Frictions of startup-led innovation in Taiwan and Korea

國

立 政 治 大 學

‧

N a tio na

l C h engchi U ni ve rs it y

FinTechBase, NDC, Institute for Information Industry – where each authority is partially independent and pursuing their own agendas, which means Taiwanese governmental initiatives are characterized by incoherent, uncoordinated variety of initiatives that is inefficient and wasting public resources. For example, NDC aims to support startup ecosystem development while TFSC is unwilling to enact favorable reforms, which leads to unfriendly and incoherent policy environment for the startups.

5.5. Frictions of startup-led innovation in Taiwan and Korea

The comparison of Taiwan and Korea reflects that in both countries the fintech industry growth has occurred as a new generation of startups creating a new ecosystem, acting as a coordinating mechanism of institutional change, while the traditional financial sector and governmental authorities have been secondary reactionary actors. The fintech industry growth and institutional evolution in both countries has also been driven by efficacy – new models for organizing economic life are more efficient, convenient and productive than traditional models – and in both countries the government has exerted additional pressure for innovation to contribute added efficacy (e.g. Lee & Kim, 2015; TFSC, 2018b; TFSC, 2017h). The leadership of startups has coordinated complementary investments and behavioral change from VCs, accelerators, and other stakeholders to establish a new fintech ecosystem, with startups even guiding the government in regulatory reforms (TFSC, 2018b; Kim, Park, Choi & Yeon, 2016). Empirical evidence however suggests that frictions limit and hinder adoption of the new fintech industry.

Firstly, the asset-specificity of assets within older organizations leads to institutional evolution operating as creative destruction as the new wave of startups are more efficient innovators. For example, new technology is largely created by the blockchain startups in Taiwan and Korea – e.g. OwlTing, Bitmark, Mithril, CoolBitX in Taiwan; Blocko, ICON, Bithump, Coinone in Korea – as while the new blockchain technology is likely to become foundational technology for the financial sector, the traditional financial sector has been incapable in participating in innovation in Taiwan and Korea. Instead of direct innovation, the traditional financial sector has merely attempted to cooperate or partner with promising startups as in Korea various banks have partnerships with fintech startups

‧

立 政 治 大 學

‧

N a tio na

l C h engchi U ni ve rs it y

(e.g. KB Financial Group investing in Coinplug, Shinhan Bank cooperating with Streami, Scalechain and Blocko, Kakao creating a joint venture with Dunamu), whereas Woori Bank is exploring option to entirely transition using blockchain technology in their service models (Lee, 2016; Ahn, 2018c; 2018b). Taiwan is similar as AMIS startup is organizing a blockchain consortium to develop new technology, as well as creating technology for Taishin and Fubon Banks (Green, 2017), while Japanese SBI Holdings invested into CoolBitX and OwlTing. This is a global trend as globally over 100 leading traditional financial institutions are experimenting with technology created by the Ripple startup (Ahn, 2018b). Survey of KPMG (2017) reflects that even the traditional financial sector executives perceive the traditional sector is incapable in fintech innovation.

But incapability of the traditional financial sector also means the traditional sector has incentives to resist change, e.g. PwC (2017) survey found 88% of traditional financial sector firms in Asia perceive fintech startups as a risk. In Taiwan this resulted in traditional sector being defensive and attempting to acquire the startups (Chen, 2017a;

Wu, 2017). The case of Taiwan illustrates the fintech startups need to overcome the obstacles of fintech innovation created by TFSR, e.g. by influencing the policy making of TFSC (Green, 2018b). In Korea the traditional financial sector has not directly aimed to suppress fintech development, as the Korea Federation of Banks even pushed for regulatory reforms to support fintech innovation (Son, 2017d), but Korea indicates the friction for innovation occurs by existing regulations favoring the traditional entities (e.g.

current regulations favor the traditional banks). But, fintech industry growth also reflects protectionism is ineffective in current global economy as protectionism only limits domestic development. Empirical data also indicates the startups are not changing existing institutions but instead creating new additional institutional fields to reorganize financial services in Taiwan and Korea. Institutions are rigid; they resist change, which is why even the fintech startups identify as a new industry creating new regulations and culture instead of aiming to change older ones. Friction of changing institutions blocks change, which is why institutional evolution operates by selection and via new generation of startups. Taiwan and Korea also illustrate that once the startups have created a new industry, the resources are re-allocated from older to newer field due to productivity benefits.

