Fintech as a Precondition for Transformations

on Global Financial Markets

Sergey Belozyorov
Chief Researcher, Laboratory of Asian Economic Studies; Head, Department of Risk Management and Insurance,
[email protected]

Olena Sokolovska
Leading Researcher, Laboratory of Asian Economic Studies, [email protected]

St. Petersburg State University, 7–9 Universitetskaya Emb., St. Petersburg 199034, Russian Federation

Young Sik Kim

Professor, Department of International Commerce and Area Studies, [email protected]

Gangneung-Wonju National University, 25457l, 7 Jukheon-gil, Gangneung-si, Gangwon-do, Republic of Korea

Abstract

T
he article considers the opportunities, risks, and The main prerequisite for the latter scenario is the
challenges associated with the development of promotion of international cooperation in the regulation
digital financial technologies. To identify them, we of digital financial companies. Such a condition requires
used the scenario approach. We determined three main new models of country-level interaction in the regulation of
development scenarios for the market of innovative innovative financial companies in order to address the risks
financial technologies — “domination of traditional and challenges of different scenarios of fintech development
financial companies”, “segmentation of market of new on global financial markets. This article includes a
financial technologies’, and “domination of digital comparative analysis of digital development in Russia and
financial companies” in terms of their probability and the Republic of Korea, which is one of the key players on
possible consequences for the global financial markets. the Asian fintech market, as a possible benchmark that
The results of analysis allowed us to suggest that can be used to shape the policies of intergovernmental
among main scenarios of fintech development the most cooperation on global financial markets. These policies
probable is the splitting of existing market, which in the include 1) regulatory cooperation that reduces risks due to
future can turn into a market of digital transnational growing experience in the regulation of innovative financial
financial corporations, which will squeeze out both small companies; 2)cooperation in investments that allow one to
companies and traditional financial giants. However, acquire additional experience in regulatory practices and to
although the scenario of capturing the financial market develop infrastructure, which meets the new requirements
by large players is currently unlikely, it is certainly of digital finance; and 3) cooperation in the taxation of
more important in terms of the consequences for global fintech companies that reduces cross-border regulatory
markets. arbitrage.

Кeywords: fintech; digital economy; scenario approach; Citation: Belozyorov S., Sokolovska O., Kim Y. (2020)
global financial markets; financial inclusion; international Fintech as a Precondition for Transformations on Global
cooperation; regulation; finance; investment; regulation;
risks; Russian Federation; Republic of Korea; comparative Financial Markets. Foresight and STI Governance, vol. 14,
analysis no 2, pp. 23–35. DOI: 10.17323/2500-2597.2020.2.23.35

© 2020 by the authors. This article is an open access article distributed under the terms and conditions of the Creative Commons
Attribution (CC BY) license (http://creativecommons.org/licenses/by/4.0/).

2020 Vol. 14 No 2 FORESIGHT AND STI GOVERNANCE 23

Strategies

W
ith the development of global digital com- risks of implementing financial technologies on
munication technologies, various forms global markets.
of international cooperation have become
exceptionally important. They allow one to effi-
ciently exploit opportunities, bypass limitations, Methodology of the Study
and balance the risks arising from differences be- The methodology of this study is based on the sce-
tween countries, mainly in the legal field. Sharing nario approach. The tools presented in [van Notten,
experience and disseminating more effective prac- 2006] were applied to build the scenarios. Adapting
tices in the private and public sectors alike contrib- this approach in line with the available statistical
utes to identifying the best tools for regulating the data and assessments of the factors under consid-
international financial market, taking into account eration allowed us to identify the following sce-
national specifics while ensuring global consen- nario development stages: determining the object;
sus. Countries’ cooperation in the field of financial describing the development drivers; building a sce-
technology (fintech) is actively discussed by the nario; assessing the likelihood of its implementa-
World Bank and the International Monetary Fund tion; and assessing relevant opportunities and risks.
(IMF). At the end of 2018, these organisations pro-
posed the Bali Fintech Agenda which reflects the The object of the study being the development of
main objectives of cooperation on relevant mar- fintech in global financial markets, the following
kets [IMF, World Bank, 2018]: major drivers were identified:

• promoting competition; • the emergence of new (digital) technologies;

