Open banking in South Korea is a clear leader among many of its Asian peers. It has successfully implemented a variety of initiatives linked to open banking, open finance, and open data policy initiatives, with significant contributions from the government in establishing a solid framework for data sharing.
The success of open banking in Korea is evident from its rapid adoption and usage.
By September 2022, the number of registered users for open finance reached a total of 54.8 million, a nearly fourfold increase from 14.2 million users in January 2022.
Registered users for open finance, 2022, Source: Open Finance: The Korean Experience and Opportunities and Challenges for the East Asia and Pacific Region, World Bank, May 2024
A new report by the World Bank, Korea Institute of Finance, and Korea Financial Telecommunications and Clearings Institute uses Korea as a case study to examine key policy implications and essential considerations for policy makers and financial sector leaders to successfully implement open banking and open finance.
It analyzes Korea’s achievements and challenges in its journey with open banking and Financial Sector MyData, and explores how other countries can apply these lessons to adopt open banking and open finance.
Open banking and open data in Korea
In Korea, policy initiatives related to open banking, open finance and open data are called open banking, Financial Sector MyData, and MyData, respectively.
Open banking, introduced in 2019, provides standardized open application programming interfaces (APIs) for data sharing and account-to-account (A2A) payments. Open banking initially began with APIs to access account balances and transaction histories from banks, but gradually expanded its scope to include nonbank depository institutions, securities companies, insurance companies, as well as fintech and bigtech companies.
On the payment services side, open banking provides APIs for debit and credit transfers, enabling companies to develop bank transfers and A2A payments, and charge electronic prepayment means using debit transfer APIs.
MyData, an API-based government-led platform launched 2022, focuses on sharing broader and more granular data. The platform allows consumers to manage data from different financial and non-financial institutions in one place, and builds on a 2020 regulatory amendment to the Credit Information Use and Protection Act which gives individuals the right to data portability for credit information.
The regulation mandates credit information providers to transmit personal credit information to requesting individuals or third parties in a machine-processable form upon request. This credit information includes all the information shared under open banking as well as broader and more granular information on loans, lease contracts, insurances, public and private pensions, financial investment, credit and debit cards, telecommunication billing, electronic prepayment means, and administrative information from governments and public entities to determine creditworthiness.
Finally, in 2023, an amendment to the Personal Information Protection Act established the right to data portability for personal information. The Korean government said it would initially focus on ten areas to implement general MyData, namely healthcare, telecommunication, energy, transportation, education, employment/labor, real estate, welfare, commerce, and leisure.
Data-sharing scope of open banking, open finance and open data in Korea, Source: Open Finance: The Korean Experience and Opportunities and Challenges for the East Asia and Pacific Region, World Bank, May 2024
Clear policy objectives and strong regulatory efforts
The report highlights the importance of setting clear policy objectives and creating practical implementation plans that utilize existing institutions. In the case of Korea, these objectives are fostering financial innovation and enabling data portability, the report says.
If the primary objective is to expand basic financial inclusion, such as increasing the proportion of account ownership, agencies must explore options such as electronic identities to simplify the know-your-customer (KYC) process and make it easier to onboard underserved populations.
The report also recommends thoroughly exploring the activities that fintech companies can perform with open finance. It warns that simply implementing open banking and open finance might not lead to significant changes if users have limited ways to utilize them.
Authorities must carefully design the roles fintech companies or open finance applications can play in providing financial services, with potential roles including marketing, advisory, intermediaries, and agents for various financial services, or even direct provision, the report says.
By allowing fintech companies to offer more functions without compromising consumer protection, the benefits of better decision-making and financial service provision can be more fully realized.
In Korea, the implementation of open banking and open finance required continuous efforts from the government. This included regulatory amendments as well as the establishment of the Banking Sector Joint Open Platform, the predecessor to the open banking system, the report says.
Interoperability in Korea’s open banking
Interoperability is crucial for the success of open banking and open finance as it enables efficient data sharing, enhances user experience, fosters innovation and competition, reduces costs and ensures regulatory compliance.
In Korea, interoperability in the financial sector has not been an issue since the Korea Financial Telecommunications and Clearings Institute manages both retail payment systems as well as the open banking system, ensuring that open banking APIs are interoperable.
In countries with multiple operators for retail payment systems or various public or private data-sharing initiatives, the report advises authorities to consider organizing working groups to establish basic API standards to ensure a minimum level of interoperability. If the open data regime extends beyond the financial sector to include areas like government data, interoperability between different sectors should also be addressed.
Phase-in approach
Open banking and open finance potentially reduce the informational advantages of established financial companies. Additionally, financial institutions vary in their readiness for data sharing regarding IT infrastructure, cybersecurity, and internal controls.
Against this backdrop, the report warns that a one-step approach to implementing data sharing would likely face fierce opposition and require more regulatory and legislative efforts.
To mitigate these challenges, the report recommends interested authorities to consider small steps. Korea, for example, started with the introduction of Pay Info, Account Info, and Insurance Damoa in 2016, 2017 and 2015, respectively.
Pay Info and Account Info are two online banking services provided by the government that allow users to consult their bank balance, send money, pay their bills, and more. Insurance Damoa is an online insurance marketplace launched by the General Insurance Association of Korea that allows users to compare and buy insurance coverage.
Developed fintech ecosystems and active collaboration
A developed fintech ecosystem and pro-competitive policies help the adoption of open banking and open finance. In Korea, popular fintech applications like Toss started providing payment or money transfer services between multiple banks or information inquiry services early on.
This early innovation compelled traditional financial institutions to embrace open finance, fearing they would lag behind in financial innovation.
Finally, the report argues that active collaboration among financial companies, fintech players, public institutions, and governments is vital for the effective implementation of open finance systems. In Korea, it notes that the Financial Services Commission (FSC) led the Data API Standardization Working Group before the legislative changes.
This group, launched in 2019, comprised the FSC, financial institutions, industry associations, and fintech firms. It focused on defining the scope of data sharing and developing standards for API specifications and security measures.
Featured image credit: edited from Unsplash