‧

立 政 治 大 學

‧

N a tio na

l C h engchi U ni ve rs it y

Secondly, the customer adoption is a crucial driver for institutional evolution not only because customers are a dominant stakeholder for institutional change but the customer adoption incentivizes other stakeholders to adopt a new economic model. Empirical data of fintech in Taiwan and Korea indicates the new industry incentivizes adoption by material efficacy as fintech adoption has dominantly occurred due to productivity benefits of new technology, e.g. Viva Republica by Toss app attracted nearly 12 million customers in Korea, almost 25% of the population, by being more convenient than the traditional services, while Korean P2P startups have quickly accumulated nearly US$ 1 billion of loans due to improved service terms, while Kakao Bank attracted quickly roughly 4 million customers by offering better rates for borrowing and lending than the traditional sector, whereas cryptocurrency craze of Korea led to quick flow of investments from traditional exchanges to the new cryptocurrency exchange startups of Korea (Bae, 2017a; Son, 2017a; Kim, 2017a; Lee, 2017b). The new cryptocurrency trading quickly became popular in Korea in late 2017 due to potential profitability of the new digital assets (Beikverdi, 2018). Empirical data indicates the fintech startups are not driven by customer demand – startups create demand and utility – as for example the cryptocurrency startups of Korea (Bithump, Upbit, Korbit) create infrastructure which provides utility for the customers to adopt new behavior. Taiwan is similar as new blockchain startups (e.g. Bitmark, AMIS, Cobinhood) are growing due to the productivity improvements, whereas P2P startups of Taiwan, similar to Korea, are also attracting customer adoption via cost efficiency. To emphasize, the institutional evolution as selection requires the new field provides productivity benefits as otherwise the stakeholders lack incentives to change their behavior. Case of Korea illustrates the customer adoption is the crucial factor the regulatory changes as the rapid adoption of new technology forced Korean government to rapidly enact supportive regulatory reforms to support the new fintech sector. New technology without productivity benefits is not adopted by stakeholders as illustrated by the robo-advisor startups in Taiwan and Korea (Lee, 2017a). Global fintech data also suggest the adoption of new fintech models is largely due to efficacy and convenience of new technology (EY, 2017a), and this indirectly via intensified competition forced traditional financial sector to enhance their service terms. Friction of required productivity is moreover pressurized from the

‧

立 政 治 大 學

‧

N a tio na

l C h engchi U ni ve rs it y

government as a requirement for regulatory reforms, e.g. in Taiwan „fintech sandbox‟

participation requires evidence of productivity benefits, while in Korea for example the FSC allowed operation of remittance fintech startups due to cost improvements (“Korea to allow”, 2017). The global data of fintech adoption reflects that fintech is adopted more rapidly in less developed countries (e.g. China, India, Brazil) as the lack of financial infrastructure makes new technology relatively more beneficial as in more advanced countries the new technology offers less of relative benefits (EY, 2017a). In Taiwan and Korea the fintech startups are hence focused on more radically innovative technology to offer more notable relative productivity benefits as the relatively developed financial infrastructure reduces incentives to focus on incremental innovation (Lee, 2016).