• extending coverage of the public; • the costs of, and the time required for new
companies entering the market;
• promoting the development of financial mar-
kets; • the rate of new technologies’ and companies’ pro-
liferation (cross-border flows and cooperation);
• monitoring changes in financial systems;
• market “rules of the game”;
• creating a sustainable financial and informa-
tion infrastructure to maintain the benefits of • companies’ operating costs (which depend
using fintech tools; upon the coverage of the population and small
and medium businesses (SMEs) by financial
• promoting international exchanges of informa- services and the application of cheaper tech-
tion. nologies).
Since the main cooperation mechanisms in the The following techniques were used to actually
field of innovation remain local, national, or re- build scenarios:
gional in nature, most of the relevant studies tend
to be of the practical type, focused on preparing • trend-based scenario techniques;
economic policy recommendations for national • creative-narrative scenario techniques.
and regional authorities. However, some authors
Both these approaches belong in the predictive
turn to conceptual aspects of such cooperation
scenarios category (Börjeson et al., 2006) closely
[Lundquist, Trippl, 2011; OECD, 2013; Makkonen
related to the probability and credibility concept,
et al., 2017; Meissner et al., 2013] or to specific fea-
since any attempt to predict anything one way or
tures of digital economic development in the re-
another comes down to assessing, sometimes sub-
gional and sectoral contexts (Table 1).
jectively, the chances of certain events’ taking place.
The mass adoption of digital financial tools is due Other classifications do not distinguish predictive
to advances in electronic payment systems, govern- scenarios but include them in the explorative sce-
ments’ new regulatory policies, and the emergence narios group [Alcamo, 2001; Greeuw et al., 2000;
of next-generation financial services available via van Notten et al., 2003; Eurofound 2003; Kosow,
mobile devices with internet access, that is, every- Gaßner, 2008; etc.].
thing collectively referred to as “fintech”.
The trend extrapolation technique involves build-
The goal of this study of the current state of the ing the most likely (reference, trend) scenarios
fintech market is identify a potential scenario for (typically just one) to compare them and range on
its development, assess the results of this scenario’s a “low-high” scale. Qualitative trend analysis and
implementation, and evaluate the risks and chal- “soft data” 1 are used to describe the development
lenges associated with the proliferation of fintech paths. Such scenarios are more often called “fore-
tools. This will help identify the most promising casts” (prognoses) or outlooks rather than “scenar-
areas for countries’ cooperation to alleviate the ios” proper [Kosow, Gaßner, 2008].

1
“Soft data” is data which cannot be measured quantitatively.

24 FORESIGHT AND STI GOVERNANCE Vol. 14 No 2 2020

 Belozyorov S., Sokolovska O., Kim Y., pp. 23–35

Also, certain elements of the creative and descrip- Let us take a look at the current state and develop-
tive approach to scenario building were applied, in ment trends of the global fintech market.
particular the assessment on the scales “implemen-
tation probability – impact strength”, “low – high
probability”, and “significant – insignificant con- Proliferation of Fintech
sequences” of the scenario implementation for the Various innovations, including in the service sec-
development of the system [Kosow , Gaßner, 2008] tor, are a major factor of increasing social prosper-
(Fig. 1). ity, while the state traditionally plays a key role in
Depending on the research object, the likelihood/ regulating relevant issues [Meissner et al., 2013;
impact balance allows one to range scenarios alomg Miles, 2016; Mention, 2019]. Today many countries
the following system of coordinates: pursue policies designed to extend the public’s ac-
cess to financial services (financial inclusion), at
• significant market trends (high probability, the national and international levels alike. Such in-
high impact); clusion (first of all use of electronic transfers and
• shaping the market context (high probability, payment cards) can turn into an economic growth
low impact); driver due to democratization of investment in-
• potential for unexpected problems (low prob- struments through mobile banking and lower
ability, low impact); transaction costs, thus leading to increased income
[Demirguc-Kunt et al., 2018]. These aspects are es-
• uncertainty factors play a major role (low prob-
pecially critical for Russia, where low purchasing
ability, high impact).
power is one of the main obstacles hindering the
Scenarios in this category are built to assess fore- development of digital financial services. Financial
casting potential, implementation probability, key inclusion will not only allow one to optimize indi-
factors affecting the development of the system un- vidual risk management, but will also contribute to
der consideration, and directions for its develop- increased savings and the reduction of the shadow
ment [Alcamo, 2001; Kosow, Gaßner, 2008; Sokolov economy and corruption due to the transition from
et al., 2019]. The following predictive scenarios’ cash to electronic payments.
features determined the application of this tech-
Figure 2 compares fintech coverage and the level of
nique in our study:
the sector’s development in various countries.
• suitability for the conceptual assessment and
analysis of anticipated challenges, opportuni- In most high-income countries the difference be-
ties, and prospects, along with the identifica- tween these two indicators is not significant. In
tion of potential problems subject to certain the regional context, the largest gap is observed
conditions of the system’s development; in Asian countries, which are the world leaders in
terms of rate of development for fintech. Although
• the opportunity to build scenarios for individ-
North America, especially the US, remains the
ual system structures;
world’s leading player (experts expect the region-
• suitability for stable trends, that is, those which al market to reach $80.85 billion by 2023), it is in
can be extrapolated confidently enough. Asia that the fintech market is expected to achieve

Figure 1. Building and Assessing Scenarios: Flow Chart

Scenario-based forecasting
techniques (I) Assessing
Trend-based scenario scenarios
Information basis techniques
Analyzing current state Identifying the
Research object most likely scenario
Development of Analyzing most likely
fintech development paths and
potential
Scenario-based forecasting
Assessing
techniques (II)
implementation
Creative-narrative scenario risks
techniques

Source: соmpiled by the authors basing on: [Börjeson et al., 2006; Alcamo, 2001; van Notten et al., 2003; Xiang, Clarke, 2003; Jäger et al., 2007; Kosow,
Gaßner, 2008; Wodak, Neale, 2015].

