Applying behavioral economics to innovate Korea’s financial industry

The Dong-A Ilbo and Channel A hosted the 2018 Dong-A International Financial Forum Wednesday under the theme of Digital Finance and Behavioral Economics. In his keynote speech addressed to numerous academics and experts from the finance and economic sectors, Professor Richard Thaler of the Booth School of Business at the University of Chicago stressed that “Korea’s financial industry can innovate by moving away from a supplier-based view and understanding consumers’ behavioral patterns and cognitive psychology.”

Thaler won the Nobel prize of economics for his research on the behavioral economics in 2017. Contrary to the mainstream belief in economics that people always make rational decisions, behavioral economics believe that people are prone to make irrational decisions. Based on this idea, he advises that “nudging” can be a good way to encourage positive behavior. This encourages the belief that carefully designed interventions are more effective in inducing behavioral change, rather than regulation.

Such insights have significant implications for the Korean financial industry, which is based on regulation and control. According to the ranking of national competitiveness released by the World Economic Forum in 2016, Korea ranked 87th in finance, even lagging behind less developed countries such as Uganda (81st). The National Assembly’s Policy Committee leader Kim Yong-tae, who also attended the event, commented that “The government-led financial policies and excessive political influence have created an occlusive business, instead of an open industry.”

The archaic banking service certificate, which shifts accountability on consumers, stiff contracts and outdated data protection laws are just a few examples of how the industry has responded to changes, either outlawing everything or evading responsibility. The two Internet domestic banks that opened last year have been blocked by laws separating industrial and financial capital, failing to act as a harbinger for innovation as initially anticipated. Korea’s financial industry faces grave challenges, including mounting household debts reaching 1,500 trillion won, decreasing retirement funds due to aging, lack of financial understanding by the unbanked population. The financial authorities should pay attention to the outcomes of the forum, approaching issues from views of financial consumers and looking for ways to connect such insights to create innovative growth engines.