Eye on the Money
Foreign capital in the U.K., China, and the U.S. have an eye on domestic fintech startups. They are planning to foster domestic fintech companies with investments of hundreds of billions of won in the next few years, and to make them enter the global market. It means that foreign capital recognizes the value of the growth potential of domestic fintech firms. However, some express concerns over its side effects, citing an example of a gaming industry that already experienced the outflow of skilled workers and technologies due to the rapid inflow of Chinese capital.
According to IT industry sources on Oct. 25, ENTIQ, a U.K.-based fintech incubating firm, will establish ENTIQ Korea by the end of this year and invest up to 150 billion won (US$132.98 million) in fostering and supporting fintech startups. The company plans to seek out and nurture 40 to 50 global fintech startups in Korea over the next year and help them to tap into the global market, including the U.K.
Chinese internet giants Alibaba and Tencent are also looking for promising fintech companies in Korea. In particular, Tencent is already choosing top domestic fintech firms based on its experience investing hundreds of billions of won in the domestic game industry. The company has invested 533 billion won (US$472.52 million) in CJ Games, 72 billion won (US$63.83 million) in Kakao, and 5.5 billion won (US$4.88 million) in Reloaded Studios since 2010. Some say that the company’s next investment will go to fintech companies in order to experience Korea’s financial market even indirectly. Also, Luxembourg is actively considering ways to cooperate with domestic fintech startups, directly led by the Minister of Economy.
Accordingly, many domestic fintech companies have already received foreign capital. Altos Ventures, a U.S.-based venture capital firm, invested 1.5 billion won (US$1.33 million) in Lendit, a P2P and online lending conference, in May, and 2.3 billion won (US$2.04 million) in Viva Republica, the leading fintech company in Korea, on two separate occasions.
There are mixed expectations and concerns over foreign capital showing a high interest and investment in domestic fintech startups. It can help them enter the global market in the future, being recognized around the world for their value and technologies. However, they can become subcontractors as well, being dependent on foreign capital. In particular, some say that the fintech industry can follow in the footsteps of the domestic gaming industry, which lost technology and talent to massive capital from China, and is now under threat of its status as a global gaming powerhouse by China.
An official from the domestic IT investment industry said, “With the current trend, I am concerned that all leading fintech companies will be lost to foreign capital. Just as Korean game developers cannot publish their games on their own without support from Tencent right now, the excessive expectations and dependence on foreign capital can become an obstacle to the growth of fintech startups in the future.”
In a bid to address the tipping effect of foreign capital, the government needs to create an environment that allows domestic conglomerates and financial companies to actively invest in fintech startups through deregulation and benefits, according to experts.
A representative of a domestic IT investment company said, “It’s not that there is a lack of funds to invest in fintech companies in Korea. From an investor’s point of view, however, the problem is that there is no way to collect capital and benefits after the investment.” Under limited domestic conditions, the only way to collect investments is to get the company listed or carry out M&As. In these cases, however, there are no differentiated tax benefits, so it is not an attractive investment.”
In fact, experts say that the U.S. and U.K. governments give various tax benefits to Silicon Valley and Tech City. They provide differentiated tax benefits to capital, which takes over fintech firms, and fintech firms themselves, compared to existing companies. When the founder of a company in Tech City UK sells stocks, the government imposes taxes below 10 percent, which is lower than the 30 to 40 percent of existing companies. Also, it provides tax cuts to those who invest in the technology development of startups.