Financial innovation is changing the way we save, spend, and invest. But are current protections keeping pace? Dr. Sunjoo Hwang of KDI examines the risks customers face when using new financial products—such as virtual assets, P2P lending, and prepaid funeral services—and proposes a smarter way to safeguard their funds.
When Innovation Meets Risk: Limits of Segregation Alone
Many emerging financial services require firms to hold customer funds during transactions—whether for crypto trading, simplified payments, or funeral prepayments. While regulations mandate fund segregation, compliance often breaks down during financial distress. The result? Customers face steep losses, as seen in the 2021 Mergepoint case, where 75.1 billion won in prepaid balances went unreturned, and in the case of funeral service provider Han River Life, which also failed to return customer funds. Simply put, segregation rules alone leave dangerous gaps, especially when firms misuse funds to stay afloat.
Toward a Resilient Safety Net: The Hybrid Protection Model
To close these gaps, Dr. Hwang proposes a hybrid customer protection system. The idea is straightforward: combine the strengths of direct and indirect safeguards. Funds already segregated in banks would be treated as protected deposits under Korea’s existing deposit insurance system, while unsegregated funds would be directly covered through KDIC (Korea Deposit Insurance Corporation), funded by insurance premiums from firms. This approach encourages safer fund management, lowers the financial burden on companies, and ensures meaningful protection for customers—all without holding back financial innovation.
