Remittance Industry Disruption in Korea: How Fintech Challenged Banks and Provoked a Strategic Fightback

- Babu Kaji Shrestha (PhD Scholars in Chung-Ang University, Korea) and Dr. Sharan Hari Shrestha, (Assistant Professor in Tribhuvan University, Nepal)

The remittance industry in Korea has been experiencing a seismic shift, driven by the increase of foreign workers in labor market and rise of fintech companies that have leveraged disruptive innovation to challenge the traditional banking sector. This transformation is reshaping how money is sent and received across borders, impacting millions of Koreans, foreigners, and the broader economy.

The Rise of Fintech Disruptors

The remittance landscape in Korea has undergone a significant transformation, shifting away from traditional banks towards fintech disruptors. Historically dominated by conventional financial institutions, the remittance sector faced issues of inefficiency and high fees. However, fintech companies have seized upon these shortcomings, leveraging advanced technologies to offer faster, cheaper, and more user-friendly services.

Driven by factors such as declining birth rates and the consequent demand for foreign labor, Korea introduced the EPS system in 2004. This system facilitated labor importation from 16 developing countries, particularly in sectors like manufacturing and agriculture. As the number of EPS workers has increased annually, so has the demand for efficient remittance solutions. Fintech firms, recognizing this market dynamic, swiftly identified the need and launched user-friendly platforms tailored to EPS workers, such as E9pay, GmoneyTrans, and GME (Global Money Express).

Currently, over 20 remittance companies and other digital banks catering to approximately 2 million foreign residents, with EPS workers constituting over 30 percent of this demographic. Notable disruptors like Kakao Pay and Toss have introduced innovative digital financial services, while other companies like GmoneyTrans, GME (Global Money Express), E9pay, Fonemoney and other remittance companies have emerged specifically to serve migrant communities and facilitate remittances back home.

The rise of these fintech disruptors aligns well with Clayton Christensen's theory of disruptive innovation. Fintech companies started by targeting the underserved segments of the market—migrant workers and small businesses—who were often overlooked by traditional banks. By offering lower fees, more transparency, better customer service, and convenience through mobile apps, these fintech companies gradually attracted a larger customer base, effectively disrupting the incumbents.

Banks' Initial Complacency

Traditional banks were initially slow to respond to these changes, partly due to their reliance on established business models and the substantial profits they generated from remittance services. This complacency allowed fintech companies to gain a foothold. As fintech offerings improved, more customers switched to these innovative services, eroding the banks' market share.

Ji-hye Park from The Korea Herald highlights that bank underestimated the appeal of fintech solutions, believing that their entrenched position and customer loyalty would protect them from significant market share loss. However, as remittance transactions increasingly moved online, customers began to appreciate the convenience, service, and cost savings offered by fintech firms like Kakao Pay and Toss alongside GmoneyTrans, GME, and E9pay and other remittance companies.

Responding to Digital Disruption

Recognizing the threat, traditional banks in Korea have launched multiple strategies to reclaim their market position. However, as suggested by Clayton Christensen's theory, simply fighting back within the existing structure and business model might be futile. Christensen advocates for the establishment of separate business units that can operate independently from the parent company, allowing them to innovate and compete more effectively against disruptors.

In line with this strategy, some Korean banks are setting up dedicated digital arms to handle remittance services. For instance, KEB Hana Bank introduced its "Global Easy Remittance" service through a specialized unit that leverages blockchain technology to enhance security and reduce transaction times. This separate business unit operates with the agility and innovation mindset required to compete with fintech firms.

Furthermore, these dedicated digital units can focus solely on digital transformation without being hindered by the bureaucratic and legacy processes of traditional banking structures. This approach enables them to quickly adapt to market changes, implement new technologies, and offer competitive services that can match or exceed those of fintech disruptors.

Strategic Fightback by Banks

In addition to establishing separate digital units, traditional banks are developing their own digital platforms and partnering with fintech companies to offer competitive remittance services. This dual strategy allows them to leverage their extensive customer bases and financial resources while benefiting from fintech's innovative approaches.

Moreover, banks are investing heavily in customer education and marketing campaigns to highlight their improved digital capabilities and trustworthiness. They are also lobbying for regulatory changes that could level the playing field between traditional banks and fintech firms, advocating for tighter controls on fintech operations to ensure fair competition.

To further strengthen their position, incumbent banks are embracing technology reemergence strategies. This involves adopting cutting-edge technologies such as artificial intelligence, machine learning, and blockchain to streamline operations, enhance security, and improve customer experiences. By integrating these technologies, banks aim to offer faster, more reliable, and more secure remittance services that can compete directly with fintech offerings.

For example, some banks are deploying AI-driven chatbots to provide instant customer support and using machine learning algorithms to detect and prevent fraudulent transactions. These technological advancements not only improve efficiency but also build customer trust by ensuring safe and reliable transactions.

The Road Ahead

The remittance industry's transformation in Korea is far from over. The continuous evolution of technology and changing customer preferences mean that both fintech companies and traditional banks must remain agile and innovative. For consumers, this competition promises better services and lower costs.

While fintech firms have disrupted the market with their innovative approaches, traditional banks are now leveraging their deep resources and regulatory influence to fight back. This dynamic interplay will likely result in further advancements and a more diverse remittance landscape, ultimately benefiting the end users. The tight competition between the banks and the fintech firms, with the urge to constantly provide better services to customers, is interesting to watch in the days to come.