example, in the U.S, Apple, Google and Amazon have entered the FinTech industry. England has over 50 FinTech enterprises. China, Taiwan, and Singapore have already started domestic operations, such as Alipay, Tenpay, and Yuupay. In the case of the domestic market, most of the FinTech corporations are startups, so they need certain time to develop. FinTech has the advantage of simplifying inconvenient processes such as getting certificates from certification authorities or using security cards. In addition, thanks to this simplification, the cost of unnecessary processes can be reduced. However, regardless of these advantages, FinTech does have a crucial shortcoming - its vulnerability in terms of security. 

 Regarding the shortcomings of virtual money and online financial services, professor Kim, Sang-hyun stresses the importance of the technology which is in charge of security and compatibility. In order to tighten up security and avoid hacking, advanced cipher technology and security regulation is needed. Forging information can be prevented by utilizing electronic signatures. The commercial law should also be improved to prevent illegal trading.

Many parts of society are changing due to the rapid development of technology, and finance is no exception. As you can see, finance has become virtual and electronic, which allows people’s financial activities to be fast and convenient, but also makes some problems. Properly adapting to and utilizing this technological development is important, but it is also vital to keep a strict watch at all times for the negative aspects of modern finance.

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