The role of asset-specificity in the financial infrastructure explains why institutional evolution operates as selection and creative destruction as transition to a new institutional field is more cost efficient than reform of the older institutions and organizations. To emphasize, the startups are relatively more efficient pattern of institutional evolution – startups possess a competitive advantage in radical innovation. Fintech development in Taiwan and Korea thus illustrates the coupling of organizational and institutional evolution as the friction of institutional change ensures that organizational evolution requires and fosters institutional evolution (Haveman & Rao, 1997). This is natural as institutional fields are behavioral templates – institutions exist only if behavior reinforces them (Greif & Laitin, 2004; Aoki 2011) – which means new behavior via fintech startups leads to new institutional fields. Behavioral change via transition from older to newer fields leads to fading away, „creative destruction‟ of older institutions, and also the financial conglomerates of Korea provide empirical evidence how creative destruction operates within the organizations as the organizations restructure resources internally towards newer fintech-imitating departments as KB Financial Group, Shinhan Bank, NH Bank, Hanwha Life and Woori have dedicated resources for newer technology (Hanwha Life, 2016; Lee, 2016; KB Financial Group, 2017). The recent 2016-2017 annual reports of financial groups in Taiwan and Korea indicates the traditional financial sectors aim to imitate newer fintech by focusing on new sector – the competition from fintech startups forces them to focus on innovation in Korea, while in Taiwan the lack of competition due to regulatory barriers limits necessity to innovate. The more fintech friendly regulatory

‧

立 政 治 大 學

‧

N a tio na

l C h engchi U ni ve rs it y

environment of Korea thus promotes competition and innovation firstly directly via innovation of the startups but secondly the intensified competition also promotes indirect restructuring within the traditional financial sector as for example Hana Financial Group invested into creation of new innovation unit „Cell‟ and „Finnq‟ platform (Hana Financial Group, 2017) while similarly KB Financial Group moved their resources to develop a

„Future Finance‟ department and new mobile services such as „Liiv‟ (KB Financial Group, 2017) and Woori Bank already in 2016 initiated new online services to be more competitive vis-à-vis the fintech startups (Woori Financial Group, 2017). Startups as stimulus for change is well-reflected in the annual report of KB Financial Group (2017) as they state “there is a paradigm shift taking place in the financial industry” but they also recognize incapability to directly compete as they opt to engage “by investing and supporting startup companies”. Finally, the creative destruction operating as growth of new wave and fading away of older firms is most clearly signified by the flows of investment as the fintech startups of Korea have received nearly US$ 1.3 billion of funding as well as the financial conglomerates (Shinhan Bank, Hanwha Life) have channeled their resources to the fintech startups (Lee, 2016; Suh 2018).

Empirical observations from Taiwan and Korea however indicate the adoption of new technology is not merely driven by material benefits but cultural friction and social embeddedness influence adoption as new technology is largely adopted mainly within younger generations of customers. For example, new service „Broccoli‟ by the DAYLI Financial Group has 100,000 monthly users with customers being dominantly younger people in their 20s and 30s (Son, 2017c), which is corroborated by Korean data of fintech service adoption showing the fintech users are consistently younger, higher educated and more often living in urban areas than the non-adopters (Kim & Lee, 2016). Global data similarly reflect younger generations lead globally the adoption of new fintech services (EY, 2017a). Partially the generational gap is grounded in costliness of change – older generations have established relations with service providers while younger generations have not (EY, 2017a, p. 17-18) – but this is not main explanatory variable as the fintech industry emerges as a new industry with entirely new services, which suggest that normative and cognitive barriers are more dominant friction explaining differences between younger and older generations. For Korea, Kim et al. (2016) suggest social

‧

立 政 治 大 學

‧

N a tio na

l C h engchi U ni ve rs it y

networks and cognitive recognition are important for adoption of new technology, which is collaborated by Beikverdi (2018) who suggest social networks are the crucial explanation for the rapid industry growth. In Taiwan in contrast the fintech industry has been restricted by not being even considered as an industry (Wu, 2017). However, the startups in Taiwan and Korea recognize the cognitive barriers limiting new technology adoption and aim as institutional entrepreneurs to educate and promote new technology adoption (e.g. startups have „startup evangelists‟ as employees, startups leverage media for promotion). Additionally, while the cognitive and normative barriers limit fintech adoption, the interviews of industry stakeholders in Taiwan and Korea emphasize the fintech entrepreneurs are partially motivated by ideological motives – they are incentivized to create a new industry with new model, which means the fintech startups are less limited by cognitive and normative barriers than average economic actors.

Interviews thus suggest the entrepreneurs and employees in fintech startups are also motivated by ideological and intellectual goals beyond mere material incentives.