South Korea’s financial watchdog emphasized the need for a stronger regulatory system to prepare for new risks that might arise as big tech companies expand their finance business.

“There should be in-depth discussion and research on introducing entity-centered regulations for big tech,” Lee Bok-hyun, chief of the Financial Supervisory Service, said during a speech at the Diagnosis and Future Tasks of Big Tech's Financial Industry seminar held in Myeong-dong, Seoul, Friday.

The seminar was jointly organized by the Korea Institute of Finance and the Korea Fintech Industry Association.

His remark comes as companies like Naver and Kakao -- the country's top mobile messenger and portal operators -- keep bolstering their foothold in the financial sector with convenient online banking and payment services.

Entity-centered regulation, which Lee referred to, is a rule created based on different risks and is applied to licensed businesses on a group level.

It means that financial watchdogs may monitor groups' internal governance and transactions between different businesses, risk-management ability, and financial soundness as part of the regulatory process.

Capital regulation is a typical entity-centered regulation that is applied to local banks here.

It is different from the activity-based regulations that are currently applied to big tech companies in Korea. Activity-based regulations apply to any firm that engages in certain activities, with compliance enforced usually by fines and other enforcement actions.

Financial consumer protection and anti-money laundering are examples of activity-based regulation.

Since last year, FSS has been considering applying both activity-based and entity-based regulation in the local market, saying that they would be able to complement each other.

While emphasizing that big tech’s finance business has been playing a positive role in increasing convenience and accessibility, Lee expressed concerns over new risks.

He raised an example of a risk that occurs when an influential big tech company’s digital-based contactless finance services become popular, while other banks and financial firms fail to attract clients. Lee claimed that this change could affect the soundness and liquidity of local banks and financial firms, so the financial regulator needs to step up and create a balanced competitive environment.

Industry insiders have also raised caution about the risks.

A report by Lee Suk-hoon and Cho Sung-hoon, researchers at the Korea Capital Market Institute, explains why industry insiders are concerned about big tech companies changing the current market structure.

“The problem is that this change can be due to the absence of regulations on fair competition, rather than the big tech companies' IT technology and innovation,” the report said.

It further explained that big tech companies can use their large customer base to expand their business by grouping new financial services with their existing services. This kind of business practice, which is based on the already dominant position that big tech firms have in the market, can limit fair competition, the report said.

The head of FSS also talked about the fire at the Kakao data center, which disrupted major services, including Kakao Bank, citing it as an example of how big tech companies’ risk can be transferred directly to their financial services.