2020 Vol. 14 No 2 FORESIGHT AND STI GOVERNANCE 25

Strategies

development, mainly due to Mexican and Brazilian

Таble 1. Studies of International Cooperation efforts [Netscribes, 2019].
in the Field of Digital Economy: Regional and
Sectoral Contexts Various combinations of the aforementioned driv-
ers allow for building the following scenarios for
Context Research Topic Literature financial markets’ development:
Regional Asian countries [Zhang, 2018; Yoon, 1. Conventional financial companies, primarily
2019] banks, insurance companies, and other inter-
Latin American and [Patiño et al., 2018]
mediaries retain market control by accumulat-
Caribbean countries ing cutting-edge advances of the innovative
fintech industry.
South American and [Banga, Kozul-Wright,
African countries 2018] 2. The market is split into numerous narrow seg-
(South-South
cooperation) ments and niches that provide financial ser-
vices focusing on consumers’ specific social,
BRICS countries [Banga, Singh, 2019]
psychological, economic, and geographical
European countries [Heimerl, Raza, 2018] needs, with the traditional major players main-
taining their positions.
Sectoral International trade [Ascencio, 2016]
3. The rapid growth of multinational digital cor-
Higher education and [Grimm et al., 2018;
development of human Lavrinenko, Shmatko, porations pushes back the traditional financial
potential 2019] market players.
Tax administration [Heikura, 2018] The implementation of these scenarios not only
and tax information
sharing implies certain risks, but opens a number of op-
portunities, the analysis of which is presented be-
Source: соmpiled by the authors. low. Each scenario’s content is described as taking
into account the following quality criteria: no un-
founded (erroneous) assumptions; credibility (reli-
ability); fullness; description of development paths;
the highest growth rates, at 43.3% in 2018-2023 and a causal relationship [Mietzner, Reger, 2005].
[Netscribes, 2019]. This will be due to the increased
number of start-ups in various segments of the fi- Scenario 1
nancial market, primarily the banking, insurance, Traditional financial intermediaries may be able to
and asset management sectors in countries such maintain their strong positions despite the grow-
as India, China, the Republic of Korea, and Japan. ing pressure from new players due to the combined
For example, the headquarters of the world’s larg- effect of various factors such as consumers’ iner-
est fintech company, Ant Financial Services Group tia, excessive regulation of the sector, and complex
(formerly Alipay), with more than 10,000 employ- market mechanisms. Under such circumstanc-
ees and assets in excess of $150 billion is located in es, traditional financial market players will have
China. Latin America is gradually becoming one enough time to develop effective competitive strat-
of the most promising regions in terms of fintech egies.

Figure 2. Fintech Development Indicators by Country, 2018

Legend Notes:
Fintech coverage a) fintech coverage reflects the share of users among
the country’s residents, i.e. those who have actually
Fintech used two or more relevant tools over the past six
development months.
b) the fintech sector’s development was calculated by
the Cambridge Center for Alternative Finance on the
basis of expert assessment; relevant data is available
only for a limited number of countries.

Source: соmpiled by the authors based on [Ernst

& Young, 2019; Cambridge Center for Alternative
Finance, 2018].

