Korean digital savings account service faces regulatory challenges

Naver Pay Money Hana Account [Image captured from Naver]

South Korea’s Naver Financial Corp. and KEB Hana Bank Co. that jointly launched the local version of Apple Card’s high-yield savings account in November last year are facing limits in operations due to regulatory barriers.

According to the two financial service providers on Tuesday, Naver Financial and KEB Hana Bank suspended new account openings of Naver Pay Money Hana Account, their digital savings account.

“All 500,000 accounts available for the service have been opened,” said an unnamed official from Naver Financial.

The two companies launched the digital savings account last year, which attracted many consumers as it offered up to an annual 4 percent interest on Naver Pay Money, a type of digital deposit on the platform, and rewards of up to 3 percent of payments made via the platform.

More than 400,000 accounts were opened in just four months after the launch. New issuances of debit cards for the digital savings account also hit 300,000 in just three months, setting a record among new Hana Card products.

The Naver-KEB Hana digital savings account was regarded as the Korean version of Apple Card’s savings account that was launched in the U.S. this month.

Consumers, however, are no longer able to open a new digital savings account with Naver Financial and KEB Hana Bank as the number of new openings has been limited to 500,000 by the financial authority.

The digital savings account service was granted permission in September last year after being designated as an “innovative financial service” by the Financial Services Commission (FSC).

[Courtesy of Financial Services Commission]

The authority, however, put a ceiling on the number of the new openings at 500,000 accounts, which is based on the 3 percent of Naver Pay’s average monthly users. The FSC noted that if the service providers want an increase in the number of new account openings, they will have to report the performance and stability of the business to authorities and obtain another approval for the change in the “innovative financial service” after consultation with authorities.

The financial authority also limited reward benefits. Any additional rewards for paying with Naver Pay Money have been limited to up to 0.5 percentage point on the ground that there should be no excessive difference in the benefits between service users and non-users.

“Obtaining designation as an ‘innovative financial service’ is difficult in itself, but many restrictions follow even after being designated,” said an industry insider. “On top of it, those ‘innovative financial services’ are labeled as ‘pilot projects,’ which gives very little space time-wise for businesses.”

The Naver-KEB Hana digital savings account service has been permitted for the limited period of two years, which means the service may not be available if they fail to obtain re-designation in November next year based on pilot operations of the service with a limited number of accounts.

“The service is technically not allowed under the current regulatory framework, but has been allowed on an exceptional and temporary basis for testing,” said an unnamed official from the FSC. “Once it is proven that there are no issues, the framework revision will follow later. For now, we are monitoring whether the new service could also provide consumer protection, as banks do.”

Naver Financial and KEB Hana Bank are preparing to file a request with regulators to lift the new account limitation, but industry sources expect that several months will be needed until the restriction is removed.