26 FORESIGHT AND STI GOVERNANCE Vol. 14 No 2 2020

 Belozyorov S., Sokolovska O., Kim Y., pp. 23–35

Given the rate of and the development forecasts for For SMEs, such platforms provide access to funding
new fintech tools, the likelihood of this scenario even if the former’s credit histories are insufficient
seems to be low. As to its positive aspects, one of or their credentials incomplete. These platforms
them is the absence of (or very small) need for reg- provide specialized services using cloud technolo-
ulatory changes. gies that reduce small businesses’ operational costs.
At the preparatory stage of supply chain formation,
Scenario 2 lending platforms can increase long-term funding,
The current trends for and the rate of fintech de- the securing of which on conventional financial
velopment give grounds to see this scenario as very markets tends to be problematic for SMEs. For very
likely in the short term. The traditionally high costs small or newly created enterprises, donations and
of companies’ entering the financial services mar- crowdfunding can be an important and, frequently,
kets are limited by the increased number of new the only source of initial capital.
players, while large dominant firms maintain their Distribution platforms, yet another highly special-
positions. At the same time, the costs of entering ized market segment that has been actively devel-
the market and the time new companies need to do oping in recent years, may prove useful both for the
so and obtain a foothold there are rapidly decreas- wholesale distribution of goods (product distribu-
ing due to the digitalization of technologies and tion platforms) and the distribution of financial re-
regulatory changes. Accordingly, new start-ups are sources (funds distribution platforms)3. Platforms
taking over certain segments and niches, including of this type give investors, financial advisors, or pri-
those previously unclaimed due to high costs and vate asset managers access to a wide range of third-
technological limitations. party products and services at specialized venues.
The key result of this scenario’s implementation The application of algorithms can reduce products’
will be increased coverage of the public and SMEs or services’ costs and increase customers’ aware-
by financial services. The following measures will ness when they are looking for the best solution.
help achieve this: Most of the distribution platforms have emerged
in mature economies (primarily in the US), but
1. Reduced or zero costs of receiving and providing now they are actively developing on emerging mar-
financial services, which is particularly important kets too, including on the basis of robo-advising
for residents of remote rural areas and more vul- technologies (e.g., in India, the Republic of Korea,
nerable social groups such as women, the poorest Mexico, China, and Brazil, or even in low-income
segments of the urban population, and migrants. countries such as Kenya).
2. Simplified customer due diligence (CDD) pro- Muslim countries and regions whose fintech mar-
cedures. kets are segmented in accordance with so-called
3. The diversification of financial services includ- Islamic finance principles, stand somewhat apart.
ing the development of financial products for low- According to the Global Findex Database, in 40
income groups. out of 56 members of the Organisation of Islamic
Cooperation (OIC), the proportion of the popu-
4. Reduced information asymmetry between par- lation who have accounts with financial institu-
ties to transactions, which is particularly important tions (50%) does not exceed the world average
for consumers with no previous access to banking [Demirguc-Kunt et al., 2018]. The proliferation of
services as they lack the information required to “Islamic” financial services can be an effective tool
adequately assess the risks. for increasing the share of the “covered” popula-
The likelihood of this scenario’s implementa- tion. Some fintech instruments match the Islamic
tion can be assessed by analyzing the example of finance principles quite well such as the ones de-
the lending segment and distribution platforms. signed for asset-backed transactions and risk shar-
Online lending, P2P lending 2, and crowdfund- ing. IMF research shows that about 70% of all
ing can increase financial services’ coverage by currently operating Islamic fintech companies are
granting loans to people with insufficient (by the focused on supporting businesses and providing
“conventional” intermediaries’ standards) credit funding to clients through equity-based crowd-
histories, while securing them (loans) using new funding and P2P lending [IMF, 2019].
data sources such as, for example, clients’ smart- The use of digital financial tools guarantees the se-
phone applications or online sale and shopping curity of sukuk transactions4. In 2018, blockchain
histories.

2
P2P lending is providing loans to persons unrelated to each other through specialized online platforms without involving conventional financial
intermediaries such as banks or other credit institutions.
3
Fund distribution platforms act as intermediaries between securities brokers and asset management companies (or individual managers), providing
administrative services such as distribution agreements, order routing, and discount calculation.
4
Sukuk is a financial instrument popular in Sharia countries, the Islamic equivalent of bonds. A sukuk provides non-guaranteed income from profits
generated by the funded activity.

2020 Vol. 14 No 2 FORESIGHT AND STI GOVERNANCE 27

Strategies

technologies were used for the secondary sale and

Figure 3. Possible Fintech Development
placement of sukuk in the amount of $500 million
Scenarios on Global Financial Markets
by one of the UAE private banks, due in September
2023. A project that allows retail investors to buy
Implementation
sukuk using blockchain technology has also been likelihood
launched in Indonesia [IMF, 2019]. high

Scenario 3 Scenario 2 Scenario 3 Impact on global

Digital financial companies’ advancing to leading financial markets
positions in regional rankings suggests that the insignificant significant
trends described in Scenario 3 are a natural con-
tinuation of those presented in Scenario 2. A key Scenario 1
factor in this scenario’s implementation is stron- low
ger international cooperation in regulating the
activities of digital financial companies, while the Source: соmpiled by the authors.
expected result is the emergence of new cross-
border financial flow formats due to the devel-
opment of innovative fintech. These include new
capital market transaction tools (among others, for
cross-border transactions) such as tokenized secu- Scenario 2. Conventional financial intermediaries
rities – a digital analogue of classic stock market gradually lose most of their customers because the
shares - and securities purchased using blockchain latter go to companies whose services better meet
technologies. Cross-border crowdfunding will also their needs.
become possible in the near future. All these devel- Other risks are associated with the limited scope
opments can gradually change the role of conven- for the implementation of the scenario, first of all
tional centralized intermediaries, transform the because the infrastructure does not meet the new
nature and characteristics of cross-border capital digital finance requirements such as high transac-
flows in global financial markets, and, as a result, tion speed, deferred interaction, automated deci-
diversify and decentralize the very model of inter- sion-making, widespread use of data, reduced use
national finance. of paper media for storage of transaction and ac-
The above analysis allows one to make a qualitative count records, and involvement in transactions of
assessment of various scenarios’ likelihood. We intermediaries and organizations whose activities
will distribute them along the proposed coordinate have not yet been properly regulated. In their turn,
axes: the implementation probability as such and these limitations may negatively affect consumers’
the impact upon financial markets. Of particular awareness of new financial opportunities and risks,
interest are the scenarios with potentially serious which is particularly relevant for the most vulner-
consequences and different likelihoods (or, alter- able social groups and those who have never used
natively, certainty) of actually taking place. such services before.
The current global fintech development trends can Another “technical” risk associated with the imple-
be projected into the future in the framework of mentation of this scenario is discrimination against
the suggested scenarios (Figure 3). borrowers. Despite the fact that fintech tools do
ensure compliance with the impartiality principle
Scenario 1. Taking into account the development for all parties to transactions and guarantee the ab-
rate of new fintech tools and relevant forecasts, this sence of accounts payable in the amount of control-
scenario’s likelihood can be assessed as low. ling interest, automatic algorithms themselves are
Scenario 2. The current trends and the rate of de- fraught with errors caused by developers, acciden-
velopment of new fintech tools allow one to assess tally or deliberately (e.g. intentional discrimina-
the short-term likelihood of this scenario as very tion against minority borrowers when developing
high. a smart contract algorithm). Therefore combining
“manual” and automatic decision-making modes
Scenario 3. Given the digital financial companies’ seems to be the best approach.
advancing to leading positions in regional rank-
ings, this scenario can implement as a result of the Less-than-perfect consumer protection mecha-
gradual transformation from the previous scenario. nisms can lead to the disclosure of personal data,
breaches of confidentiality, inadequate tools for
Each of these scenarios implies certain risks. restoring violated rights, a low level of cybersecu-
Scenario 1. Fintech coverage grows at a slower rate rity, and digital illiteracy. The main consequence of
and overall development of innovative financial all these risks is the theft of personal data, which
tools also slows down. is the more likely to happen the lower the level of

28 FORESIGHT AND STI GOVERNANCE Vol. 14 No 2 2020

 Belozyorov S., Sokolovska O., Kim Y., pp. 23–35

customers’ financial and digital literacy, and the to upgrade capital flow management mechanisms
smaller the range of alternative digital products. and strengthen macro-prudential measures. P2P
transactions are difficult to monitor and limit. The
A separate group of risks associated with this sce-
increased number of channels for cross-border
nario is related to regulating innovative financial
capital flows can lead to increased demand for reg-
companies, primarily the lack of relevant experi-
ulatory arbitrage, aggravated adverse consequenc-
ence. Regulators represented by national legislative
es of contagious (infectious) risks, loss of liquidity
and law enforcement authorities insist on the need
risks, and spillover effects.
to develop international standards for managing
and supervising fintech companies’ and service A particular problem is the issuing and circulation
providers’ activities, since the relevant regulatory of digital currencies, which if widely adopted, can
practices remain very limited even in “established” change the key factors supporting the reserve cur-
market segments such as mobile banking. In oth- rency status: the structure and nature of foreign
er fintech market segments, only a few countries trade and the financial network effects. Depending
have legally regulated use of crypto-assets and re- upon the new cryptocurrencies’ liquidity and the
lated services, P2P lending, and algorithmic trad- level of confidence in them, they can affect the need
ing. Essentially there are no similar regulatory for reserves (buffered inventories and/or liquid as-
solutions for areas such as digital insurance tech- sets) or promote the emergence of new reserve cur-
nologies (InsurTech), robo-advising, and artificial rencies. In turn, this will affect gold and foreign
intelligence-based lending. This is partly due to exchange reserves, the choice of the exchange rate
the lack of resources for developing adequate reg- regime, and the size and structure of the global fi-
ulatory measures. The above limitations become nancial safety net (GFSN).
critically important when it comes to managing
The above challenges and risks lead to the need
cybersecurity risks, operational risks (including
to strengthen countries’ cooperation to achieve a
those of third parties), and the theft of borrowers’
balance between the efficiency and risks associ-
information (especially legal entities) provided in
ated with the emergence and development of new
accordance with information disclosure require-
formats of global financial flows and minimize
ments. Low-income countries are particularly vul-
undesirable conflicts in international transactions.
nerable in this regard, forced to balance between
Cooperation between individual countries on the
a threat to financial stability and the prospect of
fintech market can improve the interaction be-
losing the opportunities provided by new fintech
tween private players and national regulators, for
tools.
example, it facilitates fintech companies’ access to
In the context of international economic law, cross- regulatory sandboxes6 in other jurisdictions.
border regulatory arbitrage risk deserves special
Before moving on to a review of the main areas of
mention, which allows countries to use differences
cooperation between Russia and the Republic of
in specific jurisdictions’ regulatory frameworks to
Korea in the financial sphere, let us take a look at
their advantage. A key feature of new digital econ-
the current level of innovative fintech in these two
omy business models is that there is no need for the
economies.
seller or buyer to be physically present in a certain
jurisdiction to conduct a transaction, which signif-
icantly increases the scope for applying various tax Russia and the Republic of Korea: the
avoidance and tax evasion schemes. Digital fintech Development of Digital Fintech Tools
tools expand access to hybrid mismatch arrange-
ments applied by hybrid and reverse hybrid com- Digital Development in Russia and the Republic
panies5. In particular, such schemes include double of Korea
non-taxation, double tax deduction, the deduction The Republic of Korea has the most efficient start-
of interest expenditures in one country, and the up promotion system in Asia, which allows the
non-inclusion of the corresponding income in the country to vigorously compete with China and
tax base in another country. India. For example, if in 1999 there were 2,000 start-
Scenario 3. The risks associated with the imple- ups in Korea, by 2018 this number reached 37,000
mentation of this scenario are related to the need [Kong, 2016].

5
Hybrid companies (also called double-classification companies) are not tax residents (they do not pay corporate income tax in the jurisdiction where they
conduct business), but are tax residents and do pay corporate income tax in a foreign jurisdiction. Reverse hybrids (companies with reverse classification),
on the contrary, do not pay income tax in foreign jurisdictions but do pay it in the jurisdiction of conducting business. See: https://www.fatca.hsbc.com,
accessed on 10.05.2020.
6
Regulatory sandboxes, or platforms, allow for exploring innovative financial services and technologies by practically testing them or evaluating them in
the scope of limited regulatory experiments. Fintech companies, primarily startups, use such sandboxes to test innovative financial tools and services
by providing them to consumers in a limited way and under the control of a regulator. The participants can be fully or partially exempted from existing
regulatory requirements. Projects implemented in regulatory sandboxes are mainly related to the application of artificial intelligence, biometric technologies,
blockchain, cryptocurrencies, and crowdfunding.

2020 Vol. 14 No 2 FORESIGHT AND STI GOVERNANCE 29

Strategies

Figure 4 presents a comparison of digital financial The regulation issue is relevant for the Republic of
services’ coverage in the Russian Federation and Korea too, but in a different way: strict regulatory
the Republic of Korea, and the overall digital com- requirements for the banking sector are hindering
petitiveness of these economies. For benchmarking its digitalization and the growth of the domestic
purposes, the figure also presents aggregated val- fintech market is primarily due to services provid-
ues of relevant indicators for East Asian and Pacific ed by the non-banking sector. Another important
(EAP) countries, which according to the World feature of South Korean fintech is the key role of
Bank classification include Korea and for European the government which was the main proponent
and Central Asian (ECS) nations includes Russia. of this sector’s development in the country [Ihn,
2018]. The proximity to North Korea negatively af-
The data presented in Figure 4 shows that digital
fects cybersecurity for cryptocurrency operations:
development indicators in the Republic of Korea,
a significant proportion of transactions suffer
for the public and for overall economy alike, sig-
from theft. According to FireEye, a US cyberse-
nificantly exceed the average values in the region.
curity company, peaks of hacker attacks originat-
The gap in the number of fintech users is espe-
ing in North Korea have been noted since April
cially wide. In Russia, the situation is reversed: the
2017. Experts believe that the US economic sanc-
Digital Competitiveness Index and the coverage of
tions against this country were the reason for the
the population by digital financial services are be-
increased number of cryptocurrency crimes [The
low the average for the relevant region. However,
Economist, 2017].
going back to fintech coverage (see Figure 2 above),
as of 2018 its value in Russia was 82% (third place
The Fintech Ecosystems in Russia and the Republic
in the world, after India and China), while in Korea
of Korea: Investment and Regulatory Aspects
it was 64%, with a global average of 65% [Ernst &
Young, 2019]. The development of fintech and the rate of cre-
ation of relevant innovative products and services
Such a significant gap is explained by the specific
depend upon the formation and efficient func-
features of the calculation methodology: Ernst &
tioning of the appropriate ecosystem comprising a
Young experts, unlike those at the World Bank,
set of interrelated factors such as access to fund-
used only observational data for Moscow and St.
ing, regulation, technology, demand, and human
Petersburg to compile the FinTech Adoption Index.
capital, which are developing in parallel (see, e.g.,
Concentration in large cities is one of the main fea-
[Nicoletti, 2018]). Let us consider two elements of
tures of the fintech sector’s development in Russia
the fintech ecosystem which are of critical impor-
(unlike in the US and the EU), along with insuffi-
tance for both Russia and the Republic of Korea:
cient regulation of many of its segments (e.g. P2P
investments and regulation.
lending, collective investments, and cryptocurrency
operations). At the same time, Russia remains one of I. Access to Funding
the largest suppliers of IT professionals to the global According to CB Insights, about $75 million were
fintech market: Russian programmers emigrate in invested in the Russian fintech market in 2011-
search of higher salaries [Deloitte, 2018]. 2016. Approximately 90% of that sum came from

Figure 4. Digital Development in the Russian Federation and the Republic of Korea
Compared with Relevant Regional Indicator Values
95
Notes:
Republic of Korea — a) The share of fintech users: the share of people aged
90 88; 92 15+ who made or received digital payments using mo-
bile banking, debit or credit cards, or mobile phones,
85 or paid for purchases and bills online over the previous
12 months.
Share of fintech users (%)

ЕСS — 75.7; 78 b) The Digital Competitiveness Index reflects the coun-

80 try’s position in the digital environment; it is calculated
by the International Institute for Management Develop-
75 ment (IMD) based on 50 ranked criteria divided into three
Russia — 65; 71 groups of factors: knowledge, technology, and readiness
for digital transformation.
70
Source: compiled by the authors based on [IMD, 2018;
65 ЕАР — 75.8; 62 Demirguc-Kunt et al., 2018].

60
65 70 75 80 85 90
Digital Competitiveness Index

30 FORESIGHT AND STI GOVERNANCE Vol. 14 No 2 2020

 Belozyorov S., Sokolovska O., Kim Y., pp. 23–35

leading Russian banks actively applying innova-

Таble 2. Promotion of Investments in the Fintech
tions in their business processes, both those devel-
Sector in Russia and the Republic of Korea
oped in-house and those obtained from promising
start-ups they supported.7 Russia Republic of Korea
In the Republic of Korea, fintech companies are Various investment Equity crowdfunding
mainly funded by large corporations. For example, promotion mechanisms
Р2Р loans
investments in local start-ups by giants such as Initiatives to support Russian
fintech start-ups and promote A system of benefits, including:
Samsung and Naver are estimated at $500-600 mil- investments • Tax benefits for SMEs
lion a year.8 • Capital tax benefits
Increasing the public’s • Tax deductions for
financial literacy investments in R&D
Table 2 presents the main fintech investment pro-
motion areas in Russia and South Korea.
Source: composed by the authors based on [Financial Stability Board,
An alternative way of financing the fintech sec- 2019; Lee, Yim, 2019; Lee, Kim, 2015], and the National Programme
“Digital Economy in the Russian Federation” (see: https://data-economy.
tor in the Republic of Korea is through equity ru/, accessed on 17.02.2020).
crowdfunding. Apart from start-ups, so-called
social enterprises also can get additional capital
this way (companies licensed by the Ministry of
time effectively monitoring and minimizing the
Employment and Labor, whose activities are aimed
risks on the market.
at improving financial and social welfare and the
environmental situation through commercial ini- Table 3 summarizes the main responsibilities of
tiatives such as providing employment for disabled fintech market regulators in Russia and in the
people, contributing to urban development, etc.). Republic of Korea.
Debt financing in the form of P2P loans remains Major efforts of Russian and South Korean regula-
one of the most popular funding sources, with a tors are focused on creating regulatory sandboxes.
constantly improving regulatory system (P2P Loan In Russia such a platform was launched in April
Guidelines). A new version of P2P Loan Guidelines 2018, and in August, Sberbank already started us-
has been in force since January 2019, setting bor- ing it for a pilot project: a service for credit orga-
rowing limits between 10 and 40 million Korean nizations that allows them to integrate a platform
won a year depending on the borrower’s income. for managing corporate clients’ accounts remotely
Investments in mortgage loans through P2P loans with the authority to conduct transactions on their
(e.g. project funding) are limited to 20 million won. behalf in bank branches. The objective is to reduce
No such limits are set for corporate or accredited the costs of banking services users. To date, more
individual investors. than 30 applications to take part in the regulatory
platform have been submitted, mainly by credit
The Korean government provides special incen-
organizations and technology companies. More
tives, mainly in the form of tax preferences. Small
important subject areas include distributed ledger
and medium fintech companies located outside
technology (DLT), big data and machine learning,
densely populated cities can get a 50% discount
digital profiles (user identification and collecting
on corporate income tax for up to five years.
data on individuals and legal entities from govern-
Companies with venture capital firm status (which
ment databases). Projects related to the use and de-
make up a significant proportion of fintech market
velopment of cryptocurrencies are not supported
players) can also claim this benefit; no location re-
by the Bank of Russia due to the lack of regulatory
quirements apply to them. Plus, there are benefits
requirements and principles for regulating these
for conducting R&D: tax deductions for certain
operations.
types of costs including labor and material ones
[Financial Stability Board, 2019; Lee, Yim, 2019; In the Republic of Korea, a regulatory sandbox
Lee, Kim, 2016; Yi, 2019]. Finally, since mid-2019, was created in April 2019 and already in May the
a 10% VAT rate applies to global corporations pro- Financial Services Commission 9 approved 18 proj-
viding digital services in the country. ects proposed by South Korean fintech companies.
Since January 2019, a total of 105 applications have
II. Regulation been submitted, 19 of which were given prior-
In the current situation, the fintech market regula- ity. Content-wise, the accepted projects are aimed
tor’s main objective is to create a legal environment at providing financial services using advanced
that would promote innovation while at the same technology platforms and mechanisms including

7
See https://investinrussia.com/data/files/sectors/0_EY-focus-on-fintech-russian-market.pdf, accessed on 14.03.2020.
8
See https://seoulz.com/korean-startup-ecosystem-and-blockchain-in-korea/, accessed on 14.03.2020.
9
The Republic of Korea’s central government body responsible for financial policy, supervision and control in this area.
10
See https://www.fsc.go.kr/eng/new_policy/fintechpolicy.jsp for more, accessed on 15.08.2019.

2020 Vol. 14 No 2 FORESIGHT AND STI GOVERNANCE 31

Strategies

Таble 3. Fintech Market Regulators in Russia and the Republic of Korea and their Main Responsibilities
Country (regulatory Responsibility
authority)
Russia • Designing a mechanism for cross-regulating and coordinating activities aimed at developing fintech
(Central Bank) in Russia
• Developing an electronic information exchange and document management system for financial
market participants
• Creating a “regulatory sandbox”
• Extending international cooperation in the framework of various integration associations to promote
the development of the fintech market
Republic of Korea • Creating a “regulatory sandbox”
(Financial Services • Reforming the financial regulation system by reviewing its formal and informal mechanisms
Commission) hindering the development of fintech
• Eliminating regulatory restrictions for financial companies› investments in fintech
• Identifying and structuring business activities in which financial companies are allowed to invest
• Taking part in the development and implementation of national technology initiatives
Source: composed by the authors based on [Deloitte, 2018; Mittal, 2019; Choi M., Choi H.-L., 2016], and data published by the Financial Services
Commission of the Republic of Korea (see https://www.fsc.go.kr/eng/new_policy/fintechpolicy.jsp, accessed on 15.08.2019).

blockchain technology.10 According to experts, the global markets requires new models of countries’
main challenges the South Korean fintech sector interactions in regulating digital financial compa-
faces have to do with regulation. In the scope of the nies. Over the course of the analysis, the example
Innovation Platforms Program, the government is of Russian-Korean relations was used to assess the
implementing a reform aimed at deregulating tech- areas of international cooperation in the field of fi-
nological development [Kim, Choi, 2019]. nance at the current stage of market segmentation
and the global digital transformation.
The first such area concerns sharing experience
Conclusion and best practices in setting up a regulatory sand-
The current situation can be described as the emer- box mechanism. Relevant efforts will reduce regu-
gence of Fintech 4.0 (similar to Industry 4.0), with latory risks by accumulating experience in creating
start-ups and technology companies providing and maintaining favorable conditions for innova-
services to economic agents (individuals and com- tive financial companies as well as the provision
panies alike) directly, bypassing the conventional of financial products and services. The Russian
financial intermediaries. Of course, digital tech- experience of promoting the development of fin-
nology per se does not facilitate access to financial tech instruments in the banking sector (which is
services. This requires having in place an advanced going through a stage of profound deregulation in
payment system and physical infrastructure, an present-day Korea) seems to be relevant here.
efficient regulatory framework, and an effective
Another area of bilateral cooperation which will
consumer protection system. The reduced costs of
contribute to accumulation of regulatory experi-
providing financial services should lead to their in-
ence and promote the development of infrastruc-
creased availability.
ture meeting the new digital finance requirements,
Our analysis shows that the most likely of the main is international investment projects. Innovative
fintech development scenarios involves the frag- fintech tools are one of the most popular invest-
mentation of the existing market into numerous ment areas. Of particular importance for Russia
narrow segments and niches, which potentially can and the Republic of Korea in this regard is the suc-
evolve into a market for multinational digital fi- cessful completion of 2018 projects: the Agreement
nancial corporations capable of pushing back small on Investment Protection and Trade in Services
firms and established conventional giants alike. At (regarding mutual investments in fintech and in-
the same time, the scenario where major players novative insurance products), and cooperation in
conquer the financial market, despite being less the framework of the Global Infrastructure Fund
likely to implement, might make a more significant which includes plans for approximately $100 mil-
impact upon the global markets. lion of Korean investments in Russia to develop
Increased coverage of the public by digital fintech digital infrastructure in the Far Eastern regions.
instruments will be a key result of certain scenarios’ The digital transformation of international finan-
implementation, identified on the basis of analyz- cial markets makes countries’ cooperation regard-
ing the current trends of the sector’s development. ing the taxation of fintech companies extremely
Adequately meeting the challenges and risks as- important, since it allows them to significantly re-
sociated with various fintech evolution paths on duce the risks of regulatory arbitration. Partnership

32 FORESIGHT AND STI GOVERNANCE Vol. 14 No 2 2020

 Belozyorov S., Sokolovska O., Kim Y., pp. 23–35

in the taxation sphere first of all concerns the imple- Generally, there are obvious gaps in the interna-
mentation of the so-called “BEPS plan” 11 which de- tional regulation of the financial sphere, which
fines a set of major changes in bilateral agreements provide incentives for using the legal asymmetries
to avoid double taxation and adapt tax regimes to and loopholes to the advantage of one of the par-
new business models for the digital economy. The ties. This situation in itself presents a serious chal-
accumulated experience of Russian and Korean lenge that can undermine international economic
cooperation indicates the need to amend the cur- cooperation and the sustainable development of
rent Convention “On Avoiding Double Taxation of global financial markets. Harmonizing individual
Income” regarding the definition of the permanent countries’ legislation on digital development will
representation concept. This would allow one to help them adopt uniform rules of the game for all
officially recognize the significant scale of busi- and promote the rapid dissemination of innovative
nesses’ presence in two jurisdictions in the context fintech tools on a global scale.
of the digital economy (where most fintech com-
panies belong), and identify double and reverse
classification companies. This, in turn, would al- This study was carried out with the financial support of
low for clearly identifying payments received by the Russian Foundation for Basic Research in the frame-
work of the research project No. 20-010-00785 “Digital
Russian and South Korean non-resident investors financial technologies as a factor in the development of
and counter hybrid cross-border schemes. the insurance market in the Russian Federation